author: Hill:

text:
    Washington State Apples, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100723.
    Promulgated January 8, 1942.

      A. J. O'1 Connor, Esq., for the petitioner.

      E. G. Adams, Esq., for the respondent.
   OPINION.

Hill:

The first question presented to us for solution is whether petitioner is exempt from tax either as an “agricultural organization” or as a “business league” under section 101 of the Revenue Act of 1936 (hereinafter all sections are from this act). We believe that the character of petitioner clearly brings it within the exemptive provisions of section 101 (7). Therefore, although perhaps it would be exempt as an agricultural organization under section 101 (1), we need not discuss this provision nor express any opinion about its applicability.

Regulations 94, relating to the Revenue Act of 1936, provides in part as follows:

Abt. 101 (7)-l. Business leagues, chambers of commerce, real estate boards, an.d boards of trade. — A business league is an association of persons baying some common business interest, tbe purpose of which is to promote sucb common interest and not to, engage in a regular business of a bind ordinarily carried on for profit. It is an organization of tbe same general class as a chamber of commerce or board of trade. Thus its activities should be directed to tbe improvement of business conditions of one or more lines of business as distinguished from tbe performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. * * *

This administrative interpretation of the term “business league” is substantially similar to prior administrative interpretations which we have long approved. Uniform Printing & Supply Co., 9 B. T. A. 251; affd., 33 Fed. (2d) 445. A short resumé of the facts will suffice to show that petitioner meets all the requirements of the statute and the regulations.

Petitioner was organized by the apple growers of the State of Washington as a nonprofit corporation. The object and purpose was to advertise and promote the sale of Washington apples. The reason for petitioner’s organization was the poor condition of the apple growing business due to a decline in the national per capita consumption of this fruit. Thus it appears that the apple growers of Washington had a common interest, i. e., the well-being of their industry, and,the purpose for the formation of petitioner was to promote that interest. This much appears to be conceded on brief by the respondent.

The principal contention of the respondent is that petitioner was organized to carry on a “regular business of a kind ordinarily carried on for profit” and to perform particular services for the individual apple growers to whose benefit the earnings of petitioner inure.

We think the facts of the instant case and the authorities refute respondent’s argument. In the cases relied upon by the respondent the primary object of the business league was either to make a profit or to render services to individual members. Retailer's Credit Association of Alameda County v. Commissioner, 90 Fed. (2d) 47; Northwestern Municipal Association, Inc. v. United States, 99 Fed. (2d) 460. The facts of the instant case readily distinguish it from those cases because this petitioner was organized to better the industry as a whole by industrial rather than individual advertising. Retail Credit Association of Minneapolis v. United States, 30 Fed. Supp. 855. Neither the statute nor the regulations requires the betterment of the general commercial welfare, but only that the activities be directed to the improvement of business conditions of one or more lines of business. G. C. M. 21000, C. B. 1939-1 (part 1), p. 124. However, the total collections which petitioner made by the assessment of approximately 1 cent per box shows that over 16,000,000 boxes of apples were shipped. Certainly, this demonstrates that apple growing and shipping was an important industry in that state. Thus the general commercial welfare of the community as a whole as well as the growers would be benefited by the improvement of business in the apple industry. Cf. Oregon Casualty Association, 37 B. T. A. 340; Crooks v. Kansas City Hay Dealers Association, 37 Fed. (2d) 83. This result is inherent in the type of advertising in which petitioner was organized to and did engage" in. No brand name or grower was mentioned in the advertisements, but only the varieties of apples grown in Washington. This type of advertisements did not replace individual advertising, but only increased the demand for Washington apples. The members and other growers benefited indirectly only by the increased demand for Washington apples. We can see_ no merit in respondent’s contention that this is the type of business normally carried on for profit. This might be true if petitioner itself had actually placed the advertising matter. Cf. Retail Credit Association of Minneapolis v. United States, supra. Here petitioner did not even do that, but hired a national advertising agency to place the advertisements.

The respondent argues that the provision for distributing the assets of the petitioner at its dissolution, together with the practice of receiving amounts from nonmembers, made earnings inure to tbe benefit of the stockholders or members. A small part of the receipts of the petitioner came from nonmembers. Those payments may have been gifts rather than income, but we need not decide that question. The petitioner was required to spend all of the money which it received, and there was no provision for distributing any amounts to its members or other individuals except upon dissolution. The petitioner had no surplus, and actually when it dissolved its only assets were $299.48 in cash and some used office furniture. Those assets had to be distributed among the members in proportion to amounts paid in by the members. The return of the cash was in the nature of a refund, since it was much less than the amount members had paid in during that year. Oregon Casualty Association, supra. The circumstance that these two insignificant items were to be distributed to members upon dissolution does not make the petitioner subject to tax.

