author: Mellott :

text:
    National Protective Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101709.
    Promulgated July 10, 1941.

      James P. Aylward, Esq., and Terence M. O'Brien, Esq., for the petitioner.

      R. P. Hertzog, Esq., for the respondent.
   OPINION.

Mellott :

Respondent has determined that petitioner is taxable as an insurance company other than life or mutual under section 204 of the Revenue Acts of 1934 and 1936. Petitioner contends that it is a life insurance company within the meaning of section 201 (a) of these acts and entitled to be taxed as such. The section relied upon by petitioner, which is the same under each act, is shown in the margin.

Petitioner contends that the only reserve it maintained during the taxable years was for the fulfillment of its life contracts; that it had no reserve for its health and accident coverage and none was required by the laws of the state of its incorporation; and that any designation of its unearned premium account as a “reserve” by the Missouri Superintendent of Insurance is immaterial. Respondent argues that petitioner’s unearned premium account is a reserve within the meaning of the phrase “total reserve”, used in .section 201 (a), supra. Petitioner concedes that if this is true then it is taxable as an insurance company other than life or mutual.

Petitioner places its chief reliance upon Maryland Casualty Co. v. United States, 251 U. S. 342, quoting from the Court’s opinion the following:

The term “reserve” or “reserves” has a special meaning in the law of insurance. While its scope varies under different laws, in general it means a sum of money, variously computed or estimated, which, with accretions from interest, is set aside, “reserved”, as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unacerued and contingent claims, and claims accrued, but contingent and indefinite as to amount or time of payment.
****** *
Reserves, as we have seen, are funds set apart as a liability in the accounts of a company to provide for the payment or reinsurance of specific, contingent liabilities. They are held not only as security for the payment of claims, but also as funds from which payments are made.

Petitioner contends that in the light of the above definition three essentials of a reserve are lacking in its unearned premium account— first, it is not calculated upon any table of experience or eontin-gencies; second, it is not calculated -with reference to accretions from interest; and, third, it can not be used to pay the claim when the contingency forming the basis of the insurance occurs.

The quoted portion of the opinion might indicate that the Court would have held, if such an issue had been before it, that a reserve for unearned premiums was not an insurance reserve. That no such holding would have been made, however, is indicated by the following language: “Unearned premium reserve and special reserve for unpaid liability losses are familiar types of insurance reserves * ⅝

Under date of October 4, 1935, petitioner entered into an agreement with the Superintendent of Insurance of the State of Missouri wherein it agreed to maintain “unearned premium reserves” in the amounts specified in the agreement. The reserve here involved was set aside pursuant to the terms of this agreement. The evidence does not convince us that it differs in any material respect from the unearned premium reserve usually maintained by insurance companies in connection with health, accident, fire, and other kinds of insurance, except life insurance. Its “chief purpose is to enable the company to rid itself of liability for future possible claims when continued excessive losses threaten to use up its surplus and impair its capital to such an extent as may endanger the security of the policyholders, either by paying back the unearned premiums and canceling the policies, or by paying them over to a new insurer to assume and carry out the policy risks.” State ex rel Missouri Life Insurance Co. v. Gehner, 320 Mo. 691; 8 S. W. (2d) 1068; Trenton v. Insurance Co., 77 N. J. Law 757; 73 Atl. 606. State laws usually require that the unearned premium reserve fund consist of the unearned portion of the gross premiums on unexpired and unterminated risks and policies. McKinney’s Consolidated Laws of New York, Annotated, Book 27, sec. 73, p. 104; Page’s Ohio General Code, Annotated, vol. 6, sec. 9362; Michigan Statutes, Annotated, vol. 17, sec. 24.218; Annotated Laws of Massachusetts, ch. 175, sec. 10. Because of the difficulties incident to examining a large number of policies to determine the unearned portion of the premiums, however, some state statutes provide that the reserve be calculated by taking a certain portion of the gross premiums collected. Purdon’s Pennsylvania Statutes, Annotated, title 40, sec. 91; Heubner-Property Insurance. That, apparently, was what the Superintendent of Insurance of the State of Missouri was doing when he prevailed upon petitioner to set aside the portion of the gross premiums referred to in the stipulation shown in our findings.

In considering the definition of a reserve in Maryland Casualty Co. v. United States, supra, it should he kept in mind that the Court recognized that the scope of the word varied and it prefaced its definition with the words “in general it means.” The unearned premium reserve of an insurance company other than life or mutual differs from a life insurance reserve in that it ordinarily does not involve a calculation based upon a table of contingency or experience, or take into consideration earnings or interest on the fund, and is not usually used to pay contingent claims when the contingency insured against occurs. It is, however, a basic insurance reserve, a fund set apart to meet certain contingencies, one being the possibility that certain policyholders might cancel their policies and demand the unearned portion of premiums, and the other being that excessive losses and consequent impairment of capital might require the company to cancel the policies and return the unearned premiums to the policyholders, or, in the alternative, pay them over to a new insurer to assume and carry out the policy risks.

In Aetna Ins. Co. v. Hyde, 34 Fed. (2d) 185, 197, Circuit Judge Stone, speaking for a statutory court of three judges sitting in the Western District of Missouri, described the unearned premium reserve of a fire insurance company in the following language:

As to the reserve: This has to do with losses under the policies. Although such losses are the exception, they occur. They may happen at any time upon any of such contracts and should, under the contract, he promptly paid. The insurer must be always in a financial position to make such payment. Good business intelligence and integrity would require the maintenance of a liquid fund proportioned to the existing risks. When an insurance business starts, this fund is provided by the capital stock. State statutes usually require a minimum capitalization. As the business grows and the total of assumed risks increases, the fund must be correspondingly increased. Well managed companies carry such “surplus” as seems advisable for such purposes. Naturally, the management of companies would differ as to how much of its income (including premiums) should be thus reserved and how much paid out in dividends. To assure a sufficient reservation for the protection of the policy-holder, the States have enacted laws. The basic thought in most of such laws is to secure this protection through reinsurance in some other and solvent company. This is worked out by requiring a fund sufficient for that purpose. As premium rates are the same in all companies—by law or by business necessity—the premiums for the unexpired terms of the policies are sufficient for the above purpose. Hence, the usual requirement is that the fund at all times equal the premiums on the unexpired terms of the policies in force. To describe this amount, it is called the “unearned” premium. The balance of the premium is called “earned” premium. This term “unearned” premium does not mean that the entire premiums have not been earned, in the sense that they are absolutely the property of the insurer. It does not mean that the insurer must take nine out of every particular $10 paid as premium on each policy and set that specific $9 aside. It does not mean that any trust or agency or other legal relation exists as to any part of any specific premium. What it does mean is that the insurer shall have and keep a fund of that amount constantly available for that purpose and that purpose alone. In short, it cannot distribute that much of its assets in dividends nor use it for otter corporate purposes. In order to be sure that this fund is secure, different requirements are made. Some states require this segregation to be by physical deposit of approved securities in designated depositories. Ordinarily, it is merely a matter of bookkeeping by the insurer, enforced by examination of its books and securities by representatives of the state.

On brief petitioner places some stress on the fact that its unearned premium reserve was not required by the laws of Missouri. This, however, is immaterial. Section 201 (a), supra, does not provide that a reserve must be required by law. It provides that a company is a life insurance company if more than 50 percent of its total reserve funds are held for the fulfillment of life insurance contracts. The fact that petitioner’s unearned premium reserve is not required by law does not alter its character as a reserve. It must be assumed that Congress was aware of the distinction between reserves maintained by insurance companies for life insurance coverage and unearned premium reserves maintained for coverage other than life, such as health, accident, and fire insurance. Both types of reserves in our opinion must be taken into consideration in computing the “total reserves” of an insurance company for classification purposes.

Petitioner’s argument to the effect that its unearned premium account is the equivalent of cash and belongs to the insured has not been overlooked. This contention seems to be based upon the fact that the health and accident policies issued by it are cancelable by either party, and, in the event of cancellation, a definite obligation, involving no contingencies, arises. Petitioner relies upon Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686. In the cited case the Court was concerned with the meaning that Congress intended by the language “4 percentum of the mean of the reserve funds required by law” in section 245 (a) of the Revenue Acts of 1921 and 1924. The question was whether the amounts set aside by the company to retire matured, unsurrendered, and unpaid coupons attached to policies of life insurance issued by it, which provided that the matured amount thereof could be applied to the payment of premiums, be withdrawn in cash, or be left with the company at compound interest, should be considered as part of its reserves. The Court held that they should not be, pointing out that they did not directly pertain to insurance, but represented a matured liability, dependent upon no contingency. There might be some substance to petitioner’s argument if the amounts reserved belonged absolutely to the policyholders; but they do not. “He [the policyholder] has no legal or equitable interest therein. All that he has is the contract obligations of the company.” Aetna Ins. Co. v. Hyde, supra. The reserve is set up for the purpose of assuring the fulfillment of such obligations. It belongs to the company and is invested by it “precisely as * * * any other monies it may have.”

