author: Sea well :

text:
    Clara B. Parker, Executrix of the Estate of George D. Parker, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58604.
    Promulgated November 21, 1934.

      Thomas R. Dempsey, Esq., A. Colder Machay, Esq., Arthur Mc-Gregor, Esq., and Wm. C. Kottemarm, C. P. A., for the petitioner.

      Richard W. Wilson, Esq., for the respondent.
   OPINION.

Sea well :

(1) The first error assigned is that the respondent failed to allow the decedent to carry forward and deduct from 1928 income an alleged net loss of $55,231.83 sustained by the decedent in his business in 1927.

It is not disputed that in 1927 and prior years (1920-1927, inclusive) the decedent, George D. Parker, advanced to the Parker Lumber & Box Co. $192,843.34, which amount in 1927 he wrote off his books as a worthless or bad debt and claimed the same as a deduction in his return for the year 1927, which was allowed by the respondent. It is alleged in the amended petition that this charge-off resulted “ in a net loss for the year 1927 which the respondent has erroneously and illegally failed to allow as a deduction from 1928 income in accordance with the provisions of section 117 of the Revenue Act of 1928.”

The respondent admits that the decedent sustained a loss in 1927 as stated, but he insists the decedent is not, in the circumstances of the instant case, entitled to have same carried forward and deducted as a net loss in the computation of his tax liability for 1928 as claimed by petitioner. The respondent contends that the loaning or advancing of $192,843.34 to the Parker Lumber & Box Co. did not, under the circumstances shown, constitute the operation of a trade or business regularly carried on by decedent, and, such being true, no net loss for 1927, within the meaning of the Revenue Act of 1928, section 117 or any of its subsections, resulted, as petitioner insists.

In behalf of the petitioner it is argued that the large advances made by the decedent to the Parker Lumber & Box Co. over a period of years were not merely isolated or occasional transactions, but were so numerous, constant, and closely connected with his own private and individual business as to constitute such a part of his trade or business. We, however, think differently and are of the opinion and hold that on this issue the decision in Burnet v. Ciarle, 287 U. S. 410, is controlling, and that the loaning or advancing of money by the decedent Parker to the Parker Lumber & Box Co., which occasioned or resulted in the loss of $192,843.34 to Parker, under the circumstances disclosed by the record, did not, within the meaning of the Revenue Act of 1928, constitute the operation by the decedent of a trade or business regularly carried on. See also Joseph Cavedon, 30 B. T. A. 364. Cf. Ames v. Commissioner, 68 Fed. (2d) 301; certiorari denied, 292 U. S. 635.

Notwithstanding the allegations in the amended petition as to the loss and charge-off on his books in 1927 of the $192,843.34 by the decedent and a bad debt deduction taken therefor in his 1927 return and allowed by the respondent, on brief in behalf of the petitioner it is argued that the facts show the losses on the aforesaid advancements to the Parker Lumber & Box Co. were sustained during 1928 and should be allowed as deductions in that year. That such were not so allowed by the respondent is not, however, assigned as error. In the light of the facts shown by the record, we are of the opinion and hold, as heretofore indicated, that in dealing with the alleged loss by the decedent of $192,843.34 the respondent did not commit error and his action in refusing to allow the alleged net loss of $55,231.83, or any part thereof, to be carried forward as a deduction from 1928 income, is approved.

(2) The second assignment of error is based on the fact of the failure of the respondent to recognize George D. Parker Co. for the years 1928 and 1929 as a five-party partnership, the respondent continuing, as in prior years, to deal with it as a two-party partnership, in which George D. Parker had a two-thirds interest and C. E. Brown a one-third interest.

Having, in the heretofore-mentioned consolidated cases, held that George D. Parker Co. was a five-party partnership and the record showing that the same during the years now in issue was in process of liquidation and that the increase by respondent of decedent’s net taxable income from the partnership in said years was due to considering and computing Parker’s partnership interest as being two thirds instead of one fourth, as it really was under the five-party partnership agreement, we are of the opinion and hold that the respondent erred as alleged in the second assignment of error and his determinations increasing the decedent’s net taxable income from the partnership in the amounts of $1,402.09 and $1,204.90 for the years 1928 and 1929, respectively, are disapproved.

(3) With respect to the third assignment of error, the record shows that George D. Parker considered the aforesaid cost of his stock in the Parker Lumber & Box Co. plus certain other items (consisting of certain oil stock, abandoned oil lease, etc.), aggregating $67,426.68, as a total loss in 1928 and in his return for that year treated the property on which loss was asserted as community property, deducting as a loss on “ worthless stocks and oil leases ” one half of the total cost thereof, or the amount of $33,713.34.

It is insisted by the respondent that such stock became worthless prior to 1928, to wit, in 1927, and at that time must have been so known to the decedent.

It has been shown that the decedent claimed and was allowed a loss of $192,843.34 in 1927, that amount representing unpaid and unsecured advances made by the decedent to the Parker Lumber & Box Co. The record shows that the decedent purchased in October 1927, at the sheriif’s sale, under judgment he obtained upon foreclosure of the aforesaid mortgages on the company’s property, substantially all the corporate assets, which in the amended petition are alleged to have been of a fair market value of not exceeding $100,000. Under such circumstances, taken in connection with other facts shown in the record, it appears to us that it must have been apparent to the decedent Parker at the time of the sale by the sheriff that the equity of redemption in the property, having a value of only $100,000, which was sold and bid in to satisfy a judgment of $240,375.76, was worth nothing and that there was no basis for a reasonable belief that he would ever realize anything on his stock; that it was then evident that his stock was as worthless as his claim of $192,843.34 for advances, which was charged off by him as a worthless debt in 1927 and allowed as such by the respondent.

In our opinion, and we so hold, the aforesaid third assignment of error is not sustained by any evidence sufficient to overcome the presumption of the correctness of the respondent’s determination in reference to the alleged loss and in adding the sum of $8,481.77 to the decedent’s income for 1928 as an overstatement of loss, and respondent’s action in so doing is approved.

(4) and (5) Errors four and five raise the issue whether or not the respondent committed error in refusing to allow the decedent to include in his returns for 1928 and 1929 only one half of the total gross income actually received by him during those years. It is not disputed that for 1928 and 1929 the decedent and his wife filed separate returns, each returning one half of the asserted income received by the decedent, on the theory that all income received by the decedent was community property.

The respondent refused to allow such division, with- the single exception of salary of the decedent for services at the Parker Machine Works, amounting to $6,000, and added to decedent’s gross income the one half of such income which was reported by his wife.

Petitioner’s ultimate contention with respect to these two assignments of error is that the respondent has overstated decedent’s income for the year 1928 by $39,413, and has overstated decedent’s income for the year 1929 by $39,183.97, by failing to recognize petitioner’s contention that these amounts represented the wife’s share of community income for those years.

It is now well settled that since July 29, 1927, divisible community income of California husband and wife taxpayers is limited to income from community property acquired after July 29, 1927, and to all salaries, wages, and fees earned by either spouse on and after that date. See section 161 a, Civil Code of California, effective July 29, 1927; United States v. Malcolm, 282 U. S. 792; Hirsch v. United States, 62 Fed. (2d) 128; certiorari denied, 289 U. S. 735; Helen N. Winchester, Administratrix, 27 B. T. A. 798; and Gouverneur Morris, 31 B. T. A. 178.

Petitioner, in setting forth her contention that decedent’s income for 1928 and 1929 is overstated by the amounts of $39,413 and $39,183.97, respectively, does not take issue with the proposition of law, as stated in the previous paragraph. In fact, she has to rely upon that proposition in order to sustain her position.

Petitioner’s proposition is that in California, on and after July 29, 1927, where income which the husband receives from a business in which either his separate property or community property acquired prior to July 29, 1927, is invested is the result of both (1) such investment and (2) his own personal services, then such income should be segregated and apportioned between the two sources, with the result that all income which is essentially attributable to such investment should be taxed to the husband, and all income which is essentially attributable to his services should be taxed equally to the husband and wife as community property.

This is practically the same question as was before the Board in Julius Shafer, 2 B. T. A. 640, which, however, involved the law of the State of Washington rather than California. • There the closing paragraph of our opinion was as follows :

Summarizing our decision, it is that, under the laws of the State of Washington, income arising in part from separate property and in part from community effort should be apportioned; that where an apportionment has been made by the taxpayer which the Commissioner accepts and which appears to be reasonable, such apportionment will not be disturbed.

