author: McMahon :

text:
    John Griffiths, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18162.
    Promulgated June 15, 1933.

      Paysoff Tinkoff, Esq., O. R. Seiter, Esq., and A. S. Hubbard, Esq., for the petitioner.

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

McMahon :

On February 7, 1929, the Board rendered its opinion in the above entitled proceeding and therein held that the respondent’s action in including in petitioner’s taxable income for the year 1919 the amount of $87,926.63 representing bond premiums was correct. The Board also held that the petitioner’s tax return filed for the year 1919 was willfully fraudulent and that the petitioner was liable to the assessment of the penalty provided by statute in such case. John Griffiths, 15 B.T.A. 252. On March 29, 1929, the Board entered its decision, holding that there was a deficiency in tax of $37,455.55 (the amount determined by the respondent to be the deficiency) and holding further that there was a deficiency in penalty of $18,727.78.

On September 30,1929, the petitioner filed a petition for review of the decision of the Board in the United States Circuit Court of Appeals for the Seventh Circuit. In such petition for review the petitioner for the first time raised the question of the statute of limitations.

On June 12, 1931, the United States Circuit Court of Appeals for the Seventh Circuit rendered its opinion in Griffiths v. Commissioner, 50 Fed. (2d) 782, therein holding that the Board erred in finding that the petitioner was guilty of fraud in making his return. The court did not disturb the holding of the Board that the respondent’s action in including the $87,926.63 item in petitioner’s taxable income for the year 1919 was correct. The court did hold, however, that there should be a retrial upon the question of the waiver of the statute of limitations. It clearly appears from the court’s opinion that assessment and collection are barred unless there has been a waiver of the statute of limitations. The court stated in this regard in part as follows:

In the instant case petitioner’s return for the year 1919 was made March 15, 1920, and the order of determination against him for a deficiency tax for the year 1919 was made by the Commissioner of Internal Revenue May 18, 1926, which was more than five years after the return was made. It follows, therefore, that respondent is barred from maintaining this proceeding unless petitioner was guilty of fraud in making his return. Not only was the remedy barred, but the liability extinguished. United States v. John Barth Co. et al., 27 F. (2d) 782. It is true that sec. 1106 (a), supra, was repealed by sec. 612-of the Revenue Act of 1928, which attempted to give effect to the repeal as of February 26, 1926, but in United States v. John Barth Co. supra, Judge Evans, speaking for the court, said, “ it was not within the power of Congress to enact legislation to recreate the liability thus extinguished.”
* ***** *
We think that petitioner was not guilty of fraud in making his return. However, we are of the opinion that the ends of justice require that the cause be retried in order that both parties may offer such evidence as they may see fit to present upon the issue of waiver of the statute of limitations.
*******

In its mandate to the Board, under date of August 27, 1981, the United States Circuit Court of Appeals for the Seventh Circuit stated:

* * * It is now here ordered and adjudged by this Court that * * * this cause be, and the same is hereby remanded to the said United States Board of Tax Appeals for further proceedings consistent with the opinion of this Court.
* * * * * * *
You, therefore, are hereby commanded that such further proceedings be had in said cause, as according to right and justice, and the laws of the United States, ought to be had, the said Order of Redetermination notwithstanding.

A rehearing was subsequently had in accordance with such mandate. At such hearing the Board ruled that under the opinion and mandate of the court, the only question remaining for the Board to determine is the question of whether there has been a waiver of the statute of limitations.

The burden of proving any exception which would remove the case from the operation of the statute of limitations is upon the respondent. Farmers Feed Co., 10 B.T.A. 1069.

Neither party amended his pleadings upon the retrial before the Board. In view of the fact, however, that the United States Circuit Court of Appeals for the Seventh Circuit, in its opinion, stated that either party may offer such evidence as it may see fit to present upon the issue of waiver, we believe that there is no duty upon respondent to amend his pleadings to allege an exception .to the running of the statute, as contended by the petitioner. The petitioner’s pleadings before the Board do not contain allegations concerning the running of the statute of limitations. The United States Circuit Court of Appeals for the Seventh Circuit, in its opinion, also stated:

Respondent contends, however, that petitioner is precluded from raising the question of the statute of limitations in this court because he did not raise it before the Board. But, as stated by Judge Evans in the case last cited, we are dealing with statutes which not only limit the time in which the action can be brought, but also extinguish the cause of action. In such a ease there need be no special plea, because it is perfectly obvious that there is no cause of action. People, etc. v. Herr, 81 Ill. 125; 37 Corpus Juris, par. 722, p. 1217 and cases cited.

At llio hearing counsel for the respondent appearing in his behalf produced an instrument in his possession which he offered in evidence and relied upon. He did not identify or authenticate the instrument by his own testimony or that of any other witness. Such instrument is as follows:

Treasury Department Internal Revenue Service Form 872a
Income and Profits Tax Waiver
For Taxable Years ended prior to January l, 1922
IT: PA: 1
IGK: 106 November 3, 1925
In pursuance ol the provisions of existing Internal Revenue Laws Mr. John Griffiths, a taxpayer of 112 West Adams Street, Chicago, Illinois, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1919 under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any assessment, as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
[Signed] John Griffiths
Taxpayer
D. H. Blair
Commissioner
A. L.
If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. [Underscoring ours.]

The above instrument is in printed form and the insertions therein, in both typewriting and handwriting, are underscored. Over the signature “ D. H. Blair, Commissioner ”, the instrument is stamped as follows:

Approved_Nov. 14, 1925
Date
Oommisisoner of Internal Revenue
On the reverse side of such instrument, the following is stamped:
Distribution Center
Nov. 12, 1925
Personal Audit Division

Upon the face of the instrument there are also other notations, written in handwriting or stamped, which we do not consider necessary to be set forth here.

From the deficiency notice, which was signed by or on behalf of the respondent, it appears that the respondent, in determining the deficiency and mailing such notice, relied upon a waiver.

John Griffiths, the petitioner, being upon the witness stand as a witness in his own behalf, testified as follows with regard to such instrument:

EXAMINATION BY THE MEMBER:
Q. Mr. Griffiths, you have examined that paper, have yon not?
A. What is the question? Yes, that’s my signature.
Q. The question is: Have you examined the paper put in your hands at my request?
Mb. Htjbbaed: May we make our objection?
The Member: I will permit you to make your objection, and, furthermore, will permit you to strike it out if it is not — ■
A. That is my signature, your Honor.
Q. You have looked the paper over?
A. Yes, sir.
Q. And that signature there, which is the signature of John Griffiths, is your signature?
A. Yes, sir.
Q. You made it?
A. Yes, sir.
Q. At or about the time it is dated?
A. Yes, sir; it is here. This is my signature.
Q. And do you recollect what became of that paper after "you had signed it?
A. No, sir.
Q. You have no recollection on that subject?
A. No.
The Member: That’s all.

Counsel for the petitioner objected to the receipt of such instrument in evidence upon the grounds that there is no proof of its execution and delivery and that it never became a part of the res gestae. It is also the position of the petitioner that the instrument in question to be admissible in evidence must be proved to have been obtained from the respondent’s files. The Board received the instrument subject to the objection of counsel for the petitioner and reserved ruling upon its admissibility.

The above quoted testimony of the petitioner establishes that the instrument in question was executed by this petitioner. The instrument having been thus identified, it is our opinion that no further identification or authentication is necessary. On its face it purports to be a consent in writing entered into between the petitioner and the Commissioner of Internal Revenue for an extension of time within which to assess any taxes for the year 1919 until December 31, 1926, It is signed “ D. H. Blair, Commissioner ” by “A. L.”; it bears the stamp of approval of the Commissioner, dated November 14, 1925, and bears other notations indicating that it was in the custody of the respondent. From the deficiency notice it appears that the respondent, in determining the deficiency and mailing such notice, relied upon a waiver, and there is no showing that it was not the waiver quoted above. At the hearing this instrument, being in the possession of counsel for respondent, was offered and relied upon by him, a duly authorized representative of the respondent. The only proof upon the subject indicates that the waiver, after having been signed by petitioner, was delivered to the respondent, and that he accepted and relied upon it.

There are set forth in the margin sections 277 (a) (2) and (b), and 278 (c) of the Kevenue Act of 1924, which were in effect at the time the above quoted instrument purports to have been executed.

In Fruit Growers Supply Co., 21 B.T.A. 315; afiirmed in Fruit Growers Supply Co. v. Commissioner, 56 Fed. (2d) 90, we said:

* * * The basic objections of the petitioner to these waivers are shown by the following paragraph in its brief:
The respondent did absolutely nothing to prove that the statute had been extended except that his counsel at the trial offered in evidence certified photostatic copies of certain papers. The petitioner stipulated that it had signed the originals of those papers. Wo other evidence was produced. The respondent did not prove where the originals were lodged, lie did not prove who signed the originals on behalf of the other party to the documents. He did not prove that the person who signed them had authority to do so. He did not prove that they were signed by the Commissioner, nor that the Commissioner had authorized anyone else to sign them, or that if the Commissioner had authorized anyone else to sign them that the person authorized had signed them. [Italics supplied.]
Substantially the .same objections have heretofore been considered by the Board in other cases and held ineffective.
Trustees for Ohio & Big Sandy Coal Co. et al., 9 B.T.A. 617 (affirmed on this point, Trustees for Ohio & Big Sandy Coal Co. v. Commissioner, 43 Fed. (2d) 282) ; Pantlind Hotel Co. et al., 9 B.T.A. 878; National Piano Manufacturing Co., 11 B.T.A. 46; and Consumers Ice Co., 11 B.T.A. 144. See also Liberty Baking Co. v. Heiner, 34 Fed. (2d) 513 (affd., 37 Fed. (2d) 203) ; Diamond Alkali Co. v. Heiner, 39 Fed. (2d) 645; and Pantages Theatre Co. v. Lucas, 42 Fed. (2d) 810, affirming Pantages Theatre Co., 17 B.T.A. 82. In fact, the petitioner inferentially admits in its brief that the decisions of the Board are contrary to its position, but suggests, for reasons therein given, that such eases have been decided erroneously. We are of the opinion that the reasons advanced by the petitioner are fully answered in the authorities cited above, and accordingly hold that the deficiencies in question are not barred.