We are of the opinion and hold that petitioner’s unearned premium reserve is a reserve within the meaning of section 201 (a), sv/pra. The gross premiums on its health and accident contracts set aside in this reserve comprised more than 50 percent of its total reserve funds. It follows, therefore, that petitioner is taxable as an insurance company other than life. The Commissioner committed no error in determining the deficiencies in tax.

Reviewed by the Board.

Decision will he entered for the respondent.

       SEC. 201. TAX ON LIES INSURANCE COMPANIES.
      (a) Definition.—When used in this title the term “life insurance company” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.


source: Caselaw Access Project

author: Tyson :

license: Public Domain

text:
    Fox River Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96961.
    Promulgated July 11, 1941.

      Edward J. Dempsey, Esq., for the petitioner.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Tyson :

The issue presented on the facts in the instant proceeding is whether or not the petitioner is entitled to the claimed credit under the provisions of section 26 (c) (2) of the Revenue Act of 1936, set out in the margin. It is clear that the trust mortgage executed by petitioner on October 1, 1931, constituted a written contract executed by the petitioner corporation prior to May 1, 1936, expressly dealing with the disposition of petitioner’s earnings and profits relative to a debt incurred prior to May 1, 1936. Our question is whether under the provisions of that contract the portion of petitioner’s earnings and profits of the taxable year 1936, here involved, is required to be paid or irrevocably set aside, within the tamable year, in or for the discharge of its bonded indebtedness.

Eespondent contends that under the provisions of the mortgage the petitioner could have satisfied the sinking fund requirement for the taxable year 1936 by tendering to the trustee, in lieu of cash, an equivalent amount of its bonds purchased, owned, and held by it; and that, therefore, petitioner was not required under the provisions of the mortgage to pay, out of its earnings for the taxable year 1936, the sinking fund payment of $25,000 which it made during that year and for which it claims a credit. We sustain the contention of respondent.

The credit allowed under section 26 (c) (2), supra, pertinent to the question presented is: “An amount equal to thó portion of the earnings and profits of the taxable year which is required * * * to be paid * * ⅜, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside.”

Under the provision of the mortgage here involved giving petitioner the “right” to tender to the trustee any of its series A bonds purchased by it and held in its treasury in “satisfaction of any payment” required by that instrument to be made to the sinking fund, it seems clear that the petitioner was not required under its contract to pay, or irrevocably set aside, either during or as of the taxable year 1936, any portion of its 1936 net earnings and profits. When in December 1936 petitioner made its anticipatory cash payment of $25,000 to the sinking fund for the year 1936 it then held in its treasury its purchased bonds far in excess of $25,000 and far in excess of 25 percent of its net earnings for 1936, which bonds were obviously purchased with funds other than from its 1936 earnings. Under the contract petitioner had the privilege of tendering to the trustee for the sinking fund, in lieu of the cash payment of 25 percent of its earnings for 1936, an equivalent amount of bonds; and this regardless of whether or not such bonds were purchased with net earnings of the taxable year 1936. Having that privilege and having in its treasury more than a sufficient amount of bonds, purchased with other than 1936 earnings, to meet the required sinking fund payment for the taxable year 1936, petitioner could have availed itself of such privilege by tendering $25,000 of such bonds to the trustee in lieu of the $25,000 cash payment. By reason of this privilege and petitioner’s ability to exercise it, no part of 1936 net earnings was required to be paid under the provisions of the mortgage. Instead, petitioner was free to pay out such earnings as dividends so far as any restriction in the contract is concerned. “The general purpose of section 26 (c) (2), * * * is to give a credit where a dividend paid credit can not be secured. In other words, the basic intent of Congress seems to have been to include in the provision only contracts which invariably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments.” G. B. R. Oil Corporation, 40 B. T. A. 738, 744.

The instant case is distinguished on its facts from Michigan Silica Co., 41 B. T. A. 511 (on appeal to the Sixth Circuit). In that case the taxpayer was required absolutely to first pay in cash a percentage of its earnings into the sinking fund within the meaning of section 26 (c) (2), supra, but thereafter it had the option of purchasing its bonds on the open market and, upon delivery thereof to the trustee for cancellation, of receiving payment from the sinking fund in redemption thereof. Such option placed the taxpayer in the position of an ordinary bondholder, except for certain specified limitations, to have bonds owned by it redeemed from the sinking fund which it had already created by its payments of cash required by its contract. The taxpayer’s option in the cited case is materially different from the right which petitioner in the instant proceeding had under its contract, namely, to tender its treasury bonds in satisfaction of any required payments due the sinking fund and in lieu of payments in cash out of the taxable year’s earnings.

We hold that petitioner is not entitled to the claimed credit under section 26 (c) (2), supra.

Reviewed by the Board.

Decision 'mill be entered for the respondent.

       SEC. 26. CREDITS OP CORPORATIONS.
      In the ease of a corporation the following credits shall he allowed to the extent provided in the various sections imposing tax—
      *******
      (e) Contbacts Resseicting Payment of Dividends.—
      (1) Peohibition on payment of dividends.— * * *
      (2) Disposition of peofits of taxable yeah.—An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. Por the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.


author: Disney:

text:
    Pio Crespi, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103133.
    Promulgated July 11, 1941.

      Robert Ash, Esg., for the petitioner.

      D. D. Smith, Esg., for the respondent.
   OPINION.

Disney:

The petitioner contends that he had no profit upon the sale of the 75 shares of stock to his son, for the reason that he sold it for $1,468.95 per share, that the certificates delivered were No. 10 and a substitute for a part of No. 11, that Nos. 10 and 11 were issued and identifiable against No. 20 of the old corporation, which in turn was purchased from Helmbrecht at $1,468.95 per share. The respondent argues that the petitioner owned all of the stock in the old corporation at a cost of $610,348, that he acquired all of the 1,000 shares of stock in the new corporation for the same price because it was issued for the assets of his old corporation, which he owned after it had ceased to exist, and that therefore he realized a profit of the difference between $610.34 per share, cost, and $1,468.95 per share, sale price, or $64,395.32, of which 50 percent was taxable under section 117 (b), Revenue Act of 1938.

The only question of difference between the parties is whether the new stock which was sold is identifiable with certain shares of the old. In our opinion it is not. The old corporation had ceased to exist and could not under Texas law secure a new charter. The assets therefore belonged to the directors, who were the stockholders, as trustees. Petitioner was the only stockholder, except for two qualifying shares. He therefore owned the assets, subject to claims of creditors. Peurifoy v. Wiebusch, 117 S. W. (2d) 773. These were transferred to the new corporation, the stock of which was, in the same amounts as in the old corporation, issued to the petitioner, and the two nominees holding qualifying shares. We think there was not even a de facto corporation in existence when the new one was organized, for the petitioner had merely overlooked the expiration of charter and had made no attempt to organize a new corporation. On this subject 14 Corpus Juris 226 reads as follows :

[§ 232] h. Expiration or Repeal of Charter. Although, there are some decisions to the contrary on the ground that there is still sufficient color of authority for a de facto corporate existence, the weight of authority is to the effect that a corporation is dissolved ipso facto, in the absence of provision to the contrary, on expiration of the period of its existence fixed by its charter or by general law, as the case may be, or on repeal of its charter, and that since there is no longer any law under which it can legally exist, it cannot acquire the status of a corporation de facto after expiration of such period, or after such repeal, by continuing to exercise corporate powers; and its corporate existence after such period may be questioned by any one, and collaterally as well as directly, unless there is color of authority for continued existence, as by reason of an act apparently extending its charter, or unless there are elements of an estoppel.

We are therefore unable to see the applicability of those cases, such as Helvering v. Rankin, 295 U. S. 123, cited by the petitioner, and involving exchange of stock in the same corporation and the rather usual question of intent to identify shares. Here, shares had ceased to exist, and the assets upon dissolution of the corporation, in effect by liquidation, passed to the petitioner. The assets only were transferred to the new corporation. The Commissioner determined that the assets had, in the hands of the petitioner, a base of $610,343, and that basis must be deemed correct, the petitioner having adduced no evidence to show a different base. That was therefore the cost to him of the 1,000 shares of stock issued to him in the new corporation, and each of the 75 shares sold had a base of $610.34. There was an attempt to identify new shares with old shares which were nonexistent. New shares were not issued for specific old shares, but all new shares, as a whole, were issued for the transfer of the assets of the old corporation, as a whole. Though the consideration for the transfer of assets was recited as assumption of the liabilities of the old corporation and release of trustees’ liability, the only reason for issuance of all stock to petitioner was his ownership of all assets of the old corporation. The attempt to identify was, in our opinion, futile, and the principles applied in such cases as Raoul S. Fleischmann, 40 B. T. A. 672 (688 citing various cases) apply here. We hold that no error has been shown in the determination of deficiency.

Decision will l>e entered for the respondent.


author: Leech :

text:
    Interstate Transit Lines, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101693.
    Promulgated July 15, 1941.

      Henry W. Clarh, Esq., and Joseph F. Mann, Esq., for the petitioner.

      Henry C. Clark, Esq., for the respondent.
   OPINION.