In G. C. M. 9825 (X-2 C. B. 146) the General Counsel, in an extended opinion on the proper method of determining the earned income credit provided for by section 31 of the Bevenue Act of 1928, when the income was derived from a combination of personal services and capital, in part, said:

In. California the situation is complicated by the construction placed on the community property laws by the courts of that State. It has been held that inasmuch as the income from a partnership between the husband and a third party was in part attributable to his separate capital and in part to his personal labor or effort, such part of the profit as accrues from the use of capital is separate property and such part as is due to the personal activity, ability, and capacity of the husband is community property. (Pereira v. Pereira, 156 Cal., 1, 103 Pac., 488; McDuff v. McDuff, 48 Cal. A., 175, 191 Pac., 957; In re Gold’s Estate, 170 Cal., 621, 151 Pac., 12.) In Pereira v. Pereira, in discussing the apportionment of income between that part attributable to the use of the capital of the husband and1 that part attributable to the activity, ability, and capacity of the husband, the supreme court of the State used the following language:
* * * The separate property should have been credited with some amount as profit on this capital. It was not a losing business, but a very profitable one. It is true that it is very clearly shown that the principal part of the large income was due to the personal character, energy, ability, and capacity of the husband. This share of the earnings was, of course, community property; but without capital he could not have carried on the business. In the absence of circumstances showing a different result, it is to be presumed that some of the profits were justly due to the capital invested. There is nothing to show that all of it was due to defendant’s efforts alone. The probable contribution of the capital to the income should have been determined from all the circumstances of the case, and, as the business was profitable, it loould amount at least to the usual interest on a long investment well secured. * * * [Italics supplied.]
Furthermore, the Supreme Court of California in In re Gold’s Estate stated as follows:
The plaintiffs claim that Gold’s share of the partnership profits made after the marriage became Gold’s separate property by reason of the fact that the partnership was formed prior to the marriage. Where a business has been carried on and capital has been invested therein before marriage, the entire profits therefrom, after marriage, are not necessarily separate property of the husband. The rules regarding the character of such property were considered in Pereira v. Pereira (156 Cal., 1, 103 Pac., 488, 23 L. R. A. (N. S.), 880, 134 Am. St. Rep., 107.) The principle there stated is that the interest of the husband in the capital of the partnership, as it was at the time of his marriage, is the husband’s separate property, and that the question what part of the subsequent profits arises from the use of this capital and what part from the personal activity, ability, and capacity of the husband is to be determined by the court from the circumstances appearing in the case, that whatever accrues from the latter source is community property, and that the remaining profits must be classed as separate estate. * * *
It is necessary, therefore, in the audit of returns in the State of California, where the husband is a member of a partnership in which both personal services and capital are income-producing factors (and the wife is not a member of the partnership), that effect be given to section 31 of the Revenue Act of 1928 and to the law of the State as set forth in the court decisions referred to above. * * *

Cf. Rucker v. Blair, 32 Fed. (2d) 222; Anna L. Compton, Executrix, 11 B. T. A. 26.

The evidence indicates that the average capital investment in the decedent’s box-nailing machine business operated under the name of Parker Machine Works for 1928 and 1929 was $170,870.12 and $208,036.63, respectively; and that the net business income for those years was $90,786.91 and $92,930.51, respectively. It is also shown-that a return of 7 percent would be a fair return on the capital investment in that business and that $6,000 was reasonable compensation for decedent’s services in each of said years.

With respect to assignments of error four and five, we are of the opinion and hold, therefore, that the total net business income of each of the years 1928 and 1929 should be apportioned on the basis of a fair return on decedent’s said investment and his reasonable compensation of $6,000 as above indicated, in accordance with the method outlined in G. C. M. 9825, supra, which we think is based on the correct principle and should be computed, as follows:

For the year 1928
17960 91 $90,786.91 equals $60,468.74, or the amount essentially attributable to decedent’s investment.
6,000.00 17 960 91 $90,786.91 equals $30,328.17, or the amount essentially attributable to the personal services rendered by the decedent, and, therefore, community income.
Correct community income_$30, 328.17
Amount determined by respondent as community income_ 6, OOO. 00
Additional community income___ 24,328.17
y2 taxable to the wife_12,164. 09
For the year 1929
14 562 56 20 562 56 oi $92>930.51 equals $70,677.30, or the amount essentially attributable to decedent’s investment.
20562 56 $92>930.51 equals $22,253.21, or the amount essentially attributable to the personal services rendered by decedent, and, therefore, community income.
Correct community income_._$22,253. 21
Amount determined by respondent- 6,000.00
Additional community income--- 16,253.21
% taxable to the wife- 8,126. 61

(6) In reference to the sixth assignment of error little need be said. It is undisputed that the decedent during the years in issue was engaged in a trade or business in which both personal service and capital investment are material income-producing factors and under such circumstances, in computing earned income credit to the decedent, he was limited to the 20 percent allowance provided in section 31 (a)(1), (2), (3) and (b) of the Revenue Act of 1928. The respondent’s deficiency notice shows a credit of 25 percent for earned net income in the amount of $245.14 for the year 1928 and in the amount of $335.82 for 1929. These earned income credits result from the respondent’s determination that earned net income of the decedent in the year 1928 was $21,555.63, or 20 percent of a net income from business of $107,778.14, and that earned net income for the year 1929 was $26,884.20, or 20 percent of a net income from business of $134,421.01. The petitioner insists that earned income credit for each year should be based on earned income of at least $30,000. The computation of net income as made by the respondent, resulting in earned income credits for 1928 and 1929 in the respective amounts stated, is not in evidence, nor does the record show wherein the respondent committed error in his computations, if error was made therein.

In our opinion and we so hold, the evidence in the record is not sufficient to overturn the presumption of the correctness of the respondent’s determination with respect to earned income credits.

(7) and (8) Relative to assignments of error seven and eight, there is no reference nor argument made in petitioner’s brief to sustain same and in our view no evidence adduced overcoming the presumption of the correctness of the respondent’s determination in reference thereto. Therefore, we are of the opinion and hold that as regards those assignments the determinations of the respondent are correct and his action is accordingly approved.

(9) The decedent and Fred Stebler organized the Stebler-Parker Co. about 1921. Each of them acquired 50 percent of the corporation’s stock. The decedent’s basis of his 1,125 shares (exclusive of the $10,000 paid by him in 1922 to George X. Wendling for services in the matter of the organization of the Stebler-Parker Co.) was $112,500. The John Bean Manufacturing Co. (name later changed to Food Machinery Corporation) was organized about 1928 for the purpose of acquiring the business of several corporations.

In 1929 the John Bean Manufacturing Co. acquired all the capital stock of the Stebler-Parker Co. from decedent and Stebler (including certain patents owned by decedent, but which pertained to the business of Stebler-Parker Co.) for 14,000 shares of its own common stock and $51,674.42 in cash. Decedent’s basis for the patents owned by him was $1,114.73. Decedent received 6,500 shares of the common stock of the John Bean Manufacturing Co. and all the cash of $51,674.42; Stebler received the remaining 7,500 shares of stock. Respondent determined and contends that decedent realized a profit on the transaction of $263,059.69, as set forth in our findings of fact.

Petitioner contends that (1) no gain whatever should be recognized because the transaction was “ well within section 112 of the Revenue Act of 1928 ”; (2) that if held not to be within section 112, then no gain whatever should be recognized because decedent was under a gentleman’s agreement not to sell any of the 6,500 shares during 1928, 1929, or 1980, which agreement precluded the stock from having any fair market value; and (3) that in any event the stock did not have a fair market value in 1929 in excess of $20 per share.

The record does not show whether the John Bean Manufacturing Co. took over the assets of the Stebler-Parker Co. and dissolved it or whether the latter company continued in existence. The facts in the instant case with respect to the transaction by which the John Bean Manufacturing Co. acquired all the stock of the Stebler-Parker Co. are analogous to the facts in John J. Watts, 28 B. T. A. 1056, and, in accordance with our determination therein, we are of the opinion and hold that the transaction by which the John Bean Manufacturing Co. acquired the stock of Stebler-Parker Co. did not constitute a reorganization within the meaning of section 112 (i) (1) of the Revenue Act of 1928, as insisted in behalf of the petitioner. See also A. L. Miller, 29 B. T. A. 1061; A. T. Evans, 30 B. T. A. 746; Alice V. St. Onge, 31 B. T. A. 295. Cf. C. H. Mead Coal Co. v. Commissioner, 72 Fed. (2d) 22; W. C. Coleman, 31 B. T. A. 319.

The written agreement of May 3, 1929, discloses that the parties thereto were contemplating an exchange on a basis of the stock of the John Bean Manufacturing Co. having a then fair market value of $50 per share.

It is undisputed that the terms and provisions of the written agreement of May 3, 1929, were carried out. That agreement contains a provision with respect to placing the stock to be received by Stebler and the decedent in escrow. The escrow agreement, assuming that it was in fact executed, was not introduced in evidence at the hearing. Whether such an instrument, if executed, contained any clause with respect to a restriction on the sale of the John Bean Manufacturing Co. stock is not shown, but it is apparent that the escrow agreement, whatever its terms may have been, terminated not later than September 15, 1929, as specifically provided in the agreement of May 3, 1929.

The intention of the parties to the agreement is clearly disclosed, and the purpose sought to be accomplished by the contract is free from any ambiguity. If there was in fact any understanding intended to be absolutely binding on the parties to the agreement to the effect that no sale of John Bean Manufacturing Co. stock should be made by Stebler or Parker or others in 1928 or 1929, it appears inconsistent and unreasonable that the written contract made no mention of any such restriction.

Fred Stebler received 7,500 shares of the stock of the John Bean Manufacturing Co. under the terms of the identical contract by which the decedent received 6,500 shares of the stock. Stebler testified in the instant case, but the record fails to disclose that he was asked or stated anything about the alleged restriction or agreement that the decedent and Stebler were not to sell during 1928 or 1929 any of the John Bean Manufacturing Co. (Food Machinery Corporation) stock acquired by them in the maimer heretofore described. Stebler was certainly well qualified to testify as to the existence of any restriction put upon the sale of the stock if such was imposed thereon at the time of its acquisition by him and the decedent.

Viewing the record as a whole, we think, as heretofore stated, that the John Bean Manufacturing Co. (Food Machinery Corporation) stock when received by the decedent in exchange for his Stebler-Parker Co. stock had a fair market value of $35 per share and we are of the opinion and hold that the profit to the decedent on the exchange should be recomputed on that basis instead of $50 per share as determined by the respondent.

With respect to the $10,000 paid in 1922 to George X. Wendling by the decedent Parker for services rendered him in the matter of the organization of the Stebler-Parker Co., which we have held (in 30 B. T. A. 1231, supra) was not deductible as an ordinary and necessary expense of carrying on business and which in the instant case is sought to be added to the cost of the decedent’s stockholdings in the Stebler-Parker Co. and recognized in determining the profit or loss resulting from the exchange in 1929 of Stebler-Parker Co. stock for John Bean Manufacturing Co. stock, we are of the opinion and hold that the petitioner should be permitted to. add that amount to the basis of decedent’s Stebler-Parker Co. stock in determining the gain involved in the exchange of Stebler-Parker Co. stock for John Bean Manufacturing Co. (Food Machinery Corporation) stock. Malta Temple Association, 16 B. T. A. 409.