In Constitution Publishing Co., 22 B.T.A. 426, we stated:

The petitioner also raised the question that there is no testimony to show that the Commissioner either signed the waiver in person or authorized any one in his behalf to sign it. The instrument, however, appears regular on its face, with the Commissioner’s signature thereon. Apparently this signature was placed there not by the Commissioner personally, as it bears initials below the signature. However, there is a presumption that the signature was placed there by some one having authority to do it. The waiver appears upon its face to be properly executed and if it is not, the taxpayer should hfuoe introduced some evidence to the contrary. Until the contrary appears, a waiver which is regular on its face, bearing the signature of the proper parties, will be accepted and considered of legal and binding effect. Liberty Baking Co. v. Heiner, 34 Fed. (2d) 513; Pantages Theatre Co. v. Lucas, 42 Fed. (2d) 810; Marshall Wells Co. v. Willcuts, 41 Fed. (2d) 751; Diamond Alkali Co. v. Heiner, 39 Fed. (2d) 645. [Italics supplied.]

In Lee Wilson & Co., 25 B.T.A. 840, we stated:

* * * A waiver is not a contract and the Commissioner’s signature is required purely for administrative purposes and not to convert into a contract what is essentially a voluntary, unilateral waiver of a defense by a taxpayer, Stange v. United States, 282 U.S. 270, and Aiken v. Commissioner, 282 U.S. 277, and there can be no doubt that the Commissioner may authorize one or more persons to sign his name to meet the exigencies of such purely administrative duties. There is nothing in the requirement for the Commissioner’s signature which limits the period during which a waiver may be effectively given, Aiken v. Commissioner, supra, and the signature of a commissioner to a waiver of limitations is presumed to have been placed there by his authority, Trustees for Ohio and Big Sandy Coal Co. v. Commissioner, 43 Fed. (2d) 782. Each of the waivers here in question is regular on its face and the petitioner has not proven any irregularity as to signature or date. The waivers are valid. Cf. Tameling v. Commissioner, 43 Fed. (2d) 814. Accordingly, assessment and collection of the deficiencies for the years ended January 31,1922 and 1923, are not barred. Also cf. Pontages Theatre Co., 17 B.T.A. 82; affd., 42 Fed. (2d) 810; certiorari denied, 282 U.S. 890; Fruit Growers Supply Co., 21 B.T.A. 315. * * *

In Onondaga Co. v. Commissioner, 50 Fed. (2d) 397; certiorari denied, 284 U.S. 671, the court said:

* * * Is the Commissioner’s personal signature necessary to the validity of the waiver? * * *
* * * The courts have taken the view that an initial signature, not in the Commissioner’s handwriting, will be presumed to be authorized within section 250 (d), where it appears in a waiver which has been the subject of official action. * * * It will be presumed that the signatures to waivers were properly affixed within the meaning of section 250 (d), since it was apparently affixed by some one connected with the Department. The Commissioner acted upon them in sending out the deficiency letter later. * * *

In Board v. Commissioner, 51 Fed. (2d) 73, the court said:

The record is wholly devoid of evidence upon which to substantiate a claim that the waiver was not executed by the Commissioner himself or by one duly authorized to act in that behalf. The execution of the waiver by the Commissioner is a purely ministerial act, and it is not clear why signature by a duly authorized deputy is not sufficient. Statutes of limitations must be strictly construed in favor of the sovereign. Compare The Confiscation Cases, 20 Wall. 92, Ill., 22 L. Ed. 320; Loewer Realty Co. v. Anderson, 31 F. (2d) 268 (C.C.A. 2). Having been signed by the petitioner and acted upon by the Commissioner, and bearing his signature either in person or by one presumably authorized to affix it, “ it would be unconscionable to allow the taxpayer to after-wards repudiate a consent upon which the Commissioner had acted and relied.” Liberty Baking Co. v. Heiner 37 P. (2d) 703, 704 (C.C.A. 3). See, also, Greyloch Mills v. Commissioner, 31 P. (2d) 655 (C.C.A. 2).

Upon the authority of the foregoing cases we hold that the identity and authenticity of the instrument in question has been sufficiently established; that the waiver must be “ accepted and considered of legal and binding effect ”; and that it is a valid waiver. The waiver was signed by the petitioner. There is a presumption that the signature of the Commissioner upon the waiver was put there by some one having authority to do so. The waiver appears upon its face to be properly executed and regular. The waiver has been the subject of official action and has been and is being relied upon by the Commissioner. The petitioner has made no showing to the contrary. The objection of the petitioner to its receipt in evidence is hereby overruled, and it is received in evidence without reservations.

We find nothing in the authorities cited by petitioner which is inconsistent with this holding.

While the question has not been raised in this proceeding, we may say in passing that we find it unnecessary to decide whether the signature of the Commissioner is essential to give such a waiver validity, in view of our holding herein that no showing has been made by the petitioner that the signature of the Commissioner upon this waiver was not put upon it by him or by some one with authority to sign for him.

As pointed out in the circuit court’s opinion, this petitioner’s return for the year 1919 was made on March 15, 1920. Thus, the five-year period for assessment and collection provided by statute expired on March 15, 1925. The waiver herein involved was not given until November 1925. However, the waiver, although given after the expiration of the five-year period, is effective. Stange v. United States, 282 U.S. 270. It extended the time for assessment of any taxes for the year 1919 until December 31, 1926. Prior to that date, to wit, on May 18, 1926, the respondent notified the petitioner of the deficiency in question, and an appeal was duly filed with the Board. We hold that there has been a waiver of the statute of limitations by the petitioner and that assessment and collection of the deficiency in question are not barred.

Reviewed by the Board.

Decision will be entered that there is a deficiency in tax for the year 1919 in the amownt of $87^55.55.

Murdock concurs in the result.

       Sec. 277. (a) Except as provided in section 278 and in subdivision (b) of section 274 and in subdivision (b) of section 279—
      *******
      (2) The amount of income, excess-profits, and war-profits taxes imposed by * * * tile Revenue Act of 1918, and by any such Act as amended, shall be assessed uitliin five years after the return vas filed, and no proceeding in court for the collection of such taxes shall he begun after the expiration of such period.
      *******
      (b) Tile period within which an assessment is required to be made by subdivision (a) of this section in respect of any deficiency shall be extended (1) by 60 days if a notice of such deficiency has been mailed to the taxpayer under subdivision (a) of section 274 and no appeal has been filed with the Board of Tax Appeals, or, (2) if an appeal has been filed, then by the number of days between the date of the mailing of such notice and the date of the final decision by the Board.
      Sec. 278. (c) Where both the Commissioner mid, the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 377 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon. [Italics supplied.]


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Mississippi Valley Trust Company, et al., Executors, Estate of Firmin Desloge, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60039.
    Promulgated June 15, 1933.

      Stanley S. Waite, Esq., and Abraham Lowenhaupt, Esq., for the petitioners.

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

Leech:

At the outset petitioners assert this Board is concluded in its interpretation of decedent’s will by the judgment of the probate court of St. Louis, where it was probated. We do not agree.

It may be conceded that “ the right to succeed to the property of the decedent depends upon and is regulated by state law (Knowlton v. Moore, 178 U.S. 41, 57, and it is obvious that a judicial construction determines not only legally but practically the extent and character of the interests taken by the legatees.” Utterheart v. United States, 240 U.S. 598, cited by petitioners.

The so-called estate tax, by virtue of which this disputed deficiency arises, is not a succession tax, but an excise on the transfer of the decedent’s estate at his death. The rights of the parties hereto are determined entirely by the will of decedent. They accrued finally when the will became effective, the date decedent died, December 18, 1929. Knowlton v. Moore, supra: Y.M.C.A. v. Davis, 247 U.S. 47; New York Trust Co. v. Eisner, 256 U.S. 345; Ithaca Trust Co. v. United States, 279 U.S. 151; Edwards v. Slocum, 264 U.S. 61. The probate court proceedings urged as a bar to our construing the will here, occurred, therefore, after the- rights of the parties to this appeal had become definitely fixed. The reversed chronological sequence of these court proceedings, as well as other material differences, clearly distinguish the present situation from that before the Supreme Court in the Utterheart case. Cf. Kuhn v. Fairmont Coal Co., 215 U.S. 349; Fidelity & Columbia National Bank v. Lucas, 52 Fed. (2d) 298. It is further observed that in the Utterheart case the proceedings in the state court, brought by one executor against the other executor and beneficiaries of the will in issue, were actually adverse. All interested parties to the will were record litigants. In the pending case, so far as the record indicates, the state court proceedings were upon petition of the executors, ex parte, without the joinder of the other possibily antagonistic interest, or the only other interested person, the widow, who acquiesced. The petition, prayer and apparently the judgment thereon referred only to paragraph 3 of the will under discussion.

Petitioners claim a deducton of an asserted gift to an admittedly charitable corporation from decedent’s gross estate in arriving at the statutory net estate subject to Federal estate tax.