Leech :

The questions are (1) whether the credits of its net income entered by petitioner on its books as transferred to the Nebraska company, coupled with the recording of such transfer on the books of the latter company, which held all the funds of the petitioner, constituted a payment by petitioner to the Nebraska company and, if so, (2) whether that payment was one of dividends within the purview of section 27 (a) of the Revenue Act of 1936 and so entitling the petitioner to a dividends paid credit in the computation of its undistributed profits tax under section 14 of that act.

Respondent does not question the recognition here of petitioner and the Nebraska company as separate corporate entities. The disputed tax was imposed upon that premise. In our opinion, both these companies must be considered here as separate taxable entities. Maine Central Transportation Co., 42 B. T. A. 350; Interstate Transit Lines, 44 B. T. A. 957.

Both companies were upon an accrual basis. In Valley Lumber Co. of Lodi, 43 B. T. A. 423, we said: “When a book credit is unrestricted and thoroughly subject to the demand and control of the shareholder, it is the equivalent of cash and does constitute payment of the dividend for the purpose of the dividends paid credit.” This contested credit by petitioner to the Nebraska company was unrestricted and subject to the control of the latter company.

We therefore think it is evident that the acknowledgment of immediate liability by petitioner to the Nebraska company in the transfer upon petitioner’s books by the credit of the amount of that liability, and the acceptance and entry of such credit by the Nebraska company, which held the funds of petitioner, constituted' a payment of the amount so credited. Kate Hudson, 34 B. T. A. 155; affd., 99 Fed. (2d) 630; certiorari denied, 306 U. S. 644; Valley Lumber Co. of Lodi, supra; Atlantic Land Co., 43 B. T. A. 74; Peoples Gin Co., 41 B. T. A. 343; affd., 118 Fed. (2d) 72.

Did this payment constitute a dividend payment within the meaning of section 27 (a) of the Revenue Act of 1936? This question, in our opinion, must be answered affirmatively.

Section 115 (a) of the Revenue Acts of 1934 and 1936 defines dividends as “any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.” Clearly, we think, the payment here comes squarely within that definition of dividends. It can not be seriously contradicted that it was a payment of the earnings of petitioner for the current year. Maine Central Transportation Co., supra. Actually, it was all of those earnings. They were paid by petitioner to the Nebraska company as its sole stockholder. The existence of a contract with the stockholder requiring that payment does not make it other than a dividend. Lincoln National Bank v. Burnet, 63 Fed. (2d) 131; Hadley v. Commissioner, 36 Fed. (2d) 543. No declaration of dividends is essential to its characterization as such for income tax purposes. M. Jackson Crispin, 32 B. T. A. 151; Peoples Gin Co., supra.

The amount of the credit to which petitioner is entitled for 1936 on account of dividends paid in that year, remains to be determined. On its return petitioner deducted the sum of $24,510.66 as the profit for that year paid to its stockholder in dividends. It asks, however, that, in the event it be held that such payment was not made within the year 1936 because the amount of the earnings for that year was not determined and the credit entries not made until the year 1937, it be allowed the deduction of its earnings for 1935 in the sum of $56,224.24, the amount of which was determined in January 1936 and credited to the stockholder in that year.

In Cox Motor Sales Co., 42 B. T. A. 192, we held that, where a taxpayer corporation on the accrual basis declared a dividend of annual net profits in December, but, though credited on its books to stockholders at that time, found it impossible to determine the amount of the profits until the 8th or 9th of the following January, such credit did not constitute payment of the dividend in the year in which declared. This decision concludes petitioner as to the credit claimed upon its return for the deduction of its net profits for 1936 in the sum of $24,510.66. On the other hand, however, it sustains petitioner in its request for allowance of a dividends paid credit in the sum of $56,-224.24, which was the amount of its 1935 profits, determined in 1936 and credited to its stockholder in that year.

We hold that petitioner is entitled to a dividends paid credit of $56,224.24 in the computation of its undistributed profits surtax for 1936.

Decision will be entered wider Rule 50.


text:
    Robert M. Harriss, Individually and as Administrator of the Estate of Abbeline C. Harriss, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99993.
    Promulgated July 16, 1941.

      'Warner Pyne, Esq., and Harold G. Wentworth, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Leech :

Petitioner sustained a loss upon the sale of the Texas farm in 1933 in the amount of $49,100.41. The sole issue as to the deficiency for 1933 is whether this loss was an ordinary or capital loss.

This issue is one of fact. Petitioner contends that he has been regularly engaged for many years in the real estate business, buying and selling improved and unimproved properties, and that this farm was purchased in the ordinary course of that business and held for sale to customers. Although it is admitted that his principal business is his cotton business with Harriss & Yose, this, of course, does not preclude him from carrying on the other business of buying and selling real estate in which his purchases, if held as a stock in trade for sale to customers in the regular course of that business, would not constitute capital assets under section 101 (c) (8) of the Revenue Act of 1932. Marsch v. Commissioner, 110 Fed. (2d) 423.

The testimony as to petitioner’s activity over a long term of years in real estate may be sufficient to show that during this time he was carrying on a real estate business and that many of the properties purchased were held for sale by him in the course of that business. However, the facts in connection with his acquisition of an interest in the La Salle County, Texas, farm does not indicate to us that this property was acquired as an incident in the carrying on of his real estate business and held for sale to customers:

Petitioner, it seems, purchased this farm together with his four brothers, each taking a one-fifth interest. It was not cleared. They took steps to clear and improve it for the purpose of carrying on extensive farming operations. These continued for some years with one of the brothers in active charge and after his death the farm was leased as a revenue-producing property. It was not until 1933, 13 years after the acquisition of this property, that petitioner sold his one-fifth interest and then, it is noted, that the sale was to one of his brothers.

This does not appear to be a case of a property purchased as an incident of a business carried on by petitioner of buying and selling real estate. We think it was rather an expenditure by petitioner and his four brothers in the organization and operation of a business of farming.

It is, accordingly, held that petitioner’s one-fifth interest in the La Salle County farm constituted a capital asset and the loss realized by him as stipulated is'a capital loss allowable to the extent of 12½ percent.

The second issue is whether respondent erred in increasing petitioner’s income for 1934 by one-half of the total gain of $12,147.67 which respondent contends he realized with two associates in carrying on the purchase and sale of cotton futures contracts. •

The findings of fact disclose the method of operation of petitioner and his two associates, Tarver and Smith, in their purchase of futures contracts which, when the delivery date approached, were sold and a similar number purchased at the market on that date, for delivery at a more subsequent date. It is petitioner’s contention that in the sale of such futures contracts the profit from such sales, although credited to his account, did not constitute realized income because it was merely an incident in a definite plan under which a new commitment was made simultaneously which, under the usage and custom of the cotton business, precluded his withdrawal of the profit realized on such sales. He contends that these transactions were in the nature of hedging operations and subject to the rule followed in Farmers & Ginners Cotton Oil Co., 41 B. T. A. 1083, and Ben Grote, 41 B. T. A. 247. But here, petitioner and his associates were not selling futures against the purchase of “spot” cotton. Their only sales were futures contracts which they owned. Their position in the market was always long under their method of operation, and the transactions were purely speculative.

Moreover these sales of futures contracts can not be considered as a part of the concurrent purchase of a similar number of futures contracts for a more distant delivery date. In each instance when a sale was made and a profit realized it was unquestionably subject then to the absolute control and enjoyment of petitioner and his associates except for their voluntary action in carrying out another transaction of purchase under which the realized profit was to be held as a deposit of guarantee. See Corliss v. Bowers, 281 U. S. 376. In every sale petitioner and his associate could have closed the account without another purchase. In fact this was actually done after one of the sales, resulting in a profit of $7,829.50. That amount is a part of the total of $72,747.67 which respondent contends was realized by petitioner and his associates. As to this item, petitioner now admits that it constituted a realized gain and that he is taxable upon his one-half interest therein.

To- sustain petitioner in his contention would be to hold that one who derives a gain may postpone its realization and recognition as such by concurrently entering into another contract under which that gain is pledged. We agree with the reasoning of the court in the case of Valley Waste Mills v. Page, 115 Fed. (2d) 466; certiorari denied, 312 U. S. 681. There the same question arose upon facts almost identical with those here. The Circuit Court there said:

It is appellant’s contention that taxable gains or deductible losses from its transactions resulted only when it, in closing out a cotton contract, did not simultaneously purchase another contract for the future delivery of a like amount of cotton; but we cannot accept this view under the facts set forth in the agreed statement. There is no dispute about the profit that was made on these purchases, and the fact that other contracts for the purchase of an equal quantity of cotton of the same grade, staple, and character were simultaneously made by it is not sufficient to relieve the appellant of the tax upon the profit actually realized upon the contract which was finally closed out during the taxable year.

Respondent is sustained on this issue.

The third issue is the propriety of respondent’s action in'including in income for 1934, $7,013 constituting commissions credited to petitioner upon the books of Harass & Vose as his share of the commissions charged by that company to customers on contracts which had been personally guaranteed by petitioner.

Of the total amount so credited we have found that $4,845 was commissions credited to petitioner’s account in connection with certain cotton transactions executed for Frierson & Co. The remainder of the commissions is not identified with any particular account. There is no evidence indicating that petitioner was restricted in his absolute control and enjoyment of them when credited to him. We think that they were income realized by petitioner in 1934. See Corliss v. Bowers, supra.