Judgment will ~be entered under Rule 50


source: Caselaw Access Project

author: Teammell :

license: Public Domain

text:
    D. B. Malernee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63553.
    Promulgated November 21, 1934.

      Phil D. Morelooh, Esq., for the petitioner.

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

Teammell :

The principal issue in this proceeding is whether or not petitioner made a bona fide gift to his wife in 1919 of 125 shares of stock in the Southard Oil & Gas Co. Prior to the alleged gift petitioner held 226% shares, and thereafter retained 101% shares. All the stock was sold in 1920. Respondent determined that a profit of $121,465.77 was realized from the sale of said stock, and included the entire amount in petitioner’s income in computing the deficiency in controversy. The issue presents a question of law, the parties being in substantial agreement as to the facts.

The essential elements of a valid gift are stated by the court in Edson v. Lucas, 40 Fed. (2d) 398, 404, as follows:

There must be a donor competent to make the gift, a clear and unmistakable intention on his part to make it, a donee capable of taking the gift, a conveyance, assignment, or transfer sufficient to vest the legal title in the donee, without power of revocation at the will of the donor, and a relinquishment of dominion and control of the subject matter of the gift by delivery to the donee [citing authorities].

There is no suggestion in the present record that petitioner was not competent to make, and his wife to take, the alleged gift, nor can there be any serious question as to the sufficiency of the transfer “ to vest the legal title in the donee, without power of revocation at the will of the donor.” The stock was transferred on the books of the corporation from petitioner to his wife. This constituted a sufficient delivery, and vested legal title in the donee. In Marshall v. Commissioner, 57 Fed. (2d) 633; certiorari denied, 287 U. S. 621, in dealing with similar facts the court said:

Transfer upon the books of the corporation in itself constitutes a delivery. Roberts’ Appeal, 85 Pa. 84. The transferee then becomes the legal owner. * * * The stock was not endorsed and re-delivered to her husband, and could not thereafter be transferred, or the dominion and ownership of the petitioner thereafter be regained, except through the independent and voluntary act of his wife.

Respondent does not question the formalities of the gift, but attacks the bona fides of the transaction. He contends substantially that petitioner never intended to give the stock to his wife but only the proceeds of the sale, and hence the profit derived is taxable to petitioner.

This contention, we think, is not supported by the evidence. At the time of the alleged gift in January 1919 the negotiations had with Pitts for the sale of the stock approximately a year previously had fallen through, and there was then no definite prospect of sale. It was some six months later that the option to purchase was given to Littleton and his partner, Weeks, but this sale also failed, the option being forfeited. In these circumstances, when no contract of sale had been entered into, and at a time when there was no immediate prospect of sale, it is difficult to understand how petitioner could have entertained an intention to give his wife a part of the proceeds of a sale which was not consummated until more than a year later.

However, disregarding petitioner’s testimony as to his intention, the best evidence of what he intended to do is what he actually did. The undisputed fact is that he caused the stock to be transferred to his wife on the books of the corporation, without power of revocation. The stock certificates were not endorsed by his wife and redelivered to the petitioner, and it seems clear that the stock could not thereafter be transferred or the dominion and ownership of the petitioner be regained, except through the independent and voluntary act of his wife.

But the respondent argues that the facts justify the conclusion that the petitioner never actually intended to relinquish dominion and control over the stock, “ and that the entire deal was engineered for the primary purpose of reducing tax liability.” Respondent points to the fact that petitioner’s wife took no part in the transaction ; that there is no evidence that she used any of the money placed in the bank to her credit, or received any benefit from the alleged gift, and that ultimately his wife contributed to the petitioner most of the money received for the stock.

We are not impressed by this argument. The fact that the donee subsequently loaned a portion of the money to her husband, after he had got into financial difficulties as a result of losing his own money in drilling dry holes, is not sufficient, in our opinion, to invalidate the gift of the stock made more than a year previously. Nor is the fact important that the petitioner was moved to make the gift partly because it would reduce his tax liability. The motive which actuated petitioner is immaterial, if he intended to and did in good faith make a valid gift. Harry G. Moores, 3 B. T. A. 301; Bingham v. White, 31 Fed. (2d) 574; Wehe v. McLaughlin, 30 Fed. (2d) 217. In the absence of fraud, a gift is not invalid because it results in the reduction of tax liability. United States v. Isham, 17 Wall. 496; Fraser v. Nauts, 8 Fed. (2d) 106; Bing v. Bowers, 22 Fed. (2d) 450; Ford v. Nauts, 25 Fed. (2d) 1015; J. M. Walsh, 18 B. T. A. 571. Again quoting from Marshall v. Commissioner, supra:

There was nothing unlawful, or even mildly unethical, in the motive of petitioner, to avoid some portion of the burden of taxation. There is nothing illegal in a gift of shares of stock by a husband to his wife.

In order to sustain respondent’s position it would be necessary for us to find from the evidence that the transfer of the stock was a mere subterfuge whereby petitioner sought to evade tax. This, we think, the proof is wholly insufficient to establish. Respondent’s action on this issue is disapproved.

The elimination from petitioner’s income of that portion of the profit ascribable to the 125 shares of stock which he gave to his wife in 1919 leaves petitioner without net taxable income for 1920, as computed by respondent in the deficiency letter. There is therefore no basis for the computation of a delinquency penalty.

Judgment will ~be entered for the 'petitioner.


author: Murdock:

text:
    National Grange Mutual Liability Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73099.
    Promulgated November 21, 1934.

      E. G. Kilpatrick, Esq., and O. W. Underwood, Jr., Esq., for the petitioner.

      J. 0. Maddox, Esq., for the respondent.
   OPINION.

Murdock:

The first issue is whether or not the petitioner was exempt from tax under section 103(11) of the Eevenue Act of 1928. The respondent contends that farmers’ mutual insurance companies are a well-known class of small companies operating within a limited territory; the word “other”, under the rule of ejusdem generis, should be interpreted to include only such other companies as are similar in character to the farmers’ companies, thus excluding mutual companies which are not of a purely local character; the petitioner operates in a number of different states and is not of a purely local character similar to the farmers’ companies; and, therefore, the petitioner is not exempt from tax under the above quoted section. He claims that the legislative history of this provision of the act and its predecessors indicates that Congress intended to exempt only a class of small local companies which were well known and recognizable. The petitioner points to the legislative history of this provision to show that Congress, in enacting section 103(11) of the Revenue Act of 1928, did not intend to limit the exemption to mutual casualty insurance companies of a purely local character.

The precursor of section 103(11) of the Revenue Act of 1928 was section 11 (a) Tenth of the Revenue Act of 1916. It was reenacted with a slight change in phraseology as section 231 (10) in the Acts of 1918 and 1921, as follows:

Farmers’ or other mutual hail, cyclone, or Are insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations oí a purely local character, the income of which consists solely of assessments, clues, and fees collected from members for the sole purpose of meeting expenses.

See Commercial Health & Accident Co. v. Pickering, 281 Fed. 539. The Committee on Ways and Means struck out the words “ of a purely local character ” in its draft of the Revenue Bill of 1924 and explained:

The words “ of a purely local character ” in paragraph (10) haffe been omitted, since all these mutual organizations should be exempt if their income consists solely of assessments, dues, and fees collected from members for the sole imrpose of meeting expenses. [Report 179, 68th Gong., 1st sess., p. 24.]

This draft was thereafter changed in other respects, but the words of a purely local character ” were left out as the Ways and Means Committee had recommended and these words have been left out of all subsequent act’s. See S. Rept. 398, 68th Cong., 1st sess., p. 29; sec. 1013 (b), Revenue Act of 1924, and 65th Cong. Rec., pt. 8, pp. 8104^8108; sec. 231 (11) of the Revenue Act of 1926. The debates and reports on as well as the provisions of the various acts indicate that Congress intended no such limitation as the respondent now contends for. The language of section 103 (11) was intended to exempt from tax mutual casualty insurance companies the income of which is used or held to pay losses or expenses. The rule of ejusdem generis may not be used to misinterpret the intention of Congress when once ascertained. Mid-Northern Co. v. Montana, 268 U. S. 45; Danciger v. Cooley, 248 U. S. 319, 326; United States v. Standard Brewery Co., 251 U. S. 210; United States v. Mescall, 215 U. S. 26, 31.

The only other alleged bar to exemption of the petitioner from tax which the respondent has suggested is that the guaranty fund was in fact preferred stock, the so-called interest thereon was a dividend, the payment of this dividend was not an expense, thus income was used or held for purposes other than paying losses and expenses, and the petitioner was a stock company. Cf. Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523. There are a number of tests to assist in the decision of the question of whether a certain security is a preferred stock or a debt, but each case turns upon its own facts. Debts and preferred stock sometimes have common characteristics, but in some respects they differ. If a security carried voting power it would, no doubt, be preferred stock. But the absence of voting power would not show conclusively that it was evidence of a debt, because preferred stock does not always have voting power. The terminology used by the parties is important evidence but not conclusive. It was called interest. In case the fund was impaired, it was to be restored by assessments upon the policyholders, the only members of the corporation. Preferred stockholders usually take the risk of losses. The payment of the interest did not have to be made from earnings. Dividends on preferred stock usually come out of earnings. The interest was cumulative and had to be paid eventually before the policyholders could receive any distributions. Owners of the fund had no voting powers. The date for payment of the principal was not fixed, but could be fixed by the directors. No feature of this fund which would be absolutely foreign to a debt upon which interest accrues has been called to our attention. Cf. O. P. P. Holding Corporation, 30 B. T. A. 337; Proctor Shop, Inc., 30 B. T. A. 721, and cases therein cited. Although in many respects the fund was not distinguishable from preferred stock, the facts in this case lead to the conclusion that this guaranty fund was not in reality preferred stock giving the owner an interest in the corporation, but was an obligation of the corporation on which interest accrued and was paid during the period in question. Thus the petitioner originally borrowed the money to establish its guaranty fund to meet extraordinary losses, but if any part of this fund was ever used to pay a loss, it was to be restored through assessments on the policyholders. Interest upon the money borrowed was an expense. The petitioner operated upon the mutual plan, and the circumstances surrounding the guaranty fund do not prevent it from being the kind of a mutual company which Congress exempted from tax.