The statute, the benefit of which is asserted, defines such deductible gifts and limits the means to effect them. It provides two ways in which the protected “ bequests, legacies, devises, or transfers * * * ” shall be made, (1) directly “ to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes * * * ” and, (2) “to a trustee or trustees * * * to be used * * * exclusively for * * * [such purposes].” Nothing is included therein indicating deductibility of a gift effected by the exercise of a power of appointment. In other sections of the act from which the above is an excerpt, as well as all other Federal estate tax laws, beginning with the Federal Estate Tax Act of 1918, transfers of property by means of powers of appointment are treated separately and by definite designation. This omission in the quoted section excludes such transfers from the deductible class, unless a trust is raised thereby. Lang v. Commissioner, 289 U.S. 109. Its application leaves no alternative, though the results in particular situations appear harsh. Cf. Crooks v. Harrelson, 282 U.S. 55; Lang v. Commissioner, supra. But petitioners properly concede the will creates no such trust. It named no trustees. No definite or ascertainable amount of the estate was designated as a corpus. Nor was there any imperative duty imposed upon anybody in the disposition of the disputed gift. Thus no trust was created, since its observance could not be compelled. Howard v. Carusi, 109 U.S. 725; Hadley v. Forsee, 303 Mo. 418; 101 S.W. 59; Russell v. United States Trust Co., 127 Fed. 445.

The petitioner’s novel position is that the amount of the controverted gift is deductible because it was effectively made to the con-cededly charitable corporation by decedent’s will by the granting therein of a discretionary special power of appointment and its later exercise. The power is said to be special because of the asserted inferential limitation on its use for charities.

The burden of the argument is that such a power of appointment as is said to be present here, although invalid as raising a trust, is here effective because the donees of this discretionary power are in existence, and may make those things certain which are not made so by the will, citing the maxim "id certum est guod cerium reddi potest T They misconceive the philosophy and therefore the effect of the statute, the protection of which they seek.

It is this altruistic philosophy, clearly effected by the statute, that not only contemplates and justifies the exclusion, from this deductible class, of gifts effected by the exercise of a discretionary power of appointment, but properly grounds and harmonizes the interpretative judicial superstructure erected thereon. This basic rationale is consistent with and practically disposes of the authorities cited by petitioners.

Undoubtedly Congress by the particular provision under discussion intended to favor gifts for charitable objects, but, as was aptly stated by Chief Justice Taft in Y.M.C.A. v. Davis, supra, it “ was thus looking at the subject from the standpoint of the testator and not from the immediate point of view of the beneficiaries. It was intending to favor gifts for altruistic objects, not by specific exemption of those gifts but by encouraging the testators to make such gifts. Congress was in reality dealing with the testator before his death. It said to him: £ If you will make such gifts, we will reduce your death duties and measure them, not by your whole estate, but by that amount, less what you give.’ ”

Thus, in logically applying this formula, the element of absolute certainty was emphasized not only in the mechanics the testator was permitted to use, but by the adding of the word “ exclusively ” this same condition precedent of certainty was applied to the testator’s intention to limit the gift to the secured class. The sine qua non of de-ductibility is that the gift should pass by the will, not within the discretion of anybody, but certainly and absolutely to one or more of the described corporations or through trustees, for the named purposes. St. Louis Union Trust Co. et al., Executors, 21 B.T.A. 1201; reversed in part on other grounds by the United States Circuit Court of Appeals, 8th Circuit, St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922; Beekman's Estate, 232 N.Y. 363; 134 N.E. 183; John Markle et al., Executors, 28 B.T.A. 201. The actual transfer of the gift to the hospital by the executors was, at most, only indicative of the interpretation the executors placed upon the instrument. Cf. Ithaca Trust Co. v. United Spates, supra; St. Louis Union Trust Co. v. Burnet, supra; John Markle et al., Executors, supra.

When must this condition of certainty occur?

The deficiency here arises from a Federal estate tax act, which has its own criteria, irrespective of local law, Weiss v. Wiener, 279 U.S. 333, and is an excise on the transfer from decedent of rights extinguished by his death. It is imposed at death and before the beneficiary receives the gift. So, continuing the logical development of judicial interpretation of this controlling statutory provision, every fact must have been known or ascertainable then, at the imposition of the tax, to bring the gift within the protection of the questioned section. Knowlton v. Moore, supra; Y.M.C.A. v. Davis, supra; New York Trust Co. v. Eisner, supra; Ithaca Trust Co. v. United States, supra; Edwards v. Slocum, supra. Cf. Hadley v. Forsee, supra. It is immediately apparent that the exercise of a discretionary testamentary power of appointment could not satisfy this requisite.

In fact, if it were otherwise, the incongruous but logical result would be that gifts provided for by such discretionary powers would be deductible whether or not completed by the exercise of the power.

It is'true the above decisions involve trusts and are therefore not factually in point. However, in our opinion, they very definitely do indicate the falacy of petitioner’s position that gifts made by the exercise of. a discretionary power of appointment, even if such a power were created and so exercised here, are deductible in reaching the amount of decedent’s statutory net estate, subject to this tax. Obviously, approval of such a claim would be in bold opposition to the very purpose and intent of this legislation, emphasized in these cases, and permit indirectly that which is not allowed directly. Child Labor Tax Case, 259 U.S. 20.

But, assuming the correctness of petitioner’s theory, in the abstract, is it applicable here? Does the present will contain a valid power of appointment? This turns upon the construction of the will before us. The intention of the testator is a cardinal rule in the construction of the will. Smith v. Bell, 6 Pet. 68; Gibson v. Gibson, 239 Mo. 490; 144 S.W. 710; R.S. 1909, sec. 583. That intention must be ascertained from the will as a whole, giving effect to all words therein in their ordinary sense, unless the testator manifested an intention otherwise. Travers v. Reinhardt, 205 U.S. 423; Lane v. Vick, 3 How. 464; Hardenbergh v. Ray, 151 U.S. 112; Gibson v. Gibson, supra.

Petitioners offer certain extrinsic testimony which appears in the stipulation of record. The objection of respondent to its admission is sustained and an exception noted to petitioner. Proper extrinsic evidence is admissible to remove certain ambiguities in a will. Gilmer v. Stone, 120 U.S. 586; Coulam v. Doull, 133 U.S. 216; Patch v. White, 117 U.S. 210; Wilkins v. Allen, 18 How. 385; cf. McCoy v. Bradbury (Mo., 1921), 235 S.W. 1047; Bond v. Riley, 296 S.W. 401, but never to control the construction of the will, Barber v. Pittsburgh Ft. W. & C. R. Co., 167 U.S. 83, which must speak for itself in disclosing the intention of the testator. Mackie v. Storey, 93 U.S. 589.

The tendered extrinsic testimony of oral declarations of the testator as to his intentions is not admissible because, in our opinion, the present will is unambiguous. The offered testimony does not establish extrinsic facts, to resolve an ambiguity as was present in the cited cases, but is tendered for the purpose of showing the testator’s intention as to the disposition of his estate to be other than that expressed in his will. Cf. Barber v. Pittsburgh Ft. W. & C. R. Co., supra; Mackie v. Storey, supra.

Petitioners center their arguments upon the construction to be placed upon paragraph 3 of the will and practically ignore the rest of the instrument. The will as a whole shows clearly that the testator’s primary intention was to provide amply for his wife and two sons .to the full extent of his estate if that were necessary under conditions existing at the time of bis death which he could not foresee at the date the will was executed. Had charity been a primary object of his bounty and had he not been concerned with the amount ultimately to go to his wife and sons, the testator would have undoubtedly bequeathed a specific amount for charitable uses. Such intention stands out strongly when it is considered that paragraph 3 is followed by the other paragraphs which dispose of the testator’s entire estate to his wife and two sons, absolutely, in fee. If it may be said that paragraph 3 expresses an intent inconsistent with that expressed in the other paragraphs of the will, the primary intention must control. Smith v. Bell, supra.

The testator’s intention as expressed in the third paragraph of the will is clear and unquestionably consistent with his primary intention to devise and bequeath his entire estate to his wife and two sons.

The fourth paragraph of the will gives the entire estate, absolutely, not only to the two sons claiming to be donees of the power of appointment, but to the testator’s widow, as well, who are the first takers. Petitioner then emphasized his intention to make his gift to these three loved ones absolute and practically foreclosed petitioner’s argument here, by categorical denial of any charitable gift in the will. In passing upon the character and extent of the estate created by will, the court in Gibson v. Gibson, supra, said: “ In what we have above expressed we do not wish to be understood as holding that what would otherwise be a fee in the first taker can be cut down to a less estate by ambiguous words, or words not as clear and strong as those in the devise to the first taker.” Cf. Schneider v. Kloepple, 270 Mo. 389; 193 S.W. 834, following the Gibson case. We find no inference or expression in the instrument limiting this fee estate. A fee estate is absolute and therefore a power of appointment attached thereto is without effect. The absolute estate of the widow and two children stands undisturbed. Cf. Gibson v. Gibson, supra; Leser v. Burnet, 46 Fed. (2d) 756; Schouler on Wills, 6th ed., vol. 2, sec. 1247.

In effect, the will here merely expresses a wish that the sons in their sole discretion donate, as their own, any amount they deem best in accordance with the testator’s wishes theretofore expressed in regard to charities. The sons were at liberty, subject to the acquiescence of their mother, to donate the entire net estate, or, if they chose, to make no donations, with the result that they and their mother would retain for themselves the entire net estate.

The action of respondent in disallowing the disputed deduction is sustained.

Reviewed by the Board.

Judgment will be entered under Rule 50.

       [Revenue Act 1926.] Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      -S * * * * * a*
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (3) The amount of all bequests, legacies, devises, or transfers, * * * to or for
      the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, * * * or to a trustee or trustees * * * to be used * * * exclusively for * * * [such purposes].