We hold petitioner is exempt from tax by the terms of section 101 (7) and the regulations relating thereto. Under this disposition of the case we need not decide any of the further questions posed by the parties.

Decision will l>e entered for petitioner.

       SEC. 101. EXEMPTIONS PROM TAX ON CORPORATIONS.
      The following organizations shall be exempt from taxation under this title—
      * ***•':* *
      (7) Business leagues, chambers of commerce, real-estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.


source: Caselaw Access Project

author: Van Fossan: Disney,

license: Public Domain

text:
    Kennedy Laundry Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104965.
    Promulgated January 14, 1942.

      James A. O'Callaghan, Esq., for the petitioner.

      E. G. Sievers, Esq., for the respondent.
   OPINION.

Van Fossan:

The question underlying determination of the stated issue in this case is the proper rate of depreciation applicable to the petitioner’s machinery and equipment for the years from 1932 to 1935, inclusive. The petitioner contends that the life expectancy of those assets was 12% years, effective January 1,1932; that the depreciation sustained must be computed at the 8 percent rate from 1932 to 1938, inclusive, even though the 10 percent rate had been used from 1932 to 1935, inclusive; and that the unexhausted base cost should be increased to the extent that the depreciation during the latter period was not deducted from income.

The respondent states the issue to be “whether the unrecovered cost for the years prior to 1936 should be reduced by depreciation computed on the 10-year life claimed and allowed, or on the 12% year life now claimed.” He then argues that the 10 percent depreciation used from 1932 to 1935, inclusive, was reasonable in the light of the then known existing conditions and thus should not be disturbed, and, (1) that the 8 percent rate is not applicable because the petitioner has not shown that the 10 percent rate was not availed of in eliminating taxable income; and (2) that the case of Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155 (reversing 37 B. T. A. 439), relied on by the petitioner, is distinguishable and not controlling.

The record sustains petitioner in its contention that a rate of 8 percent for the period from 1932 to 1935, inclusive, was reasonable and should have been used by it. The removal of a large part of its business to the Gary plant and the loss of the Atlantic & Pacific Tea Co. business, occurring just prior to and within the period, respectively, decreased the use of the machinery from 30 to 40 percent. The further facts that in 1937 the petitioner adopted the new rate, with the Commissioner’s approval, and that the Commissioner applied it retroactively to the year 1936 are corroborative of the petitioner’s position. If the 8 percent rate was “reasonable” for 1936, as determined by the Commissioner, it was equally reasonable for the preceding period during which the circumstances causing the extension' of life expectancy arose.

The respondent argues that the depreciation should be computed on the basis of facts known in the taxable year. The pertinent facts were known in 1932 and 1933, but they were ignored ana the petitioner thereby fell into an error, which was corrected in 1937.

This conclusion brings us to the question of law involved in the determination of the base as of December 31, 1935.

Petitioner cites Pittsburgh Brewing Co. v. Commissioner, supra, as controlling. In construing section 113 (b) (1) (B) of the Revenue Act of 1932 (identical with corresponding provisions of the Revenue Act of 1936) specifically, the words “to the extent allowed (but not less than the amount allowable) ”, the court in the Pittsburgh Brewing Co. case, said:

After full consideration of this question we have reached the conclusion that depreciation is not “allowed” within the meaning of the act unless it is actually taken as a deduction against taxable income.

In the years 1932, 1934, and 1935 petitioner’s returns showed net losses of $5,221.37, $6,222.36, and $5,385.88, with claims for depreciation in the respective amounts of $22,387.60, $17,306.73, and $17,694.44. To the extent of the net loss in each of these years petitioner received no tax advantage from the depreciation deduction. Under the ruling in the Pittsburgh Brewing Co. case, depreciation was accordingly not “allowed” in the full amount of 10 percent claimed by petitioner in its returns. We, therefore, turn to the “amount allowable” which we have found should be computed at a rate of 8 percent for the years 1932, 1933, 1934, and 1935.

We hold that, to the extent that it received no tax advantage in such preceding years, petitioner’s base for depreciation as of December 31, 1935, should be computed by employing a rate of 8 percent for the years 1932 to 1935, inclusive. This holding is not inconsistent with the conclusion reached in Beckridge Corporation, 45 B. T. A. 131, where the taxpayer had never taken depreciation in preceding-years and the Board sustained the Commissioner in holding that the basis should be adjusted for the “amount allowable.” In the Pittsburgh Brewing Co. case the court reached the same conclusion on a different set of facts.

Reviewed by the Board.

Decision will be entered wider Rule 50.