The deduction and net loss questions need not be decided, since the petitioner is exempt from tax.

Reviewed by the Board.

Decision will be entered for the petitioner.

       SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.
      The following organizations shall be exempt from taxation under this title—
      *******
      (11) Farmers or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including' interinsurers and reciprocal underwriters) the income of which Is used or held for the purpose of paying losses or expenses.


author: Muedook: Smith,

text:
    Alfred R. L. Dohme, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward C. True, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank C. Starr, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68159, 68501, 69259.
    Promulgated November 22, 1934.

      G fiarles Mark ell, Esq., for the petitioners.

      John D. Foley, Esq., Allin H. Pierce, Esq., and Irving M. Tullar, Esq., for the respondent.
   OPINION.

Muedook:

The Commissioner determined deficiencies for 1929 as follows:

Alfred R. L. Dohme (Docket No. 692S9)_$294, 826. 78
Edward C. True (Docket No. 68501)_ 18,215.20
Frank C. Starr (Docket No. 68159)_ 412.31

The petitioners assign as error the action of the Commissioner in taxing the gain from three exchanges as if there had been but one. They also contend that the value of common stock received by them was $20 instead of $28 as determined by the Commissioner. The latter now contends that he erred in the determination of the deficiencies in treating as a “ reorganization ” a transaction which was not a “ reorganization ” within the meaning of that term as used in the Kevenue Act of 1928. The above issues are common to all three proceedings and also to- a number of other proceedings now on the Board’s Keserve Calendar. There is also another issue in the case of Alfred K. L. Dohme of whether the deduction under 23 (n) (2) for contributions is limited to 15 percent of ordinary income exclusive of capital net gain. Stipulations of fact have been filed in each case. Testimony was introduced only for the purpose of proving the value of common stock of the 1929 corporation received by the taxpayers. A summary of the stipulations will suffice for the purpose of this opinion. The reorganization issue will be discussed first.

Sharp & Dohme, Inc., hereinafter referred to as the 1926 corporation, was incorporated in 1926 under the laws of Maryland. Dohme, Mrs. Dohme, Starr, and Mrs. True were stockholders of that corporation. Another corporation of the same name, hereinafter referred to as the 1929 corporation, was incorporated in 1929 under the laws of Maryland in order to bring in new interests and expand the business theretofore conducted by the 1926 corporation. The total outstanding capital stock of the 1926 corporation on August 1, 1929, consisted of 90,000 shares of no par value common stock. A plan was agreed upon in 1929 whereby the 1926 corporation, which had been engaged in manufacturing and selling medicines and drugs, was to “sell or exchange” all of its assets, subject to its liabilities, to the new corporation in such a way that the stockholders of the 1926 corporation would “ retain a substantial interest in the business, besides receiving a satisfactory price in cash for the rest of their present interest.” The 1926 corporation, after August 1, 1929, distributed to its stockholders 9,000 shares of “ special ” stock and made its common stock redeemable at $150 per share. It also issued 500 shares of “ limited ” stock to the 1929 corporation for $1 per share in cash “ to continue the existence of the old corporation.” The 1929 corporation was to pay to the 1926 corporation as consideration “ for the present property and assets ” of the 1926 corporation, $13,500,000 in cash and 225,000 shares of the common stock of the 1929 corporation, with one variation which will be mentioned. The stockholders of the 1926 corporation were permitted to exchange one third or less of their common stock of the 1926 corporation directly to the 1929 corporation for a convertible preferred stock of the 1929 corporation, on the basis of one share of the 1926 common for 2% shares of the 1929 preferred, and 24,733f£ shares of the common stock of the 1926 corporation were thus exchanged for 59,359 shares of the preferred stock of the 1929 corporation. The 1929 corporation was then permitted to surrender to the 1926 corporation the 24,733-]-£ shares of the common stock of the 1926 corporation at $150 per share in lieu of a part of the $13,500,000 cash which it agreed to pay to the 1926 corporation. The 1929 corporation paid the balance of the cash and 225,000 shares of the 1929 common stock to the 1926 corporation. The assets of the 1926 corporation were transferred on or about August 6, 1929, to the 1929 corporation, subject to the liabilities of the 1926 corporation. The 1926 corporation then distributed to the holders of its special stock pro rata the 1929 common stock thus received and redeemed its outstanding common stock at $150 per share. The 1929 corporation authorized and negotiated for the sale to the public of its remaining common and preferred stock so that there would be outstanding 485,000 shares of its common stock and 162,500 shares of its preferred stock. Both classes of stock had voting rights.

The petitioners, Dohme and Starr, and Mrs. Dohme and Mrs. True, received for their stock in the 1926 corporation cash, and common and preferred stock of the 1929 corporation in amounts as set forth in the stipulations. Each exchanged some common stock of the 1926 corporation for preferred stock of the 1929 corporation, each surrendered his special stock of the 1926 corporation for common stock of the 1929 corporation on the basis of one of the former for 25 of the latter, and each surrendered the balance of his common stock of the 1926 corporation for cancellation at $150 per share.

The Commissioner, in determining the deficiencies, held that the gain to each was recognized to the extent of the cash received by each, valued the common stock of the 1929 corporation at $28 per share, valued the preferred stock of the 1929 corporation at $62.50 per share, and computed a profit of the excess of the amount realized in cash and stock of both kinds over the basis to each petitioner of the common stock of the 1926 corporation before the stock dividend.

We find as facts that at the time of the aforesaid transactions the fair market value of the preferred stock of the 1929 corporation received by the taxpayers was $62.50 per share, and the fair market value of the common stock of the 1929 corporation received by the taxpayers was $28 per share.

The important question in these proceedings is whether or not the transaction whereby the 1929 corporation acquired the properties of the 1926 corporation was a “ reorganization ” within the meaning of that term as defined in section 112 (i) (1) (A) of the Revenue Act of 1928. Distributions in liquidation are treated like exchanges. Sec. 115 (c). The general rule of 112 (a) is that all gain upon the sale or exchange of property shall be recognized. There are, however, exceptions to this rule. These petitioners claim that one of the exceptions relieves them of tax at this time on a part of their gain. They say that they exchanged stock in one corporation, a party to a reorganization, in pursuance of the plan of reorganization, for stock in another corporation a party to the reorganization, so that section 112 (b) (3) applies to two of the exchanges. See also section 112 (c) (1), under which the Commissioner computed their taxable gain. Unless the facts bring them squarely under the exception the general rule will apply. Thomas H. Redington, 25 B. T. A. 707, 711; Winston Bros. Co., 28 B. T. A. 1248, 1252; Connecticut Power Co., 28 B. T. A. 38. The Commissioner now contends that there was no reorganization ” and hence he erred in not recognizing all of the gain for tax purposes. The facts relating to this point are not in dispute.

The 1929 corporation acquired all of the properties of the 1926 corporation and the contention of the petitioners is that this meets precisely the definition of a reorganization in section 112 (i) (1) (A), where it provides, “ including the acquisition by one corporation of * * * substantially all the properties of another corporation.” The quoted words do not stand alone in the definition, however. They are in parenthesis after the words “ merger or consolidation.” Not every acquisition by one corporation of substantially all of the properties of another constitutes a “ reorganization.” Minnesota Tea Co., 28 B. T. A. 591; Prairie Oil Gas Co. v. Motter, 66 Fed. (2d) 309. A “ reorganization ” only results where the acquisition is a true merger or consolidation or partakes of the nature of a merger or consolidation. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599. The petitioners agree that the words “ merger or consolidation ” as generally understood in the law of corporations would not include such a transaction as occurred here. They concede that there was no merger or consolidation and rely solely upon the words in parenthesis. They likewise concede that (B) does not apply. The words in parenthesis in (A) “ expand the meaning of ‘ merger ’ or ‘ consolidation ’ so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation.” Pinellas Ice & Cold Storage Co. v. Commissioner, supra. The nature of a merger and a consolidation must first be determined in order to apply the test of similarity which the Supreme Court has outlined. The nature of a merger and a consolidation is revealed when the purpose and distinguishing characteristics of these phenomena are considered. The purpose in each case, as the descriptive names indicate, is to merge, consolidate, or combine the business and franchises of two or more corporations into one. The combining into one of what formerly had been separate in two or more, that is, the combining of the businesses and franchises of two or more corporations into one corporation, is one of the most typical and distinguishing characteristics of a merger and a consolidation. The actual combination takes place by operation of law either by merging all of the old group into one of the corporations in the group or by consolidating all of the old group into a new corporation. It is characteristic of a merger and also of a consolidation that only one corporation exists after the merger or consolidation has taken place and this one corporation is greater than any one of the original group, since there is combined in it the properties and franchises of that whole group. A transfer of assets is an essential but not necessarily a distinguishing characteristic of a merger or a consolidation. The court said in Cortland Specialty Co. v. Commissioner, supra, that there must be some continuity of interest on the part of the original stockholders in every statutory “ reorganization.” Before a merger or a consolidation takes place the stockholders of each separate corporation are interested in the business and assets of'their own particular corporation. But when the combination takes place they, in a sense, give up a part of their complete interest in these particular properties for a partial interest in the business and assets of the other corporations entering into the combination, so that instead of a complete interest in a part they now have a part interest in the whole group of properties.