        Federal Estate Tam Acts:

      1916 — See. 202. No provision.
      1917 — See. 900. Merely increased the rates.
      1918 — Sec. 402. Value of gross estate includes (d) to the extent of any interest subject at decedent’s death to any change through the exercise of a power, (e) extent of any property passing under general power of appointment exercised by decedent (1) by will, or (2) by deed executed in contemplation of or intended to take effect at or after death.
      1921 — Sec. 402 (e). Same.
      1924. — Sec. 302 (f). Same.
      1926 — See. 302 (f). Same.
      1928 — Makes no amendment of sec. 302 of 1926 Act.
      1932 — Makes no amendment of sec. 302 of 1926 Act.


author: Seawell: Murdock,

text:
    San Joaquin Fruit & Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6989, 20801, 27038, 35835, 40407, 42726, 49317, 52253.
    Promulgated June 15, 1933.

      Joseph D. Peeler, Esq., George M. Naus, Esq., and N. L. McLaren, C.P.A., for the petitioner.

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

Seawell:

These proceedings were consolidated for hearing and report, and involve the redetermination of deficiencies in income and excess profits taxes for 1920 and 1921 in the respective amounts of $22,872.09 and $21,867.40; deficiencies of $58,422.79, $2,898.43, $10,965.80, $17,663.58, $20,177.14, and $3,061.39 in income taxes for 1922, 1924, 1925, 1926, 1927, and 1928, respectively; and the liability of the petitioner as a transferee for unpaid income and excess profits taxes of the San Joaquin Fruit Co. for 1921 in the amount of $21,867.40.

At the threshold we are confronted with a motion of the respondent asking that we make the decision of the court in Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123; reversing, in part, 16 B.T.A. 1290, the judgment of this Board as to Docket Nos. 6989 and 20801 for 1920 and 1921, and that his determination of petitioner’s income tax liability be approved.

The facts necessary to a consideration of the motion, briefly stated, are as follows: A consolidated hearing was held in Los Angeles, California, May 3, 1927, on all of the issues raised in Docket No. 6988 for 1918 and 1919 (not now involved) and Docket Nos. 6989 and 20801, except the one involving special assessment, which was not tried because of the refusal of the Commissioner of Internal Revenue to answer a subpoena to produce comparatives. Upon the conclusion of the hearing, orders were entered continuing the proceedings to the reserve calendar pending a decision in the case of Blair v. Oesterlein Machine Co., 275 U.S. 220. Thereafter in 1928 amended and supplemental petitions were filed in the proceedings in which, among other things, it was alleged that the petitioner was not organized until 1922 and therefore was not liable for the proposed deficiencies. The proceedings were consolidated and set for hearing on October 16, 1928, at which time the petitioner submitted evidence on the new issues raised in the amended petitions. The deficiency notices for 1918, 1919, and 1920 were mailed to the petitioner, and the notice for 1921 was addressed to the San Joaquin Fruit Co., hereinafter referred to as the “ Fruit Co.”, in care of the petitioner.

In a decision promulgated June 29, 1929 (16 B.T.A. 1290), the Board held that the petitioner was not organized until 1922 and, accordingly, was not liable for the deficiencies proposed against it for 1918, 1919, and 1920, and that, as the deficiency notice for 1921 was not mailed to the petitioner, the Board was without jurisdiction to hear the proceedings for that year. Appropriate orders were thereupon entered that there were no deficiencies for 1918, 1919, and 1920, and dismissing, for lack of jurisdiction, the proceedings in so far as they related to 1921.

The respondent took an appeal from the decision to the Circuit Court of Appeals for the Ninth Circuit. The court sustained the Board as to 1918 and 1919 and reversed its decision as to 1920 and 1921, the former ruling being in accordance with an admission made by counsel for the Government that the deficiencies were barred by the statute of limitations. On August 4, 1931, after the receipt of the court’s mandate affirming the Board’s decisions as to 1918 and 1919 and reversing it as to 1920 and 1921 and commanding that such further proceedings be had in such cause as according to right ■and justice and the laws of the United States ought to be had,” this Board, by appropriate order, placed Docket Nos. 6989 and 20801, applicable to the years 1920 and 1921, respectively, on the Day Calendar of October 5, 1931, for hearing on the merits. Thereafter the respondent consented to a motion of the petitioner for the transfer of the proceedings to the Circuit Calendar.

By motion filed October 13, 1931, tbe respondent alleged, among other things, that all of the issues involved in the proceedings for 1920 and 1921 had been tried on May 3, 1927, with the exception of the issue relating to special assessment, and asked that the Board set a time for the filing of briefs upon questions other than special assessment, and that after the issues were decided, to set the case down for hearing on the special assessment question. The petitioner opposed the motion. A hearing was had on the motion with the result that on January 9, 1932, an order was entered denying the respondent’s motion to decide the issues involved other than special assessment on the then record and continuing the proceedings on the Circuit Calendar “ for the presentation of such other and further evidence respecting the issues herein as the parties may be advised.” In April 1932 the proceedings, and other cases involving identical issues raised by the petitioner for later years, were placed on the Circuit Calendar for hearing. A consolidated hearing was held at Los Angeles, California, May 23-24,1932, at which the respondent moved to make the aforesaid decision of the circuit court the Board’s decision for 1920 and 1921. The presiding Member reserved judgment on the motion and proceeded to hear testimony on all of the issues raised in all of the petitions, except special assessment.

The underlying theory of the respondent’s contention is that the decision of the circuit court of appeals settled all of the issues raised by the petitioner in Docket Nos. 6989 and 20801 for the years 1920 and 1921, and for the Board to receive further evidence on the issues and render a decision thereon would amount to a review of the judgment of the appellate court.

The petitioner is not asking us to review the decision of the appellate court with the.view of reaching a contrary conclusion. All it seeks to do is to have us decide questions raised on the merits in the light of all the evidence of record, issues it contends were not decided by this Board or the circuit court of appeals.

The hearing had in Los Angeles in 1927 was not a full and complete one on the merits, and it appears from the record, as we pointed out in our order of January 9,1932, that counsel for the petitioner contemplated the introduction of other and further evidence to support, its allegations. The hearing had in October 1928 was confined to the law questions raised by the amended petitions, and in the Board’s report of the hearing, the findings of fact, and decisions related only to such questions, the questions on the merits not being regarded as. submitted for decision. In his appeal to the circuit court of appeals from the Board’s decision, the respondent alleged as error-only the matters decided by the Board, alleging that such evidence-as had been offered on the other questions was immaterial to a review of the decision.

An examination of the court’s decision discloses that it did not discuss or decide questions other than those passed upon by the Board. After setting forth in full the Board’s findings of fact and opinion, the court discussed the effect of petitioner’s action before this Board and the sufficiency in law of the respondent’s notice to the Fruit Co. as a notice to the petitioner, without mentioning questions raised on the merits.

The court’s reversal of our decision did not directly or indirectly settle the questions now before us; hence it made no rulings which may be regarded as controlling the questions on the merits. As to them, the petitioner has not had its day in court and is entitled to a decision from the Board. Accordingly, the respondent’s motion is denied.

The petitioner questions our jurisdiction to hear the proceedings in so far as they relate to 1922 on the ground that it has received no deficiency notice for that year.

On February 28, 1927, the respondent mailed a deficiency notice to the Fruit Co., informing it of a deficiency of $58,422.79 in income taxes for 1922. Within the time allowed by law the petitioner filed a petition with the Board, alleging several errors in the determination of the deficiency. The petition is captioned “ San Joaquin Fruit & Investment Company, Successor to San Joaquin Fruit Company, through change of name only,” and is signed “ San Joaquin Fruit & Investment Company (formerly San Joaquin Fruit Company) By C. V. Newman, Secretary.” In the verification of the petition it is stated that the San Joaquin Fruit & Investment Co. succeeded the San Joaquin Fruit Co. “ through change of name only during the year 1922 and is the petitioner referred to in the foregoing petition.”

We had the identical question before us in San Joaquin Fruit & Investment Co., supra, for the year 1921, and from facts in all material respects the same as those here we found that the deficiency notice was not a notice to the petitioner, and held that we lacked jurisdiction to hear and decide the proceeding. On appeal, the Board was reversed. Burnet v. San Joaquin Fruit & Investment Co., supra. We feel bound by the court’s decision for the prior year in view of the right of appeal to the same court from our decision for the taxable year. Accordingly, we hold that we have jurisdiction to hear and decide the issues raised for the year 1922.

The issues on the merits presented for decision are (a) the proper basis for determining the amount of gain realized'or loss sustained on thé sale of certain land in each of the years 1922 to 1928, inclusive, and the computation of depreciation on walnut and orange trees in all of the taxable years; (b) whether invested capital should be increased for the years 1920 and 1921; and (c) whether a loss of $14,272 was sustained in 1926 on account of the removal of certain walnut trees from petitioner’s land. The special assessment issue applicable to 1920 and 1921 was abandoned.

In 1906 C. E. Utt and Sherman Stevens negotiated a certain lease from the Irvine Co. for 1,000 acres of bare and unirrigated land in Orange County, California, the acreage being part of a 100,000-acre tract of land owned by the lessor. Subsequently in 1906 the Fruit Co. was organized under the laws of California with a capital of $100,000, divided into 1,000 shares, each of the par value of $100, for the purpose of executing the lease. The Irvine Co., a West Virginia corporation, C. E. Utt and Sherman Stevens each purchased at par 270 shares of the stock. No additional stock was ever issued. All of the stock of the Irvine Co., except qualifying shares, was owned by James Irvine.

On October 13, 1906, the Irvine Co. leased the land to the Fruit Co. for a term of ten years beginning December 1, 1906. By the terms of the lease the lessee was required, among other things, to plant all of the land to fruit trees within four years at its own expense; to grow crops of grain, beans and other products on such other portions of the land as could be cultivated without material injury to the fruit trees; and to sink wells for and develop sufficient water on a designated tract of nearby land owned by the lessor for use in producing crops on the leased land. The lessor was to receive as rent for the land one fourth of the crops produced by the lessee on the leased premises. The lessee was given an option to purchase not in excess of 500 acres of the land before the expiration date of the lease at $200 per acre cash, and all of the tract at the expiration of the lease at the same price, payable one fourth cash and the balance within five years. An exercise of the right to purchase portions of the tract during the life of the lease worked a termination of the option to purchase all of the tract on the expiration of the term of the lease. The lessee could not assign or transfer the lease, or sublet any portion of the land, without the written consent of the lessor.