However, as to the credit of $4,8'45 a different condition exists. It is clearly established that, although these commissions were credited to petitioner’s account, they were not subject to his withdrawal because of the fact that the Frierson account did not show an equity in excess of those commissions. It is true that they were entered upon the books as a credit due him. But whether he would ever receive them depended upon the Frierson account being closed without a liability on the part of petitioner under his guarantee or that the account, because of a market rise, showed such an equity, or paper profit, that Harass & Vose would voluntarily permit their withdrawal. Neither of these conditions occurred. The evidence discloses that, although these commissions were credited, petitioner was advised that they were not available to him. Under such conditions, we conclude they can not be considered as subject to his unfettered use and therefore realized by and taxable to him. See Corliss v. Bowers, supra.

The last issue involves petitioner’s claim of a deductible loss in the amount of $43,935.22 alleged to have been sustained in 1934 on his investment in stock of the One and Three South William Street Building Corporation or in property on Long Island acquired by himself and brother, the title to which was held by that corporation for them. Petitioner argues that occurrences in the year 1934, to wit, the threat of foreclosure of the mortgage held by the Brooklyn Trust Co., the refusal by petitioner’s brother to bear any further expense in connection with the property, his endorsement and delivery of his shares of stock in the corporation to petitioner, and the refusal by the trust company to accept petitioner’s offer of a transfer of the property in satisfaction of the mortgage, fix and identify a loss as occurring in that year.

It is not entirely clear .whether petitioner’s position is that the basis for computing the amount of his loss is the value of his stock-holding in the corporation or his investment in the property, disregarding the corporate entity and treating the property as personally owned by himself and his brother. His computation of the amount of the loss would appear to be upon the latter basis, since it includes not only the item of the cost to him of his stock in the corporation which was the original cost of the property when acquired, but also the expense borne individually by him since that time.

Undoubtedly, the corporation was used merely for the purpose of holding title for petitioner and his brother. It had no income, kept no accounts and the expenditures by petitioner and his brother for taxes, mortgage interest, and attorneys’ fees were never charged as advances by them to the corporation but as individual expenditures on their own account in connection with property owned by them. In fact, petitioner appears to have deducted, individually, taxes paid by him on the property. Even for the year 1934, involved here, in arriving at the deficiency, respondent has allowed the deduction of amounts in taxes paid on this property by petitioner personally and claimed on his return.

Under these conditions we think the issue is resolved by whether the property could be considered as having become worthless in 1984 and thus support a loss then realized. Cf. Archibald R. Watson, 42 B. T. A. 52. Petitioner argues that, for all practical purposes, he abandoned the property in 1934 and the loss was then realized, as in W. W. Hoffman, 40 B. T. A. 459.

However, in the Hoffman case, the taxpayer refused to pay either taxes, insurance, interest, or other charges. The amount of these then owing totaled a large sum and the value of the property was far below the amount of the outstanding mortgage. Here, at the close of the taxable year, 1934, there was no indebtedness against the property other than the mortgage of $100,000. Petitioner had paid all arrears in taxes and interest. He has continued to pay these charges since that time, and it does not appear that as of that date the value of the property was less than the outstanding mortgage.

It is further urged by petitioner that under the rule in DeLoss v. Commissioner, 28 Fed. (2d) 803, the loss must be considered as sustained in 1934, since the record reveals that the value of his investment was then extinct and therefore.no sale or disposition of the property was necessary in order to determine it as having been then realized. Under this edict, however, no deductible loss occurred in 1934. The evidence indicates that if the investment was worthless in that year its value was even less in prior years. In fact, the evidence indicates that in 1934 there had been improvement in the market value of the property over prior years. In 1934 the" existence or effectiveness of restrictions upon apartment construction thereon no longer existed. Certain of petitioner’s valuation witnesses testified that the value of the property in 1934 was less than it was in 1928, but these witnesses valued the property at only $69,000 in 1928, which was far less than the amount of the mortgage. They agreed that its value in 1933 was less than that in 1928. Thus, even if it could be held that petitioner realized a loss through diminution in the value of the property, (see Rhodes v. Commissioner, 100 Fed. (2d) 966), it was sustained long prior to the taxable year here involved and, of course, can not be postponed.

No deductible loss wa,s realized in 1934.

Decision will he entered under Rule 50.

       SEC. 101. CAPITAL NET GAINS AND LOSSES.
      (c) Definitions.—For the purposes of this title—
      (8) “Capital assets’’ means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or husiness.


author: Van Fossan:

text:
    David M. Heyman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97827.
    Promulgated July 17, 1941.

      Lawrence A. Baker, Esq., for tbe petitioner.

      B. M. BrodsJcy, Esq., for tbe respondent.
   OPINION.

Van Fossan:

The respondent held the trust of March 14, 1931, in favor of Ruth S. Heyman (hereinafter called the wife’s trust) to be revocable and the income therefrom taxable to the grantor under the provisions of section 166 of the Revenue Acts of 1934 and 1936. Under appropriate pleadings, he now asserts that such income is also taxable under the provisions of sections 167 and 22 (a) of those acts. He further contends that the income from the three trusts, created July 21, 1933, for the benefit of his sons (hereinafter called the children’s trusts), is likewise taxable under sections 22 (a) and 167 of those acts. The petitioner denies the taxability of the income from all trusts under any statutory provision.

Addressing ourselves to the wife’s trust, we are at once impressed by the breadth of control by the donor trustee and the absence of the limitations usually found in trust instruments. The situation is quite similar to that present in Chandler v. Commissioner, 119 Fed. (2d) 623. There the court said:

The first question which arises is whether the income from the trust securities is taxable to Chandler. The Board held that it was. Its decision was grounded upon the second paragraph of article seventh of the trust agreement, which is as follows:
“During the lifetime of Grantor, Trustee shall make such sale, exchange or other disposition either to Grantor or to a third party or third parties designated by him of all or any part of the Trust Fund and for such considerations and upon such terms as to credit or otherwise as Grantor shall at any one time or from time to time direct. Trustee shall also acquire by purchase, exchange or otherwise such real or personal property for such considerations and either from Grantor or from such third party or third parties as Grantor may at any one time or from time to time direct. Grantor may be personally interested in the sale, exchange or other disposition of any part of the Trust Fund and/or in the purchase, exchange or other acquisition of real and/or of personal property for the Trust Fund. Trustee shall at all times and forever be freed from any and all liability and responsibility for acting in accordance with such directions of Grantor.”
The Board found that, Chandler could so exercise the power reserved (by the provisions just quoted) to himself as grantor as to direct a sale of trust securities to himself at less than their real value and to that extent revest title in the trust corpus in himself.

Commenting upon article seventh of the trust instrument, the court further said:

In the present ease there can be no doubt that the power to control reserved by Chandler was for his own benefit. In addition to broad powers of directing investments by the trustee, such as were present in the trust instrument in Carrier v. Carrier, supra, Chandler reserved to himself the right to sell to or buy from the trust estate at his own price and to direct the disposition to himself (other than by way of sale or exchange) of all or any part of the trust fund for such consideration and upon such terms as he might direct. We think that the reservation by the settlor of the power to deal with the trust assets for his own benefit is irreconcilable with the fundamental principle underlying all fiduciary relationships that the fiduciary must act solely in the interest of the cestui que trust and, therefore, may not have personal dealings with the trust property. Restatement, Trusts, § 170 and comments thereto. As owner of the assets Chandler, of course, had the right to reserve such a power. His doing so clearly indicates that he did not intend to impose upon himself fiduciary restraints enforcible by the trust beneficiaries. We think that the Board was entirely justified in construing the power as a reservation by the settlor of the right to revoke the trust.

In the wife’s trust instrument we find that paragraphs 3, 8, and 14 contain similar, if not broader, powers of control over the trust corpus as compared with those in the Chandler case. In paragraph 3 the grantor was under “no restrictions whatever” with respect to the investment and reinvestment of the trust estate. He was granted “power without accountability” for what might “otherwise be considered negligence” and permitted to make “speculations in any form” for the trust estate. In paragraph 8 the trustees were protected in carrying on transactions authorized by the trust agreement and were not liable for depreciation or loss “by reason of any sales, investments or reinvestments so made.” Under paragraph 14 the donor may purchase investments from the trust estate for himself or his firm and sell them to himself and his firm. All transactions with his firm are subject to commissions.

These reservations and grants are couched in the broadest language and permit the petitioner to set any price he sees fit on any part or all of the trust corpus. As in the Chandler case, he might fix the amount of the sale at a nominal figure, upon terms amounting substantially to a gift or sell at a bargain price without restriction or accountability. Likewise, an excessive purchase price for assets bought from himself for the trust would result, in effect, in an immediate cash distribution from the trust corpus, measured by the difference between the amount received and the fair market value of the purchased asset. Thus the power to revest in the grantor any part of the corpus is clearly vested in him by the terms of the trust instrument.