The next step, after having thus briefly outlined some of the characteristics of mergers and consolidations, is to compare what happened in the present case with these distinguishing characteristics to see whether or not the transaction in question was in general like a merger or consolidation so that it may fairly be said to partake of their nature. Most of the assets of the old corporation were transferred to a new corporation. The transfer was not made in order to combine the business and franchises of two corporations, but was made in order to allow the original stockholders to take out a portion of their investment in cash and to prepare to let in new interests sufficient to expand the single business involved. The transaction, to the extent at least of the cash involved, partook of the nature of a sale. But, a more important circumstance is that there was no combination. Prior to the transfer there was no group of separate corporations having separate businesses and separate assets which could have been combined. Before anything was done there was but one corporation and but one business. Neither the franchise nor the business of this corporation was combined with the franchise or business of any other corporation. Just at the time of the transfer, and for the purpose before mentioned, a new corporation was organized, but this new corporation had no business of its own which could be combined with that of any other corporation. It simply acquired the business of the old corporation. It had a franchise separate from that of the old corporation, but even this was not combined with that of the old corporation. Both corporations continued to exist after the transfer, each with its own franchise separate from that of the other, and the retention by the old corporation of its franchise was an integral part of the plan. There was some continuity of interest, that is, the stockholders of the old corporation did not lose all interest in the properties transferred. The petitioners argue that the extent or degree of interest retained is immaterial because the scheme of the statute is to tax the gain to the extent of the cash, or property other than stock of the new company, received. See contra, Warner Co., 26 B. T. A. 1225. But in this case even the interest of stockholders after the transfer is not like the corresponding interest in the case of a consolidation or merger. These stockholders of the old corporation gave up a part of the complete interest which they had had in the business and assets of the old corporation. But they did not give it for a partial interest in the combined assets of a new corporation, including assets and businesses of other combining corporations; instead, they gave it up for cash and for a fractional interest in the same assets and the same business which had formerly belonged to their old corporation. The new corporation was to acquire additional cash through the issuance of its stock to new stockholders, but this fact would not help to develop a resemblance between this transaction and a merger or a consolidation. Thus it appears that this transaction was not in general like a merger or consolidation. Although it had some features which a merger or a consolidation might also have, still it had “ no real semblance to a merger or consolidation ” and did not sufficiently “ partake of the nature of a merger or consolidation ” to bring it within the statutory definition of a reorganization. 'Pinellas lee c& Cold Storage Co., supra.

It does not matter whether or not the transaction in question would have been a reorganization within the generally understood meaning of that term. Von Weise v. Commissioner, 69 Fed. (2d) 439; cer-tiorari denied, 292 U. S. 655. Such a meaning of the term has no significance here, for the statute defines “ reorganization ” and the transaction was not a “reorganization” under section 112 (i) (1) (A). The general provisions of Congress in enacting the reorganization and nonrecognition provisions of the statute have not been overlooked in the decision of this case, but a discussion of those purposes would not prove beneficial and is not necessary, since in any event this case does not come within any of the exceptions to the general rule of section 112 (a).

The Commissioner has determined that the value of the common stock of the 1929 corporation received by these petitioners, or their wives or both, was $28 per share at the time of receipt. No opinion evidence of the value of the stock was offered. The Commissioner relies upon the presumption of correctness which attaches to his determination and upon the prices at which the stock was actually sold on various exchanges. These sales indicate a value of $28 per share for the stock, as determined by the Commissioner. The petitioners have not argued this point. Apparently they rely upon some or all of the following facts: Offers of $200 per share for the common stock of the 1926 corporation were rejected; 260,000 shares of the common stock of the 1929 corporation were sold to the underwriting bankers for $4,200,000; there are statements in resolutions that the stock was worth $20 per share; and an understanding existed between the recipients of 40,000 shares of the common stock of the 1929 corporation and the bankers that the 40,000 shares would be withheld from the market for a time. The rejected offer is of little, if any, significance. The details of the withholding agreement have not been shown and the evidence as to that agreement does not show that it affected the value of the stock, particularly the value of the shares here in question. The statements in resolutions are not very helpful when considered in connection with their context and the absence from the witness stand of those responsible for the statements. The most important fact in the record, from the petitioners’ standpoint, is the sale to the bankers. But even that piece of evidence when added to all other evidence in favor of the low value of $20 is insufficient to cause a preponderance in favor of the low value. The bankers were supplying services and were being compensated for services so that the stated sale price to them is not a reliable criterion of the value of the stock. There is no reason, on the other hand, to discount the sales which actually took place on exchanges. Prices were uniform over a considerable period during which sales in considerable quantities were made. The evidence does not justify a reversal of the Commissioner’s determination.

Decision of the question of how many exchanges took place for tax purposes may be immaterial in view of the decision that there was no statutory reorganization. However, the evidence establishes that there were actually three real exchanges and each had its usual and separate effect for tax purposes. See Evelyn F. Gregory, 27 B. T. A. 223, and Commissioner v. Gregory, 69 Fed. (2d) 809, reversing the Board’s decision on other grounds.

The stipulated facts in the case of Alfred R. L. Dohme on the point relating to the elimination of capital net gain from the computation of the 15 percent limitation on the deduction for contributions brings this case squarely within the decision of a similar point in Aaron Straus, 27 B. T. A. 1116. The Commissioner erred in eliminating capital net gain from the computation. See also Bliss v. Commissioner, 68 Fed. (2d) 890.

Reviewed by the Board.

Decision will he entered under Rule 50.

Smith,

dissenting: In the Revenue Act of 1918 (section 202 (b)), and in each subsequent revenue act, Congress has provided that certain profits arising from the exchange of property upon the reorganization, merger, or consolidation of corporations shall not be taxed until there has been a sale or other disposition by the taxpayer of the property received in exchange. The purpose of these statutory provisions was to facilitate corporate reorganizations, or rather not to discourage and block necessary business readjustments by taxing mere paper gains before such gains are realized in money. See Federal Income Tax: Definition of “ Reorganization,” 45 Harvard Law Review 648, note 1, quoting S. Rept. 275, 67th Cong., 1st sess., pp. 11, 12.

In the drafting of the reorganization provisions of the statutes Congress had the active cooperation and assistance of the Treasury Department and, in fact, those of the later acts, highly technical in character, were the handiwork of direct representatives of the Treasury Department. Great weight must therefore be given to the interpretation placed upon them by the respondent. His application of them to situations which have arisen has been given wide publicity in Treasury publications. See “ Reorganization and Other Exchanges in Federal Income Taxation ”, by Robert N. Miller, et ah, for an analysis of such rulings. In I. T. 2392, Cumulative Bulletin VI-2, p. 17, a form of reorganization substantially the same as that involved in the instant proceeding was held to be a “reorganization ” within the meaning of the statute. Relying upon such interpretations, many reorganizations have been effected in past years. One of these was the Sharp & Dohme transaction in 1929. The respondent held that the transaction amounted to a reorganization within the meaning of the statute and the deficiencies herein involved have been determined on that view. He never raised any question as to the correctness of his determination until June 7,1938, when he filed amended answers in these proceedings asking increased deficiencies on the ground that he had erred in holding that there had been a reorganization of the 1926 corporation in 1929.

Without regard to the history of the legislation or to the interpretation which has been placed upon it by the respondent in past years, I am of the opinion that there are no decisions of the courts that warrant the respondent’s claim that the 1926 corporation “ sold its assets ” to the 1929 corporation in such a way that in 1929 there was no reorganization of the 1926 corporation. In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599 (cited with approval in Pinellas Ice & Coal Storage Co. v. Commissioner, 287 U. S. 462), it was stated:

* * * In defining “ reorganization,” section 203 of tlie Revenue Act [of 1926] gives the widest room for all hinds of changes in corporate structure, but does not abandon the primary requisite that there must be some con-tinunity of interest on the part of the transferor corporation or its stockholders in order to secure exemption. Reorganization presupposes continuance of business under modified corporate forms.

The definition of reorganization ” referred to in the above cited decision (section 203 (h) (1) of the Revenue Act of 1926) is identical with that contained in section 112 (i) (1) of the Revenue Act of 1928.

The facts in these proceedings show that the stockholders of the 1926 corporation received 46.87 percent (225,000 out of 485,000 ¡shares) of the issued common stock and 36.53 percent (59,359 out of 162,500 shares) of the issued preference stock of the 1929 corporation. There was, therefore, a continuity of interest in the stockholders of the 1926 corporation in the 1929 corporation.

In the opinion of the Board in these proceedings it is stated “ that there was no combination of the two corporations ”; that therefore there was “ no real semblance to a merger or consolidation.” The evidence shows, however, that the 1929 corporation was incorporated on July 17,1929; that a large part of its stock was issued to bankers for cash; and that with this cash and additional shares it acquired all the assets of the 1926 corportion. From this it appears that there were two corporations existing side by side for a short period and that the 1929 corporation took over all the assets and business of the 1926 corporation. For some unexplained reason the 1929 corporation did not see fit at once to dissolve the 1926 corporation. It was continued as a mere shell of a corporation, its only assets consisting of its franchise and $500 in cash paid into its treasury by the 1929 corporation in exchange for all its capital stock. If substance and not form is to control in a situation of this character, I am of the opinion that the continued existence of the 1926 corporation is without significance.

In Pinellas Ice & Cold Storage Co. v. Commissioner, supra, it was definitely held that the parenthetical clause included in the definition of a reorganization expands:

* * * the meaning of'“ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. * * *

I think that this expanded definition of the phrase “ merger or consolidation ” covers the transaction before us. It was so considered by the respondent until June 7, 1933. I do not think that there are any decisions of the courts that warrant a different view.

Black, Arundell, Matthews, Leech, and Adams agree with this dissent.