Smith and SteRNHagen dissent.

Disney,

dissenting: I find it impossible to agree with the majority opinion in this proceeding, first, because I do not think that the petitioner has made the proper showing that he received no tax benefit from the depreciation “allowed” in previous years, and, second, because I do not think that it can reasonably be said to have been the intent of Congress that depreciation be considered “allowed” only in case there is net income to offset it.

First, as to the showing made by the petitioner: It was petitioner’s affirmative burden on its theory to show that the depreciation allowed did not affect and counterbalance taxable income. The showing made was that in each taxable year there was net loss in a certain amount, and depreciation claimed and not denied by the Commissioner in a greater amount; and from such showing alone the majority concludes that “To the extent of the net loss in each of these years petitioner received no tax advantage from the depreciation deduction.” For example, as to the year 1932, the petitioner had gross income of $279,043.96; net loss of $6,221.37, and total depreciation of $22,387.60. From these facts alone the majority opinion holds, as I understand it, that there was no tax advantage to the petitioner to the extent of $5,221.37, but that there was tax advantage for the remainder of the $22,387.60. I do not agree that the mere fact of the net loss proves the lack of tax advantage in that amount. Taking the year 1932, and the above figures as an example, it is apparent that the petitioner had set up in its return $284,265.33 in items for deduction, since it returned a net loss of $5,221.37 above gross income of $279,043.96. The majority opinion in substance is that the net loss was caused by one item, to wit, depreciation of $22,387.60, out of the possibly many deducted items totaling $284,-265.33, that is, that such item was the particular one which put the petitioner’s account “in the red.” Omitting the depreciation item, and subtracting $22,387.60 from $284,265.33, leaves $261,877.73 of deductions, and, compared with gross income of $279,043.96, such total of deductions left the petitioner, not with a net loss, but with a net profit of $17,166.23. The majority opinion amounts to saying that such profit was wiped out and converted into a net loss of $5,221.37 by the item of depreciation. I can conceive no reason for saying that it was that particular item of depreciation which caused the net loss. Depreciation is in the same category with all other deductible items. It is based upon wear and tear upon properties, which wear and tear contributes as much to the production of the gross income as does current expense, for example. I therefore discern no reason to distinguish between the deductible items making up the total of $284,265.33 and to say that any one of them caused the net loss. Plainly no single item caused the total. Though it well may be that depreciation should logically be considered as contributing to the net loss, I can see no rational principle under which to consider it so to do except ratably in the proportion that $22,387.60 bears to $284,265.33. In other words, the net loss is seen to be caused by depreciation, only to the extent of the fraction of 22,387.60/-284,265.33 of $5,221.37. If the net loss be not apportioned as above, then the only other way in which the petitioner can show depreciation of tax benefit is to show that he had no gross income to be offset by the depreciation, or that the gross income was less than the item of depreciation, in which case it seems obvious that pro tanto, to the extent of the gross income offset, the petitioner would have tax advantage, but above that figure would have none. Of course, a showing that there was, in most cases at least, no gross income would in effect negative a showing that the property is “used in the trade or business” within the text of section 23 (1), Eevenue Acts of 1936 and 1938, and indicate the lack of right to deduct depreciation. In my opinion, only by prorating net loss among deductions, or by showing no gross income, or gross income less than depreciation item, can the petitioner demonstrate in whole or in part that the depreciation item was of no tax advantage. I know of no authority involving the present question and the necessity by the petitioner of an affirmative showing of no tax advantage, which indicates that a showing thereof is made merely by showing net loss. Therefore, assuming the soundness of the principle that depreciation is not “allowed” within the statute here involved, unless it confers tax advantage, petitioner in my opinion has wholly failed to make such showing, unless it be to the very small fractional extent above indicated on the theory of apportioning net loss in the ratio of depreciation to total deductions.