Within two years the lessee developed the amount of water required by the lease for irrigation purposes and by the close of 1910 expended from $150,000 to $170,000 in developing and improving the tract.

On November 30,1916, the Fruit Co. exercised the option given in the lease to purchase the property.

In 1907 the lessee planted 140 acres of the tract to orange trees and 500 acres to walnut trees. In 1909 it increased the acreage of orange trees to 390 and walnut trees to 600.

The San Joaquin Fruit & Investment Co., the petitioner, was organized in July 1922, under the laws of California, with a capital stock of $1,500,000 divided into 15,000 shares, each of the par value of $100. The stockholdings of C. E. Utt, Sherman Stevens and the Irvine Co. in the Fruit Co., amounting to 810 shares, were surrendered November 6, 1922. The surrendered stock was immediately reissued, the petitioner receiving 807 shares, and C. E. Utt, Sherman Stevens and James Irvine, Jr., one qualifying share each. On the same day the petitioner issued shares of its stock as follows in exchange for the stock it had received of the Fruit Co.:

Shares
Irvine Oo_4, 998
James Irvine_ 1
James Irvine, Jr_ 1
Shares
Sberman Stevens_5, 000
O. E. Utt_2, 500
Margaret R. Utt_2,500

No new capital was put into the petitioner at the time of the issuance of its stock.

The directors of the Fruit Co. on November 6, 1922, called a meeting of the corporation’s stockholders for November 18, 1922, for the purpose of considering the question of dissolving the corporation. The meeting was held on the called date, at which the stockholders adopted a resolution to liquidate and dissolve the corporation. On November 21,1922, the directors of the Fruit Co. filed a petition with the Supreme Court of the County of Orange, State of California, for the dissolution of the corporation. On the same day the court ordered the filing of the application and the advertising thereof for a period of 30 days, and set the proceeding down for further hearing on December 26, 1922. At some undisclosed time between the filing of the petition and December 26, 1922, C. E. Utt, Sherman Stevens and James Irvine; Jr., assigned their stockholdings in the Fruit Co. to the petitioner. On December 26, 1922, said court found the petitioner to be the sole stockholder of the Fruit Co. and ordered all of the latter’s assets to be transferred to the former. The Fruit Co. was dissolved December 26, 1922. At or about that time the petitioner surrendered the stock of the Fruit Co. and received therefor all of the corporation’s assets.

The physical assets of the Fruit Co. were taken up on the books of the petitioner at the value of $1,206,000 in round figures in accordance with an appraisal made of the properties as of November 15, 1922.

In determining the deficiencies the respondent computed depreciation on orange and walnut trees and determined gains realized from sales of acreage each year, commencing in 1922, on the basis of the actual cost of the assets to the Fruit Co. The petitioner argues as to the years 1920,1921, and 1922, that the exercise of the option to purchase in 1916 operated to convert capital assets, consisting of a vested property right, a valuable option and purchase money, into a fee simple title, a taxable transaction, giving rise to a new basis, namely, the value of the land and trees on the date the option was exercised. In the alternative, it is claimed, among other things, that the Fruit Co. had an equitable interest in the assets prior to the exercise of the option and for all practical purposes was the owner of the property during that period; that the instrument of October 13, 1906, should be construed as a sale of the land, and, one or more of these things being the case, the proper basis is the March 1, 1913, value of the land and improvements, or the value at that time of the option, plus $200,000, the price paid upon its exercise.

We will first consider the character of the agreement of October 13, 1906. The execution of the agreement of October 13, 1906, was preceded by negotiations between Utt and Stevens, experienced or-chardists, and the Irvine Co., represented by James Irvine, its principal stockholder, for a purchase by the former of 1,000 acres of the 100,000-acre ranch owned by the Irvine Co. Irvine preferred to sell the land outright, but had grave doubt as to the ability of Utt and Stevens to finance the purchase on their limited capital of about $30,000 each, particularly in view of the absolute necessity of making a large capital outlay at once for water for irrigation purposes. A lease of the desired land was suggested by the owner, but Utt and Stevens expressed unwillingness to enter into the venture unless it would involve more than a lease. Irvine then endeavored to persuade Utt and Stevens to take a smaller tract of land, but without avail. All of them were confident that the proposed operations would be a success, provided water could be found nearby in sufficient quantities, and while they were confident that water could be developed, the quantity obtainable was then unknown. Further negotiations resulted in an agreement on the part of the owner to involve 1,000 acres in the deal and to join Utt and Stevens in the venture on an equal basis to increase the chances of success. The Fruit Co. was then formed to execute and carry out the contract.

The instrument in question was drafted by Irvine. It is designated a lease, and throughout refers to the owner as the “ lessor ” and the Fruit Co. as the lessee.” It provides that the “ Lessor hereby leases to the said Lessee ”; and makes provisions for the retention of title to the land by the lessor until the completion of the installment payments to be made in case the option granted to purchase was exercised; the payment of taxes and assessments on the land by the lessor “ until said lands have been sold to the said lessee, or its assigns, as herein agreed ”; and for the retention by the lessor of one fourth of the crops produced “ as rent ” for the property. No provision was made in the instrument for the application of rent money to the purchase price of the property in case the option was exeraised, a condition that existed in the document involved in Robert A. Taft, 27 B.T.A. 808, and the facts are by no means parallel to those in Arthur B. Grover, 3 B.T.A. 508. The instrument itself is opposed to the idea of a sale.

The testimony offered does not prove that the intention of the parties to the instrument was to make a sale of the land. Negotiations were commenced by Utt and Stevens with the express purpose of buying the land, but their offers to buy were declined for reasons already given. They took the next best thing obtainable from their standpoint, namely, a lease with an option to buy portions of the land for cash during the term of the lease or all of it upon its termination, on terms. Irvine testified for the petitioner on direct examination that he “ could not have sold it to them in any other way; they could not have bought it * * *, they did not have the financial means to buy it; impossible.” Other testimony of his shows that the Irvine Co. executed a great many other instruments along the same line. Other witnesses testified that failure to exercise the options granted in such instruments was the rule rather than the exception.

We have no doubt that at the time the agreement was entered into the Fruit Co. believed the venture would be sufficiently successful to justify the exercise of the option as to a portion or all of the tract, hut much more is required to show an intention to buy and sell under a particular instrument. Profit was the evident object of the transaction, and had the venture been unsuccessful the lessees would probably have permitted the option to lapse with the expiration of the lease. We construe the document to be a lease, with option to purchase, as it purports to be, and not a contract of sale, and will proceed to decide the issues accordingly.

There is testimony in the record that the option was a valuable property right in the hands of the Fruit Co. and that the land in question had a value in November 1916, considerably in excess of the price paid for it. Had the acquisition of the land at that time not been through the exercise of an option to purchase, granted ten years before, there could be no question that the basis to the purchaser would be actual cost of the land. Does the fact that the property was under option for ten years prior to its purchase affect the situation ? We think not.

The subject matter of the 1916 transaction was not the option, but the land itself. The option was merely the instrumentality through which the property was acquired. While the exercise of the right to purchase by the optionee might have resulted in taxable gain or deductible loss to the lessor, it was not a taxable transaction to the Fruit Co. As to it, there was a mere conversion of a right given to purchase into a contract of sale of the land (Smith v. Bangham, 156 (al. 359; 104 Pac. 689), without resulting gain or loss.

The granting of the option to purchase was not a sale of the land; only a sale of the right to purchase the property. Smith v. Bangham, supra; Hicks v. Christeson, 174 Cal. 712; 164 Pac. 395; Menzel v. Primm, 6 Cal. App. 204; 91 Pac. 754. Under the great weight of authority, the Fruit Co., as optionee of the land, had no interest, legal or equitable, in the property. Richardson v. Hardwick, 106 U.S. 252; Todd v. Citizens’ Gas Co. of Indianapolis, 46 Fed. (2d) 855; certiorari denied, 283 U.S. 852; Ludy v. Zumwalt, 85 Cal. App. 119; 259 Pac. 52. It was not, therefore, until the exercise of the option that the Fruit Co. acquired an interest in the property. Such interest as it had in the land during 1920,1921, and 1922 was acquired by reason of the conversion of the right of purchase into a contract of sale in 1916, at a cost of $200,000.

The case of People’s Street Ry. Co. v. Spencer, 156 Pa. 85; 27 Atl. 113, is cited to show that the Fruit Co. should be regarded as the owner of the land from 1906 because of its exercise of the option. The reasoning of the court in that case was based upon the theory that the transaction giving rise to the suit was, in substance, a loan of money, whether the parties were lessor and lessee, vendor and purchaser, or mortgagor and mortgagee, not being considered important, and that the railway company had an equitable interest in the property at the time in question. When construed in the light of such conclusions, the decision lacks force as supporting a view that the optionee here should be considered as the owner ab initio. In this respect the case of Smith v. Bangham, supra, did not go further than to say that an optionee had such an interest in the optioned property as to “ cut off intervening rights acquired with knowledge of the existence of the option.” The cases of Crowley v. Byrne, 71 Wash. 444; 129 Pac. 113, and Horgan v. Russell, 24 N.D. 490; 140 N.W. 99, are to the same general effect.

Whether the March 1, 1913, value of the land and trees, or the value at that time of the option, is material would seem to turn upon the interest of the Fruit Co. in the property prior to 1916. As we have pointed out, the Fruit Co. had no property right in the land prior to the exercise of the option to purchase and, accordingly, no basis for exhaustion or computing gain or loss. The option expired with the exercise thereof and any value it might have had while in existence can not affect the cost basis of property acquired through it. Not having had any interest in the property prior to 1916, the values of the land and improvements, and the option at March 1, 1913, are, in our opinion, of no importance.