      Sbc. 112 (i) (1). The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation).


author: McMahon :

text:
    The National Bank of the Republic of Chicago, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47764.
    Promulgated November 22, 1934.

      F. G. Ludwig, Esq., and Arthur J. Hughes, Esq., for the petitioner.

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

McMahon :

This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1926 in the amount of $24,185.67.

The parties entered into the following stipulation of facts, which also defines the issue involved:

It is hereby stipulated by and between the parties hereto, by their respective solicitors, that the only issue in this Appeal is whether The National Bank of- the Republic of Chicago had the right to use the statutory net loss of The National City Bank of Chicago for the year 1924, amounting to One hundred sixty-seven thousand five hundred seventy-six dollars and forty-seven cents ($167,576.47), as a deduction from its income for the year 1926; i. e., whether Petitioner is the same taxpayer as The National City Bank of Chicago and entitled to such deduction under Section 206 of the Revenue Act of 1926, in view of the fact that Petitioner claims to come within Section 203 of the Revenue Act of 1924, and claims to be, by reason thereof, the same entity for income tax purposes pursuant to Article 1574 of Regulations promulgated under said Section 203; and, for the purpose of determining this issue, it is stipulated that the admitted facts in this case are as follows:
1.That The National City Bank of Chicago was merged under the National Banking Act with The National Bank of the Republic of Chicago under the charter and title of The National Bank of the Republic of Chicago as of December 21, 1924, pursuant to a Certificate of Authority of the Comptroller of the Currency. The capital set-up of the constituent banks immediately prior to the merger, and of the bank resulting from their merger, is as follows:
The National City Bank of Chicago
Capital_ $2,000, 000.00
Surplus-1,000, 000. 00
Undivided Profits_ 622, 553. 83
The National Bank op the Republic op Chicago Capital_ $2, 000,000.00
Surplus-1, 000, 000. 00
Undivided Profits_ 928, 777.91
The National Bank op the Republic op Chicago (Resulting Bank) Capital_ $4, 000,000. 00
Surplus-1, 000, 000. 00
Undivided Profits_ 500, 000. 00
Contingent Reserve-200, 000. 00
Under the plan, which was approved by said Comptroller, equal net assets over and above all liabilities in the sum of Two Million eight hundred fifty thousand dollars ($2,850,000.00) were contributed by each of these banks, making the capital set-up of the merged bank as above indicated; and under said plan the shareholders of each constituent bank received share for share in the merged bank in exchange for the old stock.
2. That under said Plan each of said banks contributed, in addition to Two million eight hundred fifty thousand dollars ($2,850,000.00) -to make up the capital, surplus, undivided profits and contingent reserve of the merged bank, an additional sum of Two hundred fifty thousand dollars ($250,000.00) of cash assets toward the capitalization of a securities company to handle and conduct the investment business of said merged bank, which said Company was known as The National Republic Securities Company, with an authorized capital of Five hundred thousand dollars ($500,000.00) ; and that under said plan the shareholders of the merged bank secured a prorated Beneficial Interest in said Company in accordance with their stockholdings in the merged bank.
3. That the remaining assets of each bank, which were considered undesirable by the Examining Committee for the purpose of making up the capital, surplus and undivided profits of the merged bank, were transferred to Trustees for liquidation under a declaration of trust which was identical for each bank Certificates of Beneficial Interest in the Trusts so created were issued to tht respective shareholders of each bank.
4. That under the Agreement between these banks all such excess assets or the proceeds thereof, were to be held as a guaranty fund to make good the assets which each bank contributed to the merged bank. A small dividend was paid by the Trustees to the Republic shareholders, but no liquidating dividend has ever been paid to the shareholders of the said The National City Bank of Chicago for the reason that there is still owing to the merged bank approximately Fifteen thousand dollars ($15,000.00) on account of such guaranty liability, with only certain frozen assets in the Trust, which, under present conditions, will not be sufficient to satisfy said liability.
5. That the return of The National City Bank of Chicago for the calendar year 1924 showed a net loss per books; and a review by the Treasury Department of such return shows such net loss per books to be One hundred sixty-seven thousand five hundred seventy-six dollars and forty-seven cents ($167,576.47) and this is the same amount herein claimed by Petitioner as a deduction on its net taxable Income for the calendar year ended December 31, 1926. The Commissioner, however, did not allow said sum as a deduction to be taken by Petitioner in its return for said year on the sole ground that Petitioner was not the same taxpayer under Section 206 of the Revenue Act of 1926.
6. That the National City Bank of Chicago and The National Bank of the Republic of Chicago, each filed separate returns annually up to the year of the merger. That The National City Bank of Chicago filed a return for the calendar year 1924, but has filed no return since that time. The National City Bank of Chicago did not surrender its charter at the time of such merger, and said bank has engaged in no business operations of any kind since the date of said merger.

At the hearing there was introduced in evidence Joint Exhibit A-l, which is a photostatic copy of the minutes of the meeting of the shareholders of the National City Bank of Chicago held December 17,1924; Joint Exhibit B-2, which is a photostatic copy of the minutes of the meeting of the board of directors of the National Bank of the Republic of Chicago held on December 17, 1924; Joint Exhibit C-3, which is a certified copy of the certificate approving the consolidation of the petitioner and the National City Bank of Chicago, signed by the Comptroller of the Currency and dated December 20, 1924; and Joint Exhibit D-4, which is a photostatic copy of the minutes of a meeting of the shareholders of the petitioner held on December ,17, 1924. All the above joint exhibits relate to the consolidation of the two banks. Such exhibits are incorporated-herein by reference, but it is not deemed necessary to set forth any of their provisions, except as they are commented on herein.

The question presented is whether the petitioner is the same taxpayer as the National City Bank of Chicago within the meaning of section 206 (b) of the Revenue Act of 1926 so as to entitle it to deduct, in computing its net income lor the year 1926, the net loss of the National City Bank of Chicago sustained during the year 1924. The petitioner is the entity which has continued to carry on the business formerly carried on by itself and also that formerly carried on by the National City Bank of Chicago in 1924, after the consolidation of the two companies in 1924 under an act of Congress entitled “An Act to provide for the consolidation of national banking associations.” 40 Stat. 1043, 1044, approved Nov. 7, 1918. The Board has had this statute under consideration in several proceedings, including National Bank of Commerce, 19 B. T. A. 1080, where it is set forth fully.

In Manufacturers Trust Co., 28 B. T. A. 1260, where facts were somewhat similar to those in the instant proceeding, we held that a national bank continuing after a consolidation or merger is not the same taxpayer, within the meaning of the net loss provisions of the statute, as the national bank with which it merged or consolidated.

In New Colonial Ice Co. v. Commissioner, 292 U. S. 435, affirming New Colonial Ice Co. v. Commissioner, 66 Fed. (2d) 480, which affirmed the decision of this Board in New Colonial Ice Co., 24 B. T. A. 886, it was held that an original corporation and its sus-cessor through reorganization are separate taxable entities and that the second corporation is not entitled to deduct from its 1923 income a net loss of its predecessor for prior years under the provisions of section 204 (b) of the Bevenue Act of 1921. The Supreme Court there stated in part:

When section 204 (b) is read with the general policy of the statutes in mind, as it should be, we think it cannot be regarded as giving any support to the deduction here claimed. It brings into the statutes an exceptional provision declaring that where for one year “ any taxpayer has sustained a net loss ” the same shall be deducted from the net income of “ the taxpayer ” for the succeeding taxable year; and, if such loss be in excess of the income for that year, the excess shall be deducted from the net income for the next succeeding taxable year. Its words are plain and free from ambiguity. Taken according to their natural import, they mean that the taxpayer who sustained the loss is the one to whom the deduction shall be allowed. Had there been a purpose to depart from the general policy in that regard, and to make the right to the deduction transferable or available to others than the taxpayer who sustained the loss, it is but reasonable to believe that purpose would have been clearly expressed. And, as the section contains nothing which even approaches such an expression, it must be taken as not intended to make such a departure.

See also Overbrook National Bank of Philadelphia, 23 B. T. A. 1209; Grange National Bank, 22 B. T. A. 1209; May Oil Burner Corporation, 27 B. T. A. 1281, affirmed in May Oil Burner Corporation v. Commissioner, 71 Fed. (2d) 644; Farmers Cotton Oil Co., 27 B. T. A. 105; and Elliott-Granite Linen Corporation, 26 B. T. A. 936. Also cf. Charles E. Van Vleck, 31 B. T. A. 433.

Upon the authority of the above cases we hold that the petitioner is not entitled to deduct, in computing its net income for the year 1926, the net loss sustained by the National City Bank of Chicago during the year 1924, since the petitioner is not the taxpayer which sustained the net loss in question.

The petitioner cites us the amendment to the National Banking Act passed by Congress on June 16, 1933, 48 Stat. 190, which contains, among other provisions, the following:

* * * Upon such a consolidation, or upon a consolidation of two or more national banking associations, under section 33 of this title, the corporate existence of each of the constituent banks and national banking associations participating in such consolidation shall be merged into and continued in the consolidated national banking association and the consolidated association shall be deemed to be the same corporation as each of the constituent institutions. * * *

It is the petitioner’s contention that this indicates an intention of Congress to clarify the purpose and intent of the law in view of the possible conflicting opinions as to the effect of a “ merger ” as distinguished from a “ consolidation ” under the state laws. Petitioner further states that this shows that it was never the intention of Congress that the resulting corporation under a consolidation under the National Banking Act should be considered as a new entity. We cannot agree with this contention. On the contrary it would seem to us that the amendment was made for the reason that such an amendment was necessary to change the existing law. What effect this provision might have upon a consolidation or merger occurring after its enactment we find it unnecessary to here determine. In our opinion it has no effect whatever upon the instant proceeding, since by its terms it does not purport to be retroactive.