It is sufficient to decide that the income from the wife’s trust during the years before us was taxable to the donor under the provisions of section 166, but we are constrained to add that under the circumstances set forth in our findings of fact the income is also taxable to him under section 22 (a). The principles announced in Helvering v. Clifford, 309 U. S. 331, apply here. In that case the trust was created for a term of years, but the absence of a specific term is immaterial. Altmaier v. Commissioner, 116 Fed. (2d) 162; White v. Higgins, 116 Fed. (2d) 312; Commissioner v. Berolzheimer, 116 Fed. (2d) 628; and Morton Stein, 41 B. T. A. 994. No single factor need be pointed out as determinative of taxability under section 22 (a), Helvering v. Clifford, supra, but the entire situation must be viewed in order to evaluate the purpose and use of the trust as a means of retaining or alienating the donor’s incidents of ownership over the corpus or his constitutent rights to and privileges in its dominion.

In the case at bar we find a marked similarity of fact to the Clifford case. In both cases the grantor was the trustee, the wife was the beneficiary (here the children were possible beneficiaries upon the happening of certain events), and income was to be paid primarily to the wife. In neither case was there specific power of revocation, but here the grantor may revoke with the consent of' his wife while they live together as man and wife, and alone thereafter, and the grantor may renounce or modify his power of revocation. There is no definition or amplification of the word “modify” and, consequently, we can not say what effect a modification might have on such power. Upon the termination of the Clifford trust the undistributed and accrued income would belong to the wife. Upon the revocation of the Iieyman trust the undistributed income would go to the grantor.

Further powers reserved to the grantor tightened his control over the trust estate. The grantor has exercised personal direction and control over the activities of the trust fund. He has been the sole trustee of the trust. He has invested the funds in his wife’s general account (which included the income from the trust) and has used that account in the purchase of additional investments selected by him in his sole discretion. He has paid out of his own funds the living expenses of his family and himself, averaging about $100,000 a year.

In the face of this brief resume of the salient facts it can not be said that the wife’s trust was not the usual “family trust”, the income from which is taxable to the grantor under section, 22 (a).

As to the children’s trusts, the respondent argues that the trusts were created as an integral part of the grantor’s plan to retain control over the property transferred in trust for the benefit of his wife and children and to deal with it as if it were still his own. He cites the grantor’s broad powers to control the corpus as equivalent to ownership. He contends that the grantor is permitted to deal with the trusts in any way he chooses and may profit therefrom personally as he sees fit. He says “the powers are broad enough to enable the petitioner to milk the trust dry or apply them to any undertaking in which he himself would stand to benefit through the use of trust funds” and thus he may violate the fundamental concept of a trust.

We see no escape from the conclusion respondent asks when we apply to the children’s trusts the same line of reasoning as has been applied to the wife’s trust. The facts that petitioner has not availed himself of the right to lend to or borrow from the trust; that he has not maintained margin accounts with the funds; that he has accumulated all gains and profits for the children’s use and benefit and otherwise provided for their education, maintenance, and support, are not determinative. Petitioner reserved the power to use the funds of the children’s trusts in much the same fashion as the wife’s trust. The possession of the power is determinative, not the fortuitous manner of its use. Petitioner retained such control over the trust corpus as to bring the trust income within the broad scope of section 22 (a). Chandler v. Commissioner, supra; Helvering v. Clifford, supra.

Reviewed by the Board.

Decision will be entered under Rule SO.


author: Smith: Mellott,

text:
    Sportwear Hosiery Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Dicket No. 99254.
    Promulgated July 17, 1941.

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

      Bernard D. Daniels, Esq., and Samuel Schultz, Esq., for the respondent.
   OPINION.

Smith:

The first question for consideration is whether the petitioner is entitled to deduct from its gross income of 1936 more than $1,538.25 paid during that year to its secretary. The petitioner actually paid $4,000 for such services. The respondent disallowed the deduction of $2,461.75 as being in excess of reasonable compensation.

Section 23 of the Revenue Act of 1936 permits a taxpayer to deduct from gross income in the determination of net income:

(a) * * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *

What constitutes a “reasonable allowance for salaries” is a question of fact, to be determined from all of the evidence in the case. See Marble & Shattuck Chair Co. v. Commissioner, 29 Fed. (2d) 393. The petitioner’s president, Fannie Goldberg’s son, testified that his mother’s services were of great value to the corporation; that she shopped the stores of Philadelphia and New York for the purpose of purchasing hosiery and for obtaining ideas that might be helpful in the business. He also testified that it was she who was responsible for an innovation of manufacturing boys’ and men’s hosiery with elastic in the top of the sock which obviated the necessity of wearing garters, and that the petitioner was the first manufacturer of such hosiery. It does not appear, however, whether this innovation was prior to the time that Fannie Goldberg became an officer of the corporation or not. The witness could not tell how often Fannie Goldberg visited the office of the petitioner corporation during 1936. She attended directors’ meetings and signed the minutes of such meetings, which, however, were prepared by counsel. She “occasionally” visited the office of the petitioner.

From a consideration of all of the evidence in this case we are of the opinion that reasonable compensation for Fannie Goldberg’s services to the petitioner in 1936 was in the amount of $1,538.25. The disallowance of $2,461.75 of the claimed salary deduction is approved.

The second question for consideration is whether the petitioner is entitled to a specific credit under section 14 (c) (1) of the Revenue Act of 1936 of $5,000, or to a specific credit of $3,416.84, as determined by the 'respondent. The petitioner contends that it is entitled to a specific credit of the larger amount.

The respondent determined a surtax on undistributed profits in his deficiency notice as follows:

Taxable net income-$17, 788. 47
Less: Normal tax_ 1, 961.86
Adjusted net income- 15, 831.62
Less: Specific credit- 3,416. 84
Remainder subject to surtax___ 12,414. 78
7 percent on $1,583.16-'- 110.82
12 percent on $1,583.16_ 189.98
17 percent on $3,166.32_ 538.27
22 percent on $3,166.32_,___ 696. 59
27 percent of $2,915.82_ 787.27
7 percent of $3,416.84 (specific credit)- 239.18
Total surtax_ 2,562.11

The petitioner does not contest the correctness of the respondent’s computation except as to the amount of the specific credit. It would compute the surtax on undistributed profits as follows:

Adjusted net income_$15,831. 62
Less: Dividends paid credit_ _
Undistributed net income_ 15,831. 62
Specific credit claimed_ 5, 000. 00
Net income subject to surtax- 10,831. 62
7 percent of $1,583.16_ 110.82
12 percent of $1,583.16_ 189.98
17 percent of $3,166.32_ 538.27
22 percent on $3,166.32___ 696. 59
27 percent of $1,332.66_ 359.82
7 percent of specific credit (7% of $5,000)- 350.00
Total surtax_ 2, 245. 48

Section 14 (c) of the Revenue Act of 1986 provides in part as follows:

(c) Adjusted Net Income Less Than $50,000.—
(1) Specific cbedit.—If tbe adjusted net income is less than $50,000, there shall be allowed a specific credit equal to the portion of the undistributed net income which is in excess of 10 per centum of the adjusted net income and not in excess of $5,000, such credit to he applied as provided in paragraph (2). [Italics supplied.]

This provision of the law was drafted by the Conference Committee. There was no provision in the Revenue Bill of 1936, as it passed the House or the Senate, comparable to section .14 (c). The conference report throws no light upon the correct construction of the provision.

Article 14-3 of Regulations 94, promulgated under tbe provisions of the Revenue Act of 1936, provides in part as follows:

Abt. 14-3. Specific credit if adjusted net income is less than $50,000.—Sec-tion 14 (c) .provides íor a specific credit in the case of a corporation which has an adjusted net income of less than $50,000. This specific credit is an amount egual to the excess of $5,000 or the total undistributed net income, whichever is less, over 10 percent of the adjusted net income and is to be deducted from the undistributed net income before computing the surtax. * * *

It then gives three examples for the computation of the total surtax on undistributed profits, namely, upon taxpayers having a net income of $1,000, of $25,000, and of $49,900. Under the respondent’s regulations the taxpayer with a small undistributed net income is entitled to a proportionately larger (in reference to its total undistributed net income) specific credit than a corporation with a larger undistributed net income. Thus a taxpayer with a net income of $1,000 is entitled to a specific credit of $900; that with á net income of $25,000 to a specific credit of $2,500; and that with a net income of $49,900 to a specific credit of $10.

In each of the cases where adjusted net income is in excess of $5,000 the specific credit is computed as the difference between 10 per centum of the adjusted net income and $5,000. The respondent has interpreted the provision as meaning that the specific credit shall be only a “portion” of the undistributed net income regardless of the amount. The respondent has found that the petitioner’s adjusted net income or undistributed net income for 1936 was $15,831.62. The “portion” of that adjusted net income “which is in excess of 10 per centum of the adjusted net income and not in excess of $5,000” is $3,416.84. This is in accordance with article 14-3 of Regulations 94.

The petitioner contends that the respondent’s regulations and return Form 945 are not in accordance with the statute. It submits:

The portion of $15,831.62 [the undistributed net income determined by the respondent] which is in excess of $1,583.16 is $14,248.46. Thus, the credit would he $14,248.46, were it not for the last part of the provision “not in excess of $5,000” which limits it to $5,000.00. The allowable credit is then $5,000.00.