The petitioner claims that the exercise of rights to purchase stock is analogous to the situation here. While a stock right has some of the characterization of an option, it is “ essentially analogous to a stock dividend.” Miles v. Safe Deposit & Trust Co. of Baltimore, 259 U.S. 247. When stock acquired through the exercise of such rights is sold, the cost of the stock, not the value of the right when received, is the basis for computing gain or loss on the transaction. Ayer v. Blair, 25 Fed. (2d) 534.

For 1924 and subsequent taxable years the petitioner is asking that we allow depreciation on the assets and compute profit on sales of parcels of the tract based upon the fair market value of the property on December 26, 1922, when the petitioner is alleged to have received the assets, in connection with the liquidation and dissolution of the Fruit Co. It contends that the exchange of stock of the Fruit Co. for its properties in dissolution proceedings was a taxable transaction giving rise to a new basis for the assets acquired. The respondent maintains that the assets in question were not so acquired, but through a reorganization, and that the basis to the petitioner is cost to the transferor corporation.

Section 204 (a) (7) of the Eevenue Act of 1924 provides that the basis for determining gain or loss from the sale of the property acquired after February 28, 1913, shall be the cost of such property, except that:

If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 203 (h) and (i) of the same act reads as follows:

(h) As used in this section and sections 201 and 204—
(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), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “ a party to a reorganization ” 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.
(i) As used in this section tlie term “control” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

The basis for allowance of exhaustion of assets under the statute is the same. Sec. 204 (c). The same numbered sections of the Keve-nue Act of 1926 and sections 112 (i) and (j), 113 (a) (7) and 114 (a) of the Eevenue Act of 1928 are to the same effect.

Counsel for the petitioner admit there would be some merit to the respondent’s position had there been an exchange of petitioner’s stock for property of the Fruit Co. instead of, as it says actually occurred, a surrender of the stock of the Fruit Co. for its assets in dissolution proceedings. We are asked, in effect, to ignore completely the circumstances under which the petitioner acquired the stock of the Fruit Co. and decide the issue without reference to such matters. We do not think the preliminary steps leading up to the acquisition of the Fruit Co.’s property should be ignored in deciding the question. Considered together they clearly show an intention to terminate the existence of the Fruit Co. in favor of the petitioner in the shortest possible time, without a substantial change in stock ownership.

The exchanges of stock by which the petitioner acquired all but three shares of the stock of the Fruit Co. and the old stockholders of that corporation received about 83 percent of the stock of the petitioner, together with the calling of a meeting of the stockholders of the Fruit Co. for November 18, 1922, to consider the matter of dissolving the Fruit Co., all occurred on November 6, 1922. Within three days after the stockholders acted to liquidate the affairs of the Fruit Co., application was made to the appropriate court for a dissolution decree. After advertisement as required by law and on a date set by the court at the first hearing, a further hearing was liad on the application. The hearing resulted in a decree of the court for the dissolution of the Fruit Co. and the transfer of all its assets to petitioner, its sole stockholder, the outstanding qualifying shares having previously been transferred to it. Except for the period of about 12 days that could have been saved by obtaining waivers from the stockholders for the meeting held on November 18, 1922, the proceedings were carried out in practically the shortest possible time. When these steps had been completed, all within about one and one half months, the petitioner owned all of the property of the Fruit Co. and the original stockholders of the Fruit Co. held about 83 percent of petitioner’s stock. Under these circumstances, we conclude that the assets of the Fruit Co. were not acquired in liquidation proceedings, as contended by the petitioner, but in connection with a reorganization. See Mente & Co., 24 B.T.A. 401: Flushing Nurseries Co., 25 B.T.A. 938.

Immediately after the acquisition by the petitioner of the assets of the Fruit Co. for the latter’s stock, the old stockholders of the transferor corporation were in control of petitioner, by reason of ' their ownership of more than 80 percent of its stock. The transaction thus comes squarely within the reorganization provisions of the statute. Under the statutes the basis to the petitioner is the same as it would have been in the hands of the transferor had it retained the property, with adjustments for gain or loss recognized to the transferor in the exchange. No adjustments are required in these proceedings as no gain or loss was recognized to the transferor. Mente & Co., supra; Fred A. Hellebush et al., Trustees, 24 B.T.A. 660; W. P. Fox & Sons, Inc., 15 B.T.A. 115.

There appears to be no controversy as to the price paid for the land, or the cost of the trees. In any event, the petitioner has failed to show that the costs are different from those determined by the respondent and, accordingly, his determinations will not be disturbed.

For each of the taxable years exhaustion of the orange and walnut trees was claimed by the petitioner and allowed by the respondent on the basis of a useful life of 33% years. The testimony and documentary evidence offered on the question are conflicting. Two qualified witnesses of petitioner testified that orange trees have a productive life of from 30 to 40 years. One of these witnesses expressed the opinion that the productive life of walnut trees is from 30 to 40 years, and the other testified that their life is from 40 to 50 years. Other evidence, consisting of reports prepared by the University of California on production costs of oranges and walnuts in Orange County, California, is that orange and walnut trees have a life for exhaustion purposes of 45 and 60 years, respectively. On the showing made, we do not think the rate used by the respondent is unreasonable. Except for adjustments that may be necessary on account of the proof made of the acreage planted to trees in the taxable years, the respondent’s allowances will not be disturbed.

The petitioner contends that if the exercise of the option is held to be a taxable transaction, the invested capital of the Fruit Co. for 1920 and 1921 should be increased by the difference between the November 30, 1916, value of the tract and the purchase price of $200,000, as earned surplus. The respondent made an allowance for invested capital based upon the cost of the land and improvements made thereon by the Fruit Co.

The exercise of the- option was not, as we have pointed out, a taxable transaction of the petitioner, but merely resulted in a conversion of the option to purchase into a contract of sale of the property. The assets were acquired solely for cash. Property acquired under such circumstances may not be included in invested capital at a figure in excess of cost. Steele, Wedeles Co. v. Commissioner, 68 Fed. (2d) 541; affirming 11 B.T.A. 279; H. T. Cushman Mfg. Co., 2 B.T.A. 39; Klamer-Goebel Furniture Co., 11 B.T.A. 1322; Jamison Coal & Coke Co., 24 B.T.A. 554. On this issue the respondent is sustained.

In its return for 1926 the petitioner claimed a loss deduction of $14,272 on account of the removal of walnut trees from 20 acres of its land. The respondent seems to have reduced the petitioner’s basis for the loss from March 1, 1913, value to cost in 1916, resulting in a disallowance of $13,834.17 of the amount claimed.

The issue is not briefed by the respondent and in the briefs filed on behalf of the petitioner it is said that the “ controversy turns on the proper basis of the orchard.” If that be the only question for decision the respondent must be sustained, as the basis for determining the amount of the deduction for losses on property acquired after February 28,1913, as this was, is cost. Sec. 234 (a) (4), Revenue Act of 1926.

The respondent would nevertheless prevail on the evidence offered by the petitioner to support the deduction. The allegation of loss made in the petition was denied by the respondent in his answer. Such evidence as we have on the question consists of testimony of Irvine and Utt. The former testified that some walnut trees were removed in 1926 or 1927 to plant the land to orange trees. The testimony of Utt, who has been president of petitioner since its organization and, as such, actively engaged in the conduct of its affairs, is that walnut trees were removed during a period of three or four years, and that he had no recollection of the removal of any of them in 1926. Manifestly this testimony is insufficient to support a finding that the trees were removed in 1926 or that a loss in the amount claimed was sustained in that year. On this issue the respondent is sustained.

There remains for disposition the transferee liability of petitioner for income and excess profits taxes of the Fruit Co. for 1921 in the amount of $21,867.10. The transferee notice was mailed December 29, 1927, more than a year after the mailing of the deficiency notice to the Fruit Co., but before the petitioner amended its petition for 1921 as a taxpayer so as to raise the jurisdictional question. The outcome of the jurisdictional question was, as we have already pointed out, favorable to the petitioner before this Board, but unfavorable on appeal to the Circuit Court of Appeals for the Ninth Circuit.

The petitioner is not liable both as a taxpayer and a transferee for the same taxes, and the statute does not contemplate collection of taxes twice. In view of the anomalous condition in which we find the record, Docket No, 35835 will be placed on the Reserve Calendar, subject to restoration to the General Calendar for further proceedings on 30 days’ notice by either party or the Board’s own motion. Reviewed by the Board.

Decision will be entered wnder Rule 50. except in Docket No. S58S5.

Murdock,

concurring: I agree that this case presents the identical question which was before us in San Joaquin Fruit & Investment Co., 16 B.T.A. 1290, on which we were reversed in Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123. With all due respect to the circuit court of appeals which reversed the Board, I still believe that the Board correctly decided that case. However, it was reversed, and this case would go to the same circuit. But the prevailing opinion is misleading in the emphasis placed upon the statements contained in the pleadings that the Investment Co. was successor to the Fruit Co. through change of name only. The facts clearly appear in this case as they did in the other case and the change was not a change of name only. Two different corporations were in existence at the same time.

VaN FossaN agrees with the above.


author: Lansdon:

text:
    Lester W. Fritz, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.

      Docket Nos. 45307-45311, 45449, 45450.

    Promulgated June 20, 1933.

      Harry C. Weeks, Esq., for the petitioners.

      J. M. Leinenkugel, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Adeline C. Fritz; J. 0. Hall; J. C. Wynne; Mrs. J. C. Wynne; Delia H. Staley; J. 1. Staley.

   OPINION.