The parties stipulated that the National City Bank of Chicago was “merged” under the National Banking Act with the petitioner under the charter and title of the petitioner, pursuant to a certificate of authority of the Comptroller of the Currency. The evidence discloses that the National City Bank of Chicago did not surrender its charter at the time of the 'so-called “ merger ” or later. The evidence also shows that the petitioner did not receive all of the assets of such bank. In his certificate the Comptroller of the Currency certified that the petitioner and the National City Bank of Chicago had been “ consolidated ” under the charter and title of the petitioner, within the purview of the National Banking Act, and approved such “consolidation.” The applicable National Banking Act refers to “ consolidation of national banking associations.” Notwithstanding that the parties stipulated that the two corporations involved in this proceeding were “ merged ”, we have referred to the transaction as a “ consolidation ”, which is what the Comptroller approved. However, there may be some doubt as to whether, as a matter of law, there was a “ merger ” or “ consolidation ” within the ordinary meaning of those terms (see discussion of “ merger ” and “ consolidation ” in Alfred R. L. Dohme, 31 B. T. A. 671), and we find it unnecessary to, and specifically do not, determine that there was here a “ merger ” or “ consolidation ” in the ordinary sense. The Comptroller of the Currency proceeded upon the theory that there was a consolidation within the meaning of the National Banking Act. The evidence does disclose that the petitioner is not the same “ taxpayer ” which sustained the net loss in question, as heretofore pointed out.'

Reviewed by the Board.

Decision will be entered for the respondent.

Tkammell dissents.

       Sec. 206. (b) If, for any taxable year, it appears upon tie production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “ third year ”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.


author: McMahon:

text:
    Columbia State Savings Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45261.
    Promulgated November 22, 1934.

      H. N. Smith, G. P. A., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

McMahon:

The question to be determined is whether commissions or discounts deducted from the principal or face of real estate mortgage loans are income in the year in which the loans are made, the books of account being kept on an accrual basis.

The petitioner included in taxable income for 1927 all commissions or discounts on loans sold or otherwise disposed of during 1927 whether made in 1927 or prior thereto. It contends that under the facts in this proceeding, while admittedly on an accrual basis, it did not derive income from the deduction of discount or commissions from the face of the loans until such loans were sold or otherwise disposed of.

A similar contention made by this petitioner involving its income for the years 1921 and 1922 was decided adversely to the petitioner in Columbia State Savings Bank, 15 B. T. A. 219, affirmed in Columbia State Savings Bank, 41 Fed. (2d) 923. This question, involving similar facts, was also before the Board in North-Western Trust & Savings Bank, 20 B. T. A. 365, and Bonded Mortgage Co. of Baltimore, 27 B. T. A. 965, affirmed in Bonded Mortgage Co. v. Commissioner, 70 Fed. (2d) 341, wherein it was held that commissions deducted from the face of real estate loans are income to the maker of the loan in the year in which such loan is made when the books of account of the lender are kept on an accrual basis, following Columbia State Savings Bank, supra. Cf. Cosmopolitan Bond & Mortgage Co., 30 B. T. A. 717.

The petitioner contends that tbe evidence in this proceeding, showing that the petitioner serviced the loans after the sale thereof and that the amount and rate of commission charged on each loan depended upon the term, interest rate, and risk involved therein, was not presented in petitioner’s prior case, Columbia State Savings Bank, supra, and that because of this additional evidence this proceeding is distinguishable from the prior proceeding. In our opinion, giving due consideration to all the additional facts shown by the evidence in this proceeding, not shown in the prior case, we must conclude, as in the prior case, that:

It thus appears that the commissions charged by the petitioner were in the nature of compensation for services rendered, and that when a loan was made the transaction was fully completed in so far as concerned the petitioner’s right to its commission. The liability of the borrower to pay the commission was in no way contingent or dependent upon the passage of time, as is the case with respect to an obligation to pay interest for the use of borrowed money. Upon the execution of the note the borrower’s liability to pay the commission became definitely accrued at the time each loan was made, and since the petitioner kept its books of account upon an accrual basis, the aggregate amount of the commissions on loans made within each taxable year should have been accrued on the books * * *.

At the time the loans were made the obligation of the borrower to pay, and the right o.f the petitioner to receive, the whole of the commissions became definitely fixed and determined. That the sale of such loans at par or the payment of such loans in full were not absolutely certain at the time when made is immaterial. The possibility of nonpayment is inherent in every obligation to j)ay. However, the evidence discloses that all mortgages and bonds sold were sold at par.

The commissions represented payment for the granting of loans and it is immaterial that the rate of commission charged in each instance was based upon the term of the loan, interest rate, and risk involved. It was testified that it was necessary for petitioner to service its loans after they were made by collecting the interest, seeing that taxes were paid and insurance renewed, inspecting the properties occasionally, and seeing that the owner of the loan received his interest and principal when due. The collection of interest, checking of payment of taxes and maintenance of insurance, and occasional inspection of property mortgaged are services incidental to the business of making real estate mortgage loans, whether performed in its own behalf or in behalf of its customers. It was also testified that it was petitioner’s policy, dependent however on the rate of commission paid to its salesmen, to repurchase from its customers mortgages sold at par. It does not appear that this policy was carried into effect in a single instance. However, this servicing and policy have no bearing upon the accrual of the commission, since they were performed and maintained to facilitate and make sales. The services were performed for the purchaser of the loan and not for the maker of the loan. The liability of the maker of the loan for the commission or discount was not contingent upon the servicing of the loan for the benefit of the purchaser thereof. It is immaterial to the borrower whether his loan is sold. He is interested merely in the granting of it.

In our opinion it would serve no useful purpose to discuss the cases cited by petitioner on brief, since all are distinguishable on the facts presented.

The action of the respondent in including in petitioner’s 1927 income commissions or discounts deducted from the principal or face of mortgage loans made in 1927 is approved.

Decision will Toe entered for the respondent.


author: Seawell :

text:
    Charles H. Sage, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53487.
    Promulgated November 22, 1934.

      Ellsworth 0. Al/vord, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Seawell :

The respondent determined that the petitioner in 1927 received as a dividend distribution from the Kimberly-Clark Co. 419.866 shares of Kotex Co. stock which at the time had a fair market value of $138.81 per share, or an aggregate value of $58,281.60.

In our opinion, and we so hold, the correctness of the respondent’s determination as to the fair market value of the Kotex Co. stock at the date (January 3, 1927) he asserts distribution of same was made is sustained by the record. However, in behalf of the petitioner, it is very earnestly insisted that there was in fact mo distribution of Kotex Co. stock as contended by respondent and that petitioner did not actually receive any Kotex Co. stock.

Numerous authorities are cited and extended arguments made by counsel on both sides in support of their respective positions. While carefully considering them, it is not necessary to review and discuss them fully nor in detail, as certain principles enunciated in a few cases are, in our opinion, controlling and determinative of the issues involved. We have endeavored to make a full and .fair statement of the material facts shown by the record and necessary to be considered in determining the issues.

The respondent’s determination of deficiency is based on the theory that the declaration by resolution of the board of directors of the Kimberly-Clark Co. on January 3, 1927, of a dividend of 44,749 shares of no par capital stock of the Kotex Co. for distribution pro rata, in proportion to the stockholdings in the Kimberly-Clark Co. and as set forth in the resolution, and the action thereafter taken, constituted a taxable dividend within the meaning of section 201 (a) and (b).of the Bevenue Act of 1926. The petitioner denies there was any dividend distribution of said stock, asserting that under the circumstances there could be none, and insists that what the stockholders o,f the Kimberly-Clark Co. were to receive and did receive in 1927 as a distribution was not Kotex Co. stock, but International Cellucotton Products Co. stock for which the Kotex Co. stock had been exchanged, and that such action brought the transaction within and governed by section 203 (c) of the act, under which no gain is recognized.

That the Kimberly-Clark Co. on January 3, 1927, did own 44,749 shares of Kotex Co. no par stock and had a surplus, consisting in part of those shares, sufficient in amount for a dividend distribution as recited in the aforesaid resolution, is not disputed. So far as the ¡record shows there was no legal obstacle to prevent the Kimberly-Clark Co. from declaring and distributing as a dividend to its stockholders the 44,749 shares of Kotex Co. stock, as respondent contends in effect was done, unless, as insisted for the petitioner, such a distribution could not be made under the then existing circumstances on account of the aforesaid two prior agreements of November 1, 1926, and December 1,1926.

In order to bring the transaction within and satisfy the requirements of section 203 (c), supra, as insisted by the petitioner, the distribution would have to be made “ in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization ”, of “ stock or securities in such corporation or in another corporation a party to the reorganization.” The record does not indicate that any reorganization was ever contemplated by or occurred with respect to the Kimberly-Clark Co., either within the meaning of “ reorganization ” as defined in section 203 (h) (1) of the Kevenue Act of 1926 or within any accepted or recognized meaning of that term. A reorganization, in the statutory sense, did actually occur in 1927 in the case of the Kotex Co., but at the time of such reorganization the Kimberly-Clark Co. had, in our opinion, ceased to be one of its shareholders, the stock of the Kotex Co. formerly owned by the Kimberly-Clark Co. being then owned by its shareholders, who exchanged it for stock of the new corporation, the International Cellucotton Products Co.

The term “ a party to a reorganization ” as defined by section 203 (h) (2) of the 1926 Kevenue Act “ includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.” The Kimberly-Clark Co. was not a corporation “ resulting from a reorganization.” Nor was it either the acquiring corporation or a corporation the shares of which were acquired in the statutory case of “ an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.” The Kimberly-Clark Co. was not, in our opinion, in the sense of the 1926 Kevenue Act, section 203 (h) (1), a party to any merger or consolidation; nor was it recapitalized and there was no change in its identity, form, or place of organization. The petitioner, in our view, can find no support in any language of the statute to sustain his contention that the Kimberly-Clark Co. was “ a party to the reorganization ” within the meaning of section 203 (c), supra. If such determination is correct, it necessarily follows that the declaration of a dividend of Kotex Co. stock on January 3, 1927, by the Kimberly-Clark Co. was not made by a corporation a party to a reorganization and the petitioner as a stockholder therein was not a shareholder in a corporation a party to a reorganization.