It will be seen from the foregoing that the petitioner would interpret the phrase “equal to the portion of the undistributed net income which is in excess of 10 per centum of the adjusted net income and not in excess of $5,000” as meaning that in every case where the excess of the adjusted net income over 10 per centum thereof is $5,000 or more the taxpayer is entitled to a specific credit of $5,000. Thus, a corporation with an adjusted net income of $49,900 would be entitled to the same specific credit as one with a net income of, for instance, $6,000, and a corporation with an adjusted net income of $5,600 would be entitled to a specific credit of $5,000 whereas one with an adjusted net income of $5,000 would be entitled to a specific credit of only $4,500. •

We think that the respondent’s interpretation of the statute is correct. It was undoubtedly the intention of Congress to give a corporation with a small adjusted net income a larger specific credit under this provision of the law than a corporation with a large adjusted net income. The respondent’s regulations give that interpretation to the statute. The petitioner’s interpretation does not. The most that can be said for the petitioner’s method of computation is that it is a possible interpretation of the statute. We think that the respondent’s interpretation is the more reasonable one. It considers the word “portion” as referring to such part of the undistributed net income as falls between 10 per centum of the undistributed net income and $5,000. In other words, it uses the amount of $5,000 as a measuring stick, and includes within the measuring stick the 10 per centum of the undistributed net income. This interpretation gives every corporation with a large undistributed' net income (but less than $50,000) a smaller specific credit than any corporation with a lesser undistributed net income, which is what we believe Congress intended. We approve the respondent’s determination that the petitioner is entitled to a specific credit of $3,416.84 and reject the petitioner’s contention upon .this point.

The third question in issue is whether the petitioner is subject to unjust enrichment tax for 1936 and, if so, the amount thereof. The petitioner alleges that it is not liable for such tax on any of the following grounds:

(a) The rebates or credits which- respondent seeks to tax were gifts or gratuities to petitioner by its vendors and are therefore not taxable.
,(b) If it be held that the rebates or credits were not gratuities, then they were reductions in the purchase price of petitioner’s goods and therefore do not constitute taxable income.
(c) If it be held that the rebates or credits were not gifts and did not constitute reductions in the purchase price of goods, but did constitute refunds of processing taxes paid by petitioner, then petitioner was not unjustly enriched.
(d) The tax on so-called unjust' enrichment is unconstitutional, null, and void.

Eelative to its first contention, the petitioner submits that $954.74 refunded to it by the Palmetto Yarn Corporation and $1,417.23 refunded to it by the Johnston Mills, two of its vendors, totaling $2,371.97, were refunded by vendors who were under no legal obligations to make the refunds. It therefore submits that these constituted gifts; that the petitioner received them as gifts; and that they are exempt from the unjust enrichment tax. Admittedly, these amounts are included in the $2,737.29 upon which the respondent has based his computation of unjust enrichment tax.

Section 501 of the Revenue Act of 1936 provides in part as follows:

(a) The Hollowing taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
* ⅜ * * * * *
(2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such persons to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.

The question arises as to what difference it makes whether the petitioner’s vendors were under any legal obligation to make the refunds or rebates which were made. The unjust enrichment tax is imposed upon such reimbursements and in our opinion it is entirely immaterial whether the vendors were under any legal obligation to make the refunds or not. There is no evidence that they were made with a donative intent. It is common knowledge that many thousands of dollars were refunded under the same conditions that refunds were made by the Palmetto Yarn Corporation and the Johnston Mills. It would indeed be an anomalous situation that the liability to the unjust enrichment tax depends upon whether the vendors are legally liable to make the refunds. In our opinion there is no merit whatever in the petitioner’s contention.

The second contention is that the refunds made by petitioner’s vendors constitute “reductions in the purchase price of goods.” Petitioner then submits that a reduction in the purchase price of an article does not constitute the realization of “income.”

It is true that the refunds were made for the purpose of reimbursing the petitioner for a part of the price which was paid by the petitioner for the yarn. But the petitioner manufactured the yarn into hosiery and sold that hosiery to its customers, including in the sales price the burden of the processing taxes which it had paid to its vendors. The very purpose of the enactment of the unjust enrichment tax was to subject to tax gains of this character. In our opinion there is no merit in this contention.

The third contention is that it was not “unjustly” enriched by the receipt of the refunds. Whatever the petitioner may think with regard to the justness or unjustness of the tax, it is indubitably true that the petitioner obtained these refunds or rebates as a result of the holding of the Supreme Court in United States v. Butler, 297 U. S. 1, that the law imposing the processing taxes was unconstitutional. Congress has declared that taxpayers who receive refunds of processing taxes without having borne the burden thereof have been unjustly enriched. We can see no merit in this contention of the petitioner.

The final contention of the petitioner is that the unjust enrichment tax is unconstitutional, null, and void. But the constitutionality of the tax has been upheld by numerous decisions of the courts. See White Packing Co. v. Robertson, 89 Fed. (2d) 775; Louisville Provision Co. v. Glenn (U. S. Dist. Ct., W. Dist. Ky.), 18 Fed. Supp. 423; Union Packing Co. v. Rogan (U. S. Dist. Ct., So. Dist. Cal.), 17 Fed. Supp. 934. See also Helmbright v. Gebelein, Inc. (U. S. Dist. Ct., Dist. Md.), 19 Fed. Supp. 621; Anniston Mfg. Co. v. Davis, 301 U. S. 337.

Reviewed by the Board.

Decision will be entered for the respondent.

DisNey dissents.

Mellott,

dissenting: It seems to me that petitioner’s method of computing the specific credit under section 14 (c) accords with the statute. Its “undistributed net income” was $15,831.62. Its “adjusted net income” was $15,831.62. The “portion of the undistributed net income which is in excess of 10 per centum of the adjusted net income” ($15,831.62-$1,583.16) is $14,248.46. Since the credit may not exceed $5,000 petitioner is limited to that amount.

The majority approve the respondent’s computation, which takes “the difference between 10 per centum of the net income and $5,000.” If Congress had intended the specific credit to be “an amount equal to the excess of $5,000 or the total undistributed net income, whichever is less, over 10 percent of the adjusted net income” it could very easily have said so; but it did not. We should not distort the language used simply to allow a taxpayer with a small undistributed net income a proportionately larger credit than one with a larger income. This was taken care of by Congress when it denied the specific credit to a corporation having an adjusted net income in excess of $50,000. There is nothing in the act before us or in its legislative history to indicate that Congress intended to do aught than to allow a sma.11 corporation a specific credit of $5,000 provided the portion of its undistributed net income, which is not in excess of 10 per centum of its adjusted net income, equals that amount,

MuedoCh, Leech, and TURNER agree with this dissent.


author: Hill:

text:
    The New McDermott, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99360.
    Promulgated July 17, 1941.

      R. B. Albertson, Esq., for the petitioner.

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

Hill:

The single issue before us is whether or not petitioner is entitled to a deduction in the taxable year for interest accrued on bonds. Petitioner contends that it has always kept its books and filed its returns on the accrual basis and that it properly accrued the sum of $9,730 as interest on the bonds due in the year 1936. It maintains that, even though it was not primarily liable on the mortgage, it is entitled to the deduction by virtue of article 23 (b)-l of respondent’s Regulations 94. Eespondent argues that petitioner was not on the accrual basis of accounting and hence may not deduct interest due but unpaid. He asserts that the bonds have been canceled by operation of law and relies upon the case of Chester A. Sheppard, Trustee, 37 B. T. A. 279.

Petitioner was on the accrual basis of accounting. Its returns were consistently filed and its accounts were kept on that basis. The fact that the largest expense items relating to interest and taxes were accrued while current operating expenses were paid does not constitute petitioner’s bookkeeping a “hybrid” system. We are convinced that petitioner’s income is clearly reflected by its use of the accrual basis. In order that petitioner may have a deduction for interest accrued, however, the interest must be due on indebtedness of the taxpayer. Colston v. Burnet, 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640; Helen B. Sulzberger, 33 B. T. A. 1093; Morris Plan Co. of Binghamton, 26 B. T. A. 772.

Petitioner received the apartment property from the General Investment Co. by warranty deed, subject to the mortgage in favor of the bank as trustee for the bondholders. Petitioner did not assume the mortgage until after the taxable year. We are nevertheless of the opinion that the indebtedness was that of petitioner within the meaning of the authorities which require the debt to be that of the taxpayer in order to support an interest deduction. Cf. Joell Co., 41 B. T. A. 825. The mortgage indebtedness is a lien on the property of which petitioner is the legal owner and upon which petitioner must necessarily rely for its source of income. Petitioner’s whole reason for being would be negatived if the mortgage were foreclosed and the property sold to satisfy the mortgage. Interest accrued on the mortgage is interest on petitioner’s indebtedness in spite of the fact that petitioner was not primarily liable on the mortgage.

Petitioner does not come within the letter of article 23 (b)-l of respondent’s Regulations 94, since that regulation speaks only of “interest paid.” We see no reason, however, in the absence of statutory specification, to grant a deduction to' a taxpayer on the cash basis for interest paid and deny deductibility to interest accrued by a taxpayer on the accrual basis. The interest here was properly accrued and the claimed interest deduction is allowable.