Lansdon:

In the taxable year the partnership, Staley & Wynne, sold certain oil and gas leases, as set out in our findings of fact, and realized net profit in the amount of $438,394.71. Petitioners contend that such profit was income from the property in the taxable year and should be included in the basis for computing depletion as provided in section 204 (c) (2) of the Revenue Act of 1926.

The issue here raised was decided adversely to the contention of the petitioners in Darby-Lynde Co. v. Alexander, 44 Fed. (2d) 186; affirmed by the Circuit Court of Appeals for the Tenth Circuit, 51 Fed. (2d) 56; and certiorari denied by the Supreme Court, 284 U.S. 666. In Macon Oil & Gas Co., 23 B.T.A. 54, the Board followed the Darby-Lynde decision above cited and from its decision no appeal was taken. On these authorities this question must be decided adversely to the petitioner.

On brief counsel for petitioner suggests and argues at some length that the principle of the Darby-Lynde and Macon cases, cited above, is overruled in Palmer v. Bender, 287 U.S. 551, which was decided after the decisions upon which the respondent relies. A careful study of the opinion in the Palmer case, supra, has convinced us that it has no bearing on the issue here. There the owners of a lease assigned or sold it to an operating company for a cash consideration, plus a further amount to be realized from the sale of oil produced from the property by the operating assignee. It is clear, therefore, that the seller or assignor retained an interest in the lease and that his realization therefrom depended on the continued production of oil by the operating company. Here the selling partnership completely divested itself of all ownership and interest in the property and received the entire consideration in cash in the taxable year. Thereafter it was not in receipt of any income from the leases that could in any way be applied to the recovery of capital investment, if any. The sale was in all respects a closed transaction at the date of the transfer of the leases and the profit therefrom must be determined under the provisions of section 204 (a) of the Kevenue Act of 1926.

The loss claimed by the petitioners upon transfer of partnership assets to a new partnership must be disallowed for lack of evidence. The stipulation of facts merely shows that after selling the bulk of its property for cash, the partnership of Staley & Wynne, composed of four individuals, with a 1/24 interest held by trustees for undisclosed beneficiaries and the ownership of 2/24 not being disclosed, transferred the remainder of its property, having a depreciated cost basis of $180,006.37, to the new partnership of Staley, Wynne & Co., composed of the same individuals with slightly readjusted interests, but not including the trustees, for a recited consideration of'$70,000, represented by debits and credits on the books of the partnerships. The record does not show whether the partnership of Staley & Wynne continued in business or whether it closed its books without collecting or intending to collect the $70,000 entered as an account receivable from Staley, Wynne & Co. In such circumstances we cannot say that the petitioners have sustained any deductible losses, except to the extent that a portion of the partnership interest may have been sold, which losses have been allowed by the respondent. The stipulation establishes nothing more than a readjustment of partnership interests with the new partnership owning the property alleged to have been sold by Staley & Wynne, though no actual sale has been shown. Cf. J. J. Carroll, 27 B.T.A. 65; Henry Wilson, 16 B.T.A. 1280; and Alpin J. Cameron, 8 B.T.A. 120; 20 B.T.A. 305; affd., 56 Fed. (2d) 1021.

Reviewed by the Board.

Decision will lie entered for the respondent.


text:
    Piggly Wiggly Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 25126, 43860.
    Promulgated June 20, 1933.

      Homer K. Jones, C.P.A., and Frank J. Albus, Esq., for the petitioner.

      De Witt Evans, Esq., for the respondent.
   OPINION.

Lansdon:

In their stipulation of facts the parties to this dispute have agreed that the petitioner suffered losses of various characters in the aggregate of $2,137,155.84 and that this sum is composed of items which they have classified in three groups, as follows:

(a) $201,433.48 represents the so-called misappropriated or embezzled funds not discharged in bankruptcy.
(b) $700,216.52 represents the amount that the court held was legally expended by Saunders on marginal accounts for the petitioner, which subsequently became lost.
(c) $1,235,505.84 represents the amounts expended by Saunders beyond the scope of his authority but not considered misappropriated or embezzled within the purview of the Bankruptcy Act.

Although the stipulation shows that the conversions referred to in groups (a) and (b) above set forth, and all except $809,120.84 of group (c), took place in 1922, the petitioner contends that its losses resulting from them should be attributed to 1923 for the reason, as it further claims, that it did not learn of such losses until the latter year. It also contends that all of such losses were sustained by it in the conduct of a trade or business regularly carried on by it under circumstances which produced a net loss in its income within the meaning of the taxing statutes.

Considering these groups in their order, the first (a) consisted of embezzled funds which the petitioner’s president, Saunders, because of his having charge of its investment business with the brokers, was able to collect and convert to his own use. Three acts of Saunders committed in the fall months of 1922 accomplished this conversion, viz.; his causing, at different dates in September, of funds in the hands of brokers belonging to petitioner in the aggregate of $57,572.48 to be transferred to his own account with said brokers, and his receipt from brokers on October 2 and November 14, 1922, of checks payable to the petitioner for $76,285.80 and $67,575.09 which he deposited to his own private account.

From the proof in the record we are unable to determine whether or not the petitioner knew of its loss prior to 1925; however, in the view ive take of the character of the losses, it is immaterial when that knowledge first became manifest. All resulted from the direct appropriation or squandering by Saunders of the petitioner’s credits and funds. The bankruptcy court found that those assembled in group (a) above, were appropriated by Saunders under circumstances which amounted to embezzlement; but, that the funds represented in group (b) were subsequently lost, after having been legally invested by Saunders in marginal accounts for the petitioner. The record shows that the marginal accounts referred to in this item were illegally converted by Saunders to his own use in September 1922, when he founded the investors’ pool, and that they became as effectually lost to the petitioner at that time as did the funds embezzled in group (a). The same may be said of the $1,235,505.84 in expenditures set out in group (c), $426,385 of which was withdrawn from petitioner’s treasury in 1922 and the balance in 1923. All of these were direct losses which resulted at the instant the funds and credits involved were improperly diverted or converted. Emil Stern, 5 B.T.A. 89; Peterson Linotyping Co., 10 B.T.A. 542; Southern School-Book Depository, Inc., 10 B.T.A. 930; Parker Wire Goods Co., 8 B.T.A. 448; John H. Farish, 7 B.T.A. 793; Douglas County Light & Water Co., 14 B.T.A. 1052; United States v. White Dental Mfg. Co., 274 U.S. 398. We therefore hold that all of the losses here in issue, excepting $809,120.84, were sustained by the petitioner in 1922; and that losses equal to the latter amount (included in group (c)) occurred in 1923.

We think from the record made that the petitioner’s contention that the losses here considered were sustained by it in the prosecution of its regular business must likewise be sustained. The respondent insists that the petitioner’s marginal stock dealings in 1922 were not a part of its regular business and for this reason the funds of petitioner embarked in these ventures should not be regarded as having been employed in such business in 1922. To this suggestion we might reply that none of the petitioner’s money was lost in the stock transactions. Whether these were properly a part of petitioner’s business or not, the record shows that it derived some profit from all of them where purchases and sales were made-. The petitioner sustained no losses from these dealings, but from Saunders’ misappropriation of its equities in stocks purchased and of its funds deposited on marginal balances and in its treasury. All of these were assets of the petitioner which Saunders controlled by virtue of his official position as its president and business manager. In these circumstances it is clear that these assets were at risk in the petitioner’s regular business and their loss under these circumstances must be regarded as having been sustained in its conduct. E. M. Elliott, 15 B.T.A. 494; Maude Enella Brickell, 17 B.T.A. 711; Harvey H. Ostenberg et al., Administrators, 17 B.T.A. 738; Elmore L. Potter, 18 B.T.A. 549.

The parties have stipulated that the petitioner is entitled to additional deductions for- patent exhaustion of $5,000 for each of the years 1922 and 1923 and additional deductions on like account of $92.01 for each of the years 1924,1925, and 1926.

Reviewed by the Board.

Decision will be entered under Rule 50.


text:
    Gottlieb Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42528.
    Promulgated June 20, 1933.

      Perry Post Taylor, Esq., for the petitioner.

      J. H. Pigg, Esq., for the respondent.
   OPINION.

Leech:

Although the Commissioner disallowed the claimed deduction of $10,175 as a loss sustained in 1926, on the ground that the misappropriation occurred in 1924, the parties have now stipulated that petitioner’s officers and directors wrongfully took that amount in 1926. The applicable provisions of the Revenue Act of 1926 are:

Sec. 234. (a) In computing tbe net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise. * * *

The Commissioner now contends that the asserted loss is not deductible for 1926 because the existence of petitioner’s claim against the persons who misappropriated its funds and the subsequent suit thereon in its present indeterminate status indicates that the loss incurred when the money was wrongfully taken may yet be compensated for within the meaning of the statute.

The existence of the claim by petitioner for recovery of its misappropriated funds, sounding as it does in no contract, expressed or implied, did not create the status of debtor and creditor between petitioner and those who mulcted it. Peterson Linotyping Co., 10 B.T.A. 542. Thus the amount misappropriated in 1926 could not be allowed as a bad debt deduction either in that year or any subsequent year in which the claim was ascertained to be worthless and charged off. Parker Wire Goods Co., 8 B.T.A. 448; Peterson Linotyping Co., supra; Bank of Wyoming, 22 B.T.A. 1132. Here a loss was incurred through the embezzlement of petitioner’s funds and a loss may be allowed as a deduction only in the year sustained. Sec. 234 (a) (4), supra. An embezzlement loss is sustained in the year in which the taxpayer’s property is wrongfully taken. Burnet v. Huff, 288 U.S. 156; Parish v. Commissioner, 31 Fed. (2d) 79; Peter Frees, Jr., 12 B.T.A. 737.