The insistence in behalf of the petitioner is that the Kotex Co. stock in the hands of the Kimberly-Clark Co. was impressed with a specific enforceable trust at the date of the dividend resolution of January 3, 1927, the Kimberly-Clark Co. prior to that date having become a party to the deposit agreement of November 1, 1926, which was signed by the Kimberly-Clark Co., Kotex Co., and all the stockholders of both companies. For petitioner it is argued that by the terms of the deposit agreement the Kotex Co. stock “ could be used only for the purpose ” of the exchange for stock of the International Cellucotton Products Co.

Suppose any or all of the individuals who owned the minority shares of the Kotex Co. had assigned or transferred their respective shares subsequent to having signed the deposit agreement, would such assignments or transfers be void or ineffective to pass their interests in and title to such shares, because their assignees or transferees would be obligated to make the exchange of stock as contemplated in the deposit agreement? We think not. And if not, is the transfer or assignment of Kotex Co. stock made by the Kimberly-Clark Co. on January 3, 1927, as set forth in resolution passed by its board of directors on that date, void or ineffective? We do not think so. The resolution of January 3, 1927, declared a dividend in stock of the Kotex Co. “ and that said dividend be paid by distributing ” to its holders of common stock “ shares of said stock of the Kotex Company, pro rata, in proportion to the stockholdings of the Kimberly-Clark Company as of the date hereof or by delivering said shares to the Deposit Committee to the extent that said stockholders have signed the Deposit Agreement dated November 1, 1926 or the Reorganization Agreement, dated December 1, 1926. * * * ”

On January 3, 1927, the Kimberly-Clark Co. endorsed, in blank, certificates representing 44,749 shares of Kotex Co. stock and delivered them to the Kotex Co., which issued new certificates in the names of the Kimberly-Clark Co. stockholders, pro rata, which certificates were not delivered in person to the individual stockholders entitled thereto and the owners thereof subject to terms of the deposit agreement, but, in accordance with their consent and agreements previously expressed, to the deposit committee, thereby completing the deposit with the committee of the entire outstanding stock of the Kotex Co.

The deposit agreement, in part, provided:

* * * and in tie event of a declaration of stock dividend or dividends upon any shares so deposited, or in the event of the declaration by the Paper Company [Kimberly-Clark Co.] of a dividend payable in the stock of the Old Corporation [Kotes Co.] the shares represented by such dividend or dividends should be, in the ease of each depositor, bound by the terms of this agreement, and the provisions thereof * * *.

After the Kimberly-Clark Co. on January 3, 1927, endorsed in blank the Kotes Co. certificates as aforesaid and the Kotex Co. issued new certificates in the names of ■ the Kimberly-Clark Co. stockholders, pro rata, in keeping with the resolution of its board of directors declaring a dividend payable in Kotex Co. stock, the stockholders of Kimberly-Clark Co. in whose names the Kotex Co. stock was issued, in our opinion and we so hold, acquired legal title to those shares as a dividend distribution, notwithstanding the limitations or restrictions by which they were bound by reason of prior agreements made with respect to the disposition to be made of the stock.

In the matter of restrictions, in Rodrigues v. Edwards, 40 Fed. (2d) 408, affirming 33 Fed. (2d) 1003, the court said:

Plaintiff concedes that the receipt of something of exchangeable value or of which he could dispose would constitute income. See Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. E. 1570. He asserts, however, that under the contract he could make no disposition of the stock without the consent of the company or Meyer; furthermore, that it was subject to purchase at some future book value.
In our judgment, the contract not only did not prevent plaintiff from disposing of the trust certificates, but, on the contrary, it evidenced a clear intention that he should have a right of immediate disposition thereof. The trust certificates were to bear on their face the statement that they should not be assignable except in accordance with the terms of the agreement; this clearly implied that, subject to those terms, they might be assigned. Cf. Uniform Stock Transfer Act, ¶ 15 (P. L. N. J. 1916, p. 402) ; Baumohl v. Goldstein, 95 N. J. Eg. 597, 124 A. 118. Clearly, therefore, they were not wholly inalienable, even though a prospective purchaser were to acguire them subject to the limitations under which they were held by plaintiff. The requirement of consent by a third person is not an absolute bar to negotiation (Farmers’ Mercantile & Supply Co. v. Lawn, 146 Wis. 252, 131 N. W. 366; In re Copal Varnish Co., [1917] 2 Ch. 349) ; on the contrary, it implies that, if such consent be secured, the stock or trust certificate is assignable. Some restrictions upon the transferability of corporate shares or trust certificates are now common; but such shares or certificates may nevertheless be readily marketed. See “ Kestrictions Upon the Transferability of Shares of Stock,” 42 Harv. Law Eev. 555, and cases cited.'

In behalf of the petitioner it is insisted that the case of Sidney F. Tyler et al., Trustees, 28 B. T. A. 367, affirmed by the Circuit Court of Appeals for the Third Circuit, 72 Fed. (2d) 950, is “ a square authority against all aspects of respondent’s contention that Earn-berly-Clark stockholders are taxable upon a dividend in Kotex Company stock.”

In the Tyler case, supra, in which case petitioners kept their book? and filed income tax returns on the cash receipts and disbursements basis, the Commissioner determined that the profit realized from the sale of certain shares of stock was received by and taxable to petitioners in 1927 — the petitioners con .ending that such profits were not received by them until the year 1928. We held that the profit was not realized until 1928 and hence there was no deficiency in 1927. In disposing of the case on appeal, the Circuit Court of Appeals, in part, said:

Whether the profit was realized in 1927 or 1928 is dependent upon whether the Safe Deposit and Trust Company of G-reensburg was the agent for the respondents, since they concede that, if the Trust Company was their agent, receipt of the purchase price by it in 1927 was equivalent to receipt by them.
:H ‡ ‡ * *
The doctrine of constructive receipt is applicable only when there is no substantial limitation or restriction as to the time of payment to the taxpayer. The deposit agreement, however, does limit and restrict the time of payment since it specifically provides that the depositing shareholders are not to receive any money until after January 1, 1928. They could neither demand their share nor control its disposition prior to that date. Under the agreement, the respondents, could not and did not in fact or constructively receive the money for their shares until 1928. We are of the opinion therefore that the Board of Tax Appeals did not err in holding that the income was earned in 1928 and that the profit therefrom was taxable in that year.

In the instant case, the deposit agreement — when signed by stockholders o.f the Kimberly-Clark Co. — made the deposit committee, in our opinion and we so hold, the agent, with very broad powers it is true, of each stockholder, and in the event of a declaration by the Kimberly-Clark Co. of a dividend payable in Kotex Co. stock, the shares represented by guch dividend were to be bound by the terms of the deposit agreement and issued to the committee or any member it might designate for endorsement and deposit thereunder. There was no prohibition against the declaration of a dividend in Kotex Co. stock and the reference to same in the deposit agreement as therein set forth was a clear indication that there might be such a dividend and, if go, how the stockholders of the Kimberly-Clark Co. had agreed it might be handled. Such a dividend was declared by the resolution of January 3, 1927, and Kotex Co. stock was thereafter issued in the names and for the number of shares to which each stockholder in the Kimberly-Clark Co. was entitled, such shares being dealt with by the deposit committee as authorized by the stockholder when he signed the deposit agreement of November 1, 1926, and thereby constituted the deposit committee his agent in the matter of receiving and otherwise dealing with the Kotex Co. stock dividend.

The deficiency notice sets forth that the petitioner in 1927 received 419.866 shares of Kotex Co. stock as a dividend distribution from the Kimberly-Clark Co., and such, the record shows, was the correct number to which he was entitled if Kotex Co. stock was in fact distributed as a dividend on January 3, 1927. The petitioner was called as a witness at the hearing. He did not deny or affirm the receipt of the alleged distribution of Kotex Co. stock and was excused without giving any testimony at variance with the respondent’s determination.

In whatever light the declaration of a dividend by the Kimberly-Clark Co. payable in Kotex Co. stock is viewed, the petitioner got the benefit thereof.

The parties agree, and we concur, that the exchange of Kotex Co. stock for International Cellucotton Products Co. stock was a nontaxable transaction. (Sec. 203 (b) (4), Revenue Act of 1926.) It is not necessary to decide whether the transaction resulted in a reorganization of the Kotex Co. (See Alfred R. L. Dohme, 31 B. T. A. 671.)

Upon the whole record and careful consideration of the authorities cited, though we have not fully discussed them, we are of the opinion and hold that the respondent did not commit error in his determination that in 1927 petitioner received 419.866 shares of Kotex Co. stock as a dividend distribution from the Kimberly-Clark Co.; that the value of that stock at the time of distribution was $138.81 per share; and that the same was not reported on petitioner’s 1927 income tax return. Respondent’s determination of deficiency in the amount of $8,323.17 with respect thereto is therefore approved. The respondent having duly made claim for an increased deficiency and it appearing from stipulation of counsel for the respective parties that the petitioner in July 1927 sold 336 shares of the preferred stock of the International Cellucotton Products Co. at the price of $100 per share, which was not reported on his income tax return for 1927, and that said shares were received or acquired in the manner and on the basis set forth in our findings of fact, we are of the opinion and hold that the sale of said stock was a taxable transaction, and, counsel of the respective parties having so stipulated, provided the Board approves, the gain or loss arising therefrom will be computed under Rule 50.

Reviewed by the Board.

Judgment will he entered u/nder Bule 60.

Smith concurs in the result.

Goodeioh dissents.