Respondent maintains that the bonds were canceled “by operation of law” and urges that Chester A. Sheppard, Trustee, supra, controls. The bonds were still outstanding at the date of the hearing and interest under the maturity extension and interest reduction agreement was still being paid on them. Respondent has suggested that under the doctrine of merger the bonds were canceled when the legal title was acquired by petitioner. We are of the opinion that the facts in the instant case do not justify application of the doctrine of merger. The resolution adopted by the shareholders of petitioner at their first meeting concerning the acquisition of the mortgaged property clearly indicates that no merger of the legal and equitable titles was intended. The fact that some of the bonds were never subject to the deposit agreement is in itself sufficient to preclude merger and consequent cancellation of the bonds. See Anderson v. Starr, 159 Wash. 641; 294 Pac. 581.

The Sheppard case is distinguishable from the instant proceeding. There the taxpayer was an individual trustee acting for bondholders. We held that it was not contemplated that there should be an obligation on the taxpayer to. pay interest on the mortgage, or even if there were such an obligation, the taxpayer was a mere trustee acting for the bondholders to whom the alleged interest was owing. Here, petitioner and the bondholders are not identic. Petitioner’s shares are sold both with and without bonds and some of the bonds were never deposited. We hold that respondent’s determination was erroneous to the extent that he disallowed a deduction for accrued interest in the amount of $9,730.

Reviewed by the Board.

Decision will he entered imder Bule 50.

       Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. * » •


author: Disney :

text:
    E. G. Wadel, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101243, 101244, 101245, 101246, 101247.
    Promulgated July 18, 1941.

      George S. Atkinson, Esg., for tbe petitioners.

      D. D. Smith, Esg., for tbe respondent.

       Proceedings of the following petitioners are consolidated herewith: Clarence Mallinson; Beatrice Mallinson; Herbert Mallinson; and Reba M. Wadel.

   OPINION.

Disney :

These proceedings, duly consolidated, involve income taxes for tbe year 1937. Tbe respondent determined deficiencies as follows:

Though the respondent, by amended answer, sought increased deficiencies, the petitioner in each case filed reply thereto, admitting the increase sought; therefore such amounts will be reflected in computation of decisions under Rule 50, and only the issues over the deficiencies originally determined remain for our consideration. The questions presented are the same in each proceeding, to wit, whether the petitioner was a member of a partnership, and whether the respondent erred in refusing each petitioner the full benefit of section 117 (d) of the Revenue Act of 1936, and in dividing the $2,000 loss deduction thereunder among the petitioners as members of a partnership.

The parties filed a stipulation of facts, and we find the facts to be as so stipulated. In addition thereto, there were admitted in evidence the partnership return of income (Form 1065) of Mallinson Bros. & Wadel, and the individual income tax returns of the petitioners Clarence Mallinson, Beatrice Mallinson, and E. G. Wadel, all for the year 1937. However, we find therein no material fact not covered by the stipulation and therefore adopt the stipulation as our findings of fact.

So far as necessary to examination of the issues, the facts may be summarized as follows:

At all times material herein the petitioners E. G. Wadel and Reba M. Wadel were husband and wife, domiciled in Texas, with income and deductions for the taxable year upon a community basis. The same is true of petitioners Herbert Mallinson and Beatrice Mallinson. Petitioner Clarence Mallinson was a single man, living in Dallas, Texas. Reba M. Wadel is a sister of Herbert Mallinson and Clarence Mallinson. In February 1986 Reba M. Wadel, Herbert Mallinson, and Clarence Mallinson, in the respective sums of $40,000, $20,000, and $40,000, deposited in a special account in a Dallas bank the total sum of $100,000 for purposes set out in an instrument in writing executed by them. That instrument in substance recited the deposit of the money; the subscription to an investment service issued by a New York company; the intent to follow the advice of that company with reference to investment in securities; the appointment by the three parties of Herbert Mallinson as agent, attorney in fact, and trustee, to use funds for the purpose of buying, selling, and dealing in securities under the advice of the New York company; that the trustee should, if he thought advisable, have securities issued in his own name; that he should not be liable for losses caused by depreciation in value or because of loss of any character resulting from investment of funds, provided he exercised reasonable diligence in acting promptly, prudently and strictly in conformity with the advice of the New York company; that he acknowledged holding the funds or securities coming into his possession, in proportion to the contributions made to the fund; that he should keep complete books and accounts of all transactions open for inspection by the parties; that dividends, interest or other income accruing should be distributed upon receipt thereof to the parties in the same proportions the contributions were made; that he should serve without compensation, but have authority to pay out of funds in his hands the expense charges involved in his operations; that the trust agreement, unless sooner terminated, should continue for the term of one year, renewable fróm year to year by memorandum endorsement appended, the agreement to be terminated, however, at any time by notice given by any party by mailing to the others; that upon termination of the agreement for any cause the trustee should after payment of all charges and expenses return the funds in the proportion of the capital contributions, and distribute the securities in the same proportion; that any party could, without demanding termination of the trust, direct the trustee, as to such party’s share only, not to follow the procedure in accordance with the advice of the New York company, in which case the trustee should notify all other parties; that in case of illness or absence or inability for any cause to perform duties, on the part of the trustee, he should have power to designate for such, period as decided upon by him either Clarence Mallinson or E. G. Wadel as substitute trustee, with the same powers as the original trustee; that in the event of the death of any party to the agreement, the trust should automatically cease and terminate.

The partnership return of income filed by “Mallinson Bros. & Wadel” disclosed income from interest $1,130, from dividends $2,-761.88, a total of $3,891.88, from which was deducted $1,304.26 expenses, leaving $2,587.62, which was reported as distributable to Herbert Mallinson 20 percent, or $517.52; to Clarence Mallinson 40 percent, or $1,035.05; and to Ernest G. Wadel 40 percent, or $1,035.05. Also, there was reported capital gain of $4,670.69, with capital loss of $28,243.89. The partnership return claimed no capital loss. The parties to the agreement, petitioners herein, each reported his distributive share of the $2,587.62 net ordinary income reported on the partnership return, in the respective amounts of $517.52, $1,035.05, and $1,035.05, as above set forth. Herbert Mallinson and wife, Beatrice, each filed an individual Federal income tax return and each reported one-half of the $517.52, and each claimed as capital loss one-half of $4,714.64, the net capital loss allocated to Herbert Mallin-son by the partnership return. Beba M. Wadel and her husband, E. G. Wadel, each filed individual Federal income tax returns, each reported one-half of the $1,035.05 net ordinary income reported on the partnership return, and each claimed $2,000 capital loss. Clarence Mallinson in his Federal income tax return reported the $1,035.05 from Mallinson Bros. & Wadel and claimed a capital loss of $2,000.

The Commissioner denied the claims of capital loss set up by the petitioners in their individual returns, allowed a $2,000 capital loss as sustained by the partnership, and correspondingly reduced each individual’s distributive share of the net income of the partnership because of the allowance of capital loss not claimed on the partnership return. Each of the petitioners now contends, under section 117 (d), Revenue Act of 1936, for the allowance of a capital loss of $2,000.

Was Mallinson Bros. & Wadel a partnership ? The petitioners suggest that the relationship was not that of a partnership, and that under the law of Texas a wife can not be a partner unless declared a trader. This question, however, turns upon the definition of the term in the Federal statute, and not upon state law. Dolores Crabb, 41 B. T. A. 686; H. H. Wegener, 41 B. T. A. 857; affd., 119 Fed. (2d) 49. That definition in section 1001 (a) (3), Revenue Act of 1936, is broad:

The term “partnership” includes a syndicate, group, pool, joint venture, or other incorporated organization, through or by means oí which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.

We think it obvious that the agreement above epitomized does not set up a mere trust. The partnership return filed indicates recognition by the parties that there was partnership. We hold that Mallinson Bros. & Wadel was a partnership within section 1001 (a) (3).

Did the Commissioner err in allowing the partnership the benefit of section 117 (d) as to capital losses and denying to each individual partner the benefit of the full amount ? The petitioners contend that there was no partnership, but that if there was, it was not a taxable entity, that income tax is assessed against the individual and the partnership return is for information only, and suggest as controlling this question the case of Neuberger v. Commissioner, 311 U. S. 83. We think that case is not here controlling. It construed section 23 (r) (1) of the Revenue Act of 1932 and held thereunder that a member of a partnership might deduct noncapital losses sustained as an individual from his distributive share of partnership gains from such securities. The Court refers to the question as a narrow one, and points out a change in the law in 1933, and a restoration in 1938. Also the Court in a footnote quoted House Ways and Means Committee Report No. 1860 (75th Cong., 3d sess.), as follows:

The method of treatment provided in these sections of the bill (182 and 183) is a logical corollary of the principle that only the partners as individuals, not the partnership as an entity, are taxable persons and is necessary to give the partners as individuals the benefit of the alternative tax in the case of net long-term capital gains, provided in section 117 (e) with respect to such gains realized from the sale or exchange of partnership capital assets. It should be noted that this method involves a departure from the principle adopted in the Revenue Acts of 1934 and 1936 * * *.