The amount of $10,175 was wrongfully taken from petitioner in 1926 and the loss then sustained was not compensated for by insurance or otherwise, unless the pending suit, instituted by petitioner three years after the misappropriation against those, now financially irresponsible, who wrongfully took its funds, contradicts the existence of a closed transaction within the quoted provision and thus bars the claimed deduction.

The mere possibility or' the bare hope of a future development permitting recovery does not bar the deduction of a loss clearly sustained. United States v. White Dental Mfg. Co., 274 U.S. 398; Joseph E. Rudiger, 22 B.T.A. 204,

The entire scheme of Federal taxation, evidenced by the several statutes incorporating it, is based upon annual periods and facts occurring within such periods. A rejection of this basis by indefinitely extending these periods, in view of the statutes of limitation and resulting lack of finalitj'', would render impossible the practicable administration of the very system itself. South Dakota Concrete Products Co., 26 B.T.A. 1429. Thus, in the last cited case, in affirming the Commissioner’s action in taking into income in the year of recovery compensation for a loss sustained and for which petitioner had been allowed a deduction from income as an expense in the year sustained, we said: “In laying down these rules the courts and this Board have been fully conscious of the fact that losses will sometimes be deducted where the future will eventually disclose compensation * *

We conclude that the misappropriation of $10,115 in 1926 constituted a loss sustained and deductible in that year pursuant to section 234 (a) (4), supra.

Although the Board has no jurisdiction to determine whether or not the income taxes of petitioner for the years 1924 and 1925 have been overpaid or underpaid, we may consider such facts with relation to the taxes for the earlier years as may be necessary to determine correctly the amount of the deficiency for 1926. Section 274 (g) of the Revenue Act of 1926; Drayton Mills, 19 B.T.A. 76; Green-leaf Textile Corp., 26 B.T.A. 737.

It follows from our determination as to the misappropriation in 1926 that petitioner sustained deductible losses from similar misappropriations of $43,032.46 and $26,621.97, in 1924 and 1925, respectively, which resulted in asserted net losses of $27,702.80 for 1924 and $19,449.73 for 1925. Is petitioner entitled to carry forward such net losses as a deduction in computing net income for the year 1926 ? To be so deductible the net losses must be such as are defined in section 206 (a) (1) of the Revenue Acts of 1924 and 1926, which provides:

As used in this section the term “ net loss ” means the excess of the deductions allowed by section 214 or 234 over the gross income, with the following exceptions and limitations:
(1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business.

We have held analogous embezzlement losses claimed by individuals to have occurred “ in trade or business ” under section 214 (a) (4) of the Revenue Acts from 1918 to 1926. Cf. John H. Farish & Co. v. Commissioner, 31 Fed. (2d) 79; J. A. Bentley, 5 B.T.A. 314; William S. Phillifs, 24 B.T.A. 98. The only business in which the petitioner was engaged during the years involved, disclosed by the record here, was that of “ buying, selling and renting real estate.”

In our opinion the losses sustained by petitioner from the wrongful taking of its funds by its officers and directors is attributable to the operation of its trade or business regularly carried on within the meaning of the statute and constitutes a proper deduction in the computation of the statutory net losses for 1924 and 1925, which should be carried forward as a deduction in computing net income for 1926. Piggly Wiggly Corp., 28 B.T.A. 412. Cf. Greenleaf Textile Co., supra; 379 Madison Avenue, Inc. v. Commissioner, 60 Fed. (2d) 68; Northway Securities Co., 23 B.T.A. 532.

In recomputing the pending deficiency effect will be given to deductions which may have been heretofore allowed to petitioner for 1924 and 1925 as items of expense or otherwise and which are here identified as deductible losses. South Dakota Concrete Products Co., supra.

Judgment will Toe entered under Bule 50.


text:
    Milton Smith, Jr., Executor, Estate of Milton Smith, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52132.
    Promulgated June 20, 1933.

      E. R. Campbell, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Lansdon:

The only question here is whether contributions made to local lodges or chapters of the Chi Psi fraternity are deductible from income under the provisions of section 23 (n) (2) or (5) of the Revenue Act of 1928. The respondent has disallowed the deduction claimed, in conformity with General Counsel’s Memorandum 5952, Cumulative Bulletin VIII-1, p. 172, in which it is held that:

A college fraternity having a fraternity house which is used as a meeting place and for entertainments, and at which many of its members live, is primarily a social organization and is not organized exclusively for scientific, literary, or educational purposes. Contributions to such an organization are not deductible in computing net income.

The determination of the respondent is presumptively correct. The memorandum upon which respondent relies, however, does not conclude the matter, since it is merely interpretative and therefore is without force and effect of law.

The excerpts from the charter of Chi Psi and the several local lodges here involved clearly set out the purposes of the organization and all come within the provisions of the statute upon which petitioner relies. The fact that students live and eat in the several chapter houses in no way weakens the claim of the petitioner. It has long been recognized that it is one of the functions of a university or college to furnish dormitories and food for students. Harvard University v. Cambridge Assessors, 175 Mass. 145; 55 N.E. 844; Yale University v. Town of New Haven, 71 Conn. 316; 42 Atl. 87; City of Chicago v. University of Chicago, 228 Ill. 605; 81 N.E. 1138.

The fact that the privileges of Chi Psi are limited to a selected group is not material, as was held in Kappa Kappa Gamma House Assn. v. Pearcy, 92 Kan. 1020; 142 Pac. 294, where the court said:

It is said that its membership is limited, and that not all young women who attend the university can gain admission to the society and receive the benefits of the exemption. The record does not disclose who are eligible to membership in the society nor the rules governing the selection of members. All the young women who are students of the university may not be able to gain admission to the Kappa Kappa Gamma society, but, so far as the record shows, other similar societies may be organized without limit by the students so that all may have adequate dormitory facilities. When they do organize and acquire a building used exclusively for a literary hall or dormitory, they, too, will be entitled to the benefit of the exemption. The fact that the chapter house is not open to the public or to any one who may apply for admission does not deprive the society of the statutory exemption. Masóme Some v. SecLgwich County, 81 Kan. 859, 106 Pac. 1082, 26 L.K.A. (N.S.) 702. It is enough that the membership of the society is made up from the class defined in the statute; that is, students at colleges or universities, where the building occupied by them is devoted solely and strictly to the prescribed uses.

The articles of incorporation of the several chapters of Chi Psi to which the donations in question were made and the decisions above cited are convincing that the organizations in question were effected exclusively for educational, literary and charitable objects, but the charter purposes of an organization may be ignored in its operation in such a way that exemption privileges are forfeited. Since the. purposes of the lodges or chapters here involved are so clearly set out in their several charters and are within the prescriptions of the statute relied on by the petitioner, it follows that the donations in question are proper deductions from income unless the intendment of the law is transgressed by operative procedure. It is necessary, therefore, for the petitioner to carry the burden of proof one step further and prove that the lodges or chapters in question are operated exclusively for the purposes set out in their respective charters.

As to the second phase of the question the contention of the petitioner is supported by the presumption of regularity which is stated in 22 Corpus Juris at page 107, section 47, as follows:

Tile presumption arising from the ordinary conduct of business and affairs, applies to corporations as well as individuals. Accordingly, it will be presumed that corporate acts and proceedings are regular and that corporate business is lawfully conducted.

Originally the presumption of regularity applied only to official acts, but its scope has been greatly enlarged. In Bank of United States v. Dandridge, 12 Wheat. 64; 6 L.Ed. 558, Justice Story said:

By the general rules of evidence, presumptions are continually made in cases of private persons of acts even of the most solemn nature, when those acts are the natural result or necessary accompaniment of other circumstances. In aid of this salutary principle, the law itself, for the purpose of strengthening the infirmity of evidence, and upholding transactions intimately connected with the public peace, and the security of private property, indulges its own presumptions. It presumes that every man, in his private and official character, does his duty, until the contrary is proved; it will presume that all things are rightly done, unless the circumstances of the case overturn this presumption, according to the maxim, omnia presumuntur rite et solcmnitur esse aeta, donee prol>etur in contrarium.

The petitioner, however, does not rely solely on the presumption that its operations are in conformity with its charter purposes. He has adduced oral testimony to the effect that each of the local chapters of Chi Psi to which donations were made in the taxable years maintains constant supervision over the studies of its members, as a condition of initiation requires minimum scholastic marks higher than those imposed by the several colleges, provides library and study room facilities for its members, assists under classmen in maintaining their scholastic standing, holds meetings for literary and scientific purposes, and arranges for forum assemblies in which faculty members and successful and distinguished alumni members lecture on matters of interest and importance.

In our opinion the evidence adduced by the petitioner is ample to overcome the presumption of correctness that attaches to the determination of the respondent. Such testimony clearly shifts the burden of proof to the respondent, who has offered no evidence in rebuttal of the undisputed facts established by the documentary and oral testimony adduced by the petitioner. In our opinion the determination of the respondent must be reversed.

In Francis Cooley Hall, 2 B.T.A. 931; Earl King, 9 B.T.A. 502; Henry Wilson, 16 B.T.A. 1280; and Alfred T. Davison, 21 B.T.A. 251, the Board considered claims for deductions on grounds substantially similar to those pleaded herein. In each of these proceedings the determination of the respondent was affirmed because the evidence was insufficient to overcome the presumption that the determination of the respondent was correct. In these circumstances none of such proceedings establishes any controlling rule applicable to donations to Greek letter fraternities. The question is purely of fact, which must he determined by the weight of evidence, which in the instant proceeding is heavily on the side of the petitioner.

Reviewed by the Board.

Decision will he entered for the petitioner.

       In the ease oí an individual, contributions or gifts made within the taxable year to or for the use of:
      ***«$*$,
      (2) any corporation, * * * organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual;
      * # * i!* * * *-
      (5) a fraternal society, order, or association, operating under the lodge system, but only if such contributions or gifts are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, * « *
      to be an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer’s net income as computed without the benefit of this subsection. * » *