Though the petitioner urges that section 117 is so plain that legislative reports should not be consulted for construction, we find it not so clear as urged, and find assistance in Ways and Means Committee Report No. 704, 73d Cong., 2d sess., which clearly indicates the intent of Congress. After pointing out that wealthy partners had applied partnership losses against individual income and the importance of closing any avenue of escape from income tax through use of partnership provision, the report reads:

* * * Under the bill, the partnership will be permitted to deduct losses on the sale of capital assets only to the extent of gains from such sales (sec. 117 (d)). Tiras the partnership can have no capital net loss and therefore the partner can have no deduction on account of any capital loss of the partnership. In this way the main source of the tax avoidance by banking and security partnerships in the past can be eliminated.

The Senate report recommended that the House bill be modified in section 117 (d) to permit charge-off of capital losses to the extent of capital gains, plus $2,000; and in this form the provision became law as section 117 (d) of the Revenue Act of 1934. It thus appears that under the 1934 Revenue Act and the 1936 Revenue Act, in which there was no change, Congress plainly intended that a partner should not have as a deduction against his individual income any capital loss of the partnership, contrary to the contention of the petitioners herein. The specific reference in the committee report to section 117 (d), herein involved, seems conclusively to indicate that the partnership was, under the statute being enacted, to be “permitted to deduct losses” on capital assets, and to negative the idea that the individual only was so entitled to deduction. We conclude and hold that under section 117 of the Eevenue Act of 1936 the Commissioner did not err in allowing the capital loss to the partnership and disallowing it to the partners.

Decision will 5e entered wider Bide 50.

       SEC. 117. CAPITAL GAINS AND LOSSES.

      (d) Limitation on Capital Losses.—Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the united States or of any State or Territory, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale (except such portion of the loss as does not exceed the amount, if any, by which the adjusted basis of such instrument exceeds the par or face value thereof) shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.


author: Black :

text:
    Daniel MacDougald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102263.
    Promulgated July 18, 1941.

      Allen W. Clapp, Esq., for the petitioner.

      Ralph E. Smith, Esq., for the respondent.
   OPINION.

Black :

On the facts disclosed in our findings of fact, we think the Commissioner must be sustained.

If the transaction by which petitioner received a cash disbursement of 15 percent on his Floridan bonds and 10 percent on his Dixie bonds, and by which he later received from Barron G. Collier 25 percent in cash for his income bonds, be viewed as one transaction and not separable, then it amounted to a retirement of the old bonds which he held for which he received 40 percent in cash for the Floridan bonds and 35 percent in cash for the Dixie bonds. The transaction would then come within the provisions of section 117 (f) of the Revenue Act of 1936, printed in the margin.

If the transaction be viewed as a retirement of the old bonds which petitioner held, for cash, then the loss sustained thereby was a capital loss within the provisions of section 117 (d) of the Revenue Act of 1936, printed in the margin. McClain v. Commissioner, 311 U. S. 527, and Helvering v. Thomson, 311 U. S. 527.

If, however, the transactions be viewed separately, as petitioner contends they should be, we think the results are the same. Petitioner’s exchange of his old bonds for a cash payment and new income bonds of 20 percent of the face value of the old ones was done as part of a plan in a 77B bankruptcy reorganization and we have held that no gain or loss is recognized in such a reorganization. Edith M. Greenwood, 41 B. T. A. 664. In the latter case we held that, where, pursuant to a reorganization of a corporation under section 77B of the Bankruptcy Act, a taxpayer exchanged her old bonds for new and different bonds having a lesser face value, the taxpayer was not entitled to deduct the difference in such value as a partially worthless debt.

Thus, in the instant case, when petitioner exchanged his old bonds for a cash payment and new and different bonds of á 20 percent face value of the old bonds, he was not entitled to deduct the difference between the cost basis of his old bonds and the aggregate value of what he had received in exchange as a partially worthless debt. Edith M. Greenwood, supra. Of course, when, in the same year, he sold the income bonds which he had received in the exchange for 25 cents on the dollar, he was entitled to take his loss deduction, but that loss deduction is a capital loss and is limited by the provisions of section 117 (d), supra.

Therefore, whether we view the transactions as a retirement of petitioner’s old bonds for cash which was equal to part of their face value or whether we view the transactions as a reorganization under 77B of the Bankruptcy Act, and therefore a statutory reorganization under section 112 (g) of the Revenue Act of 1936, and the subsequent sale by petitioner of the income bonds which he received in'the reorganization, the loss which petitioner incurred is in either event a capital loss, limited by section 117 (d), and can not be taken as a partial bad debt loss under section 23 (k) of the Revenue Act of 1936.

Decision will be entered for respondent.

         (f) Retirement of Bonds, Etc.—For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

       (d) Limitation on Capital Losses.—Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *


author: Sternhagen :

text:
    Charles T. Kline, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101972.
    Promulgated July 19, 1941.

      J. Warren Brock, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner contests the deficiency on the ground that the restriction upon the ownership of the Lavino shares had the effect of depriving them of value; or that if the shares are to be regarded as having value it was no more than the one-third of book value on the preceding December 31, 1936. The Commissioner’s determination is based upon a value of $43 a share, which he arrives at by using the 75 percent provision of the contract, applying it to book value on December 31,1937, and “excess earnings available on common stock.”

The evidence does not, in our opinion, require a holding that the Commissioner’s determination of the value of the gift is too high. A restriction upon the right to dispose of shares, imposed by agreement upon the owner, does not, as a matter of law, deprive the shares of value, Newman v. Commissioner, 40 Fed. (2d) 225; certiorari denied, 282 U. S. 858; T. W. Henritze, 28 B. T. A. 1173. Helvering v. Tex-Penn Oil Co., 300 U. S. 481, does not require a departure from this view. In holding that the shares there under consideration were without fair market value, the Court relied on a conjunction of “their highly speculative quality” and “the terms of a restrictive agreement making a sale thereof impossible.” Petitioner’s shares had no highly speculative quality; E. J. Lavino & Co. was old, sound, and prosperous, and, so far as the evidence shows, its stock could be held with substantial assurance of safety. It was not subject to the hazards of a new enterprise, cf. Proffer v. Commissioner, 89 Fed. (2d) 617, or danger of dissension among shareholders, cf. Morris D. Kopple, 35 B. T. A. 1056. The restriction did not make a sale impossible, although it narrowed the freedom of disposition. Without more, it did not deprive the shares of fair market value, Heiner v. Gwinner, 114 Fed. (2d) 723; State Street Trust Co. v. United States, 37 Fed. Supp. 846; R. E. Baker, 37 B. T. A. 1135; affd., 115 Fed. (2d) 987; James Couzens, 11 B. T. A. 1040, 1163-4.

A more difficult problem is the determination of the value. Petitioner’s insistence that it was no more than one-third of the book figure on December 31, 1936, presupposes his discharge for cause within one year from December 24,1937, and the company’s acceptance in 1937 of his obligatory offer to sell the shares to it at the stipulated price. The record indicates, however, that, while a possibility, such discharge was highly improbable. Petitioner had risen in the company’s employ since his connection with it in 1919; his services were satisfactory, and his faculties were not impaired. The shares were given to him because he was recognized as a deserving officer; he has remained so ever since, and the entire record affirmatively indicates the probability of his continued employment and of the directors’ disposition to respect his wishes concerning the shares. They approved of the transfer to a trust which was to continue the ownership after petitioner’s death, and it can not be assumed that as a matter of course the company will accept the obligatory offer 75 percent of book value in the event of death, or at 50 percent or 33½ percent, in the event of circumstances requiring it. The company was under no duty to buy the shares, as it had been under no duty to give the employee the shares in the first place, and if it should not accept an offer within one year after it was made, the restriction apparently was off.

Iin several cases the price at which shares had to be offered to others under restrictive agreements has been regarded as the. limit of fair market value, Salvage v. Helvering, 297 U. S. 106; Wilson v. Bowers, 57 Fed. (2d) 682; Commissioner v. Bensel, 100 Fed. (2d) 639; Lomb v. Sugden, 82 Fed. (2d) 166. But the agreements considered in them were between parties who might be expected to press |their bargaining advantage. In Wilson v. Bowers, supra, the court thought “the possibility that the options would not be exercised seems too extravagant to require further refutation.” Here, on the contrary, it seems unlikely that any event prior to petitioner’s death will require the contractual offer and unlikely that it will be accepted even then. But, if acceptance be presumed, book value as of the close of the preceding year can not be foreseen, and hence no prospective sale price can be set.

The restrictive agreement may have lessened the value of a share, but it can not be said that such reduced value was less than the $43 which the Commissioner has determined. The company’s common capital stock account, surplus, dividends paid, and reserve for doubtful accounts at the close of 1937 totaled nearly $2,600,000, which was over $51 for each common share. The dividends of $4 a share and the sharp upward trend of earnings point to a greater value for an unrestricted share. In the absence of sales, the evidence shows plainly that $43 represents a very substantial allowance for the adverse effect of the restriction agreement.

The Commissioner’s determination is sustained.

Decision will be entered wnder Bule 50.