Moreover, I do not believe that Congress intended the result which follows the theory adopted by the majority opinion. It seems a strained construction of language beyond its ordinary use in tax matters and seems to lead to an unadministrable result in many cases. In my view, Congress simply intended to add something to the previous statute. Had it not intended to do so, no amendment would have been necessary. The previous statute required that the taxpayer be charged with “allowable” depreciation, by which I understand is meant some attempt at reasonable approximation of the actual wear and tear upon the property involved. Surely no amount less than such reasonable amount was covered in the amendment, for such lesser amount was already included within and covered by the “amount allowable” under the former statute. Congress therefore is seen to have legislated with the view to an amount greater than the “amount allowable.” I think that Congress merely and simply meant to say that if the taxpayer claimed and the respondent did not oppose (or if without claim the Commissioner considered in arriving at the deficiency) an amount greater than the amount “allowable”, then such figure must be used to adjust the base of the property involved. Nothing was said, and I think nothing was in fact within the contemplation of Congress, as to what the result would be upon the basis of property in the future. In ordinary parlance or thought as to income tax matters the word “allowed” means in effect “considered in arriving at the net tax result for the year”, and in my opinion that is all that Congress intended in the section here being considered. The word “allowed” was first used in this respect in section 202 (b), Revenue Act of 1924, where adjustment is required in computing gain or loss from sale or other disposition of property for wear and tear “previously allowed with respect to such property.” It appears from the committee reports in connection with that statute that in the form the bill had taken in the House the words “properly chargeable” were used, and on this subject the Senate Committee Report says: “To remove a possible ambiguity in the House Bill, the deductions are limited to those ‘previously allowed’ rather than those ‘properly chargeable’.” The Revenue Act of 1926, section 202 '(b), changed the expression to “allowable”, which was by section 113 (b) (1) (B) of the Revenue Act of 1932 changed to “extent allowed (but not less than the amount allowable).” It seems to me that Congress in 1932, as it did in 1924, used the word “allowed” in order “to remove a possible ambiguity”, that is, intended in order to make the matter definite, to say that if a depreciation item was “allowed” in the sense that a claim therefor was not opposed or the depreciation was given effect in determining the tax situation for the year involved, it was to constitute a ground for adjustment of base for the property considered. I think that was all that Congress had in mind and that the legislators did not go into more tenuous consideration of tax advantage, or lack thereof in the year of depreciation, but laid down a definite and not unfair rule. The taxpayer had the opportunity of preventing the “allowance” of more depreciation than necessary (above the “amount allowable” or reasonable amount). He could limit his claim, withdraw it to any extent desired, or oppose its use by the Commissioner. This being within his power, there is no injustice in requiring him, when property basis is considered in later years, to abide by the figure used by him, or permitted by him to be used. The whole matter of depreciation was open for consideration and argument, when the return for the year of depreciation was being considered, in a more salutary way than as an afterthought in a later year when basis of property comes up- for attention. The requirement that the matter be settled in the earlier year prevents violation of the year unit of taxation and furnishes a rule which is practicable and administrable, whereas in many cases the rule approved by the majority opinion would obviously not be administrable and might lead to double deductions. Thus, if applied to years prior to January 1, 1933, when the net loss carry-over was abolished, the majority rule here established might result in a taxpayer recouping the tax advantage lost in 1929, for example, in his basis upon sale in 1931, yet also recoup the net loss of 1929 by applying it to the year 1930 under the net loss carry-over provision, when his return for 1930 is passed upon, in 1932 for instance, after the sale of the property involved, thus getting tax advantage twice for the same amount. On the other hand, if such double deduction is to be avoided, the recoupment of the net loss by consideration thereof in the basis upon later sale of the property under the majority view herein must be delayed (in years when net loss carryover is allowed) until after the closure of the tax return for the year following the net loss — and even for the third year, where the net loss may be carried over to the third year, such as under section 206 (b) of the Revenue Acts of 1924 and 1926, and section 117 (b) of the Revenue Act of 1928. In this connection it should be noted that the Revenue Act of 1938 restored the idea of the net loss carryover in section 26 (c) (1), where credit is given therefor, and in section 117 (e) as to net short-term capital losses which shall be treated as such in the succeeding taxable year, with an exception not affecting the present question. These considerations are ample, it seems to me, to show the lack of practicability in departing so far from the year-unit rule of taxation as is permitted by the majority opinion.

For all of the above reasons I respectfully dissent.

Aknold agrees with this dissent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (1) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * *
      *******
      (n) Basis for Depbeciation and Depletion. — The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in section 114.
      SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      (6) Basis fob Depbeciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
      SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      *******
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
      (1) General Rule. — Proper adjustment in respect of the property shall in all cases be made—
      * * * * * * *
      (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. Where for any taxable year prior to the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;


author: Leech :

text:
    Magnus Beck Brewing Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102876.
    Promulgated January 14, 1942.

      Richard. E. Buckley, O. P. A., for the petitioner.

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

Leech :

Respondent determined a deficiency in income tax for the calendar year 1936 in the amount of $11,439.52. Part of that deficiency, to wit, $10,766.15, resulted from the action of respondent in disallowing credit of $47,332.98 under section 26 (c) (2) of the Revenue Act of 1936, in computing the surtax on undistributed profits.

The petitioner is a corporation organized under the laws of the State of New York, on December 23, 1932, with an authorized capital stock of $500,000, and is engaged in the brewing industry. It filed its income tax return for the calendar year 1936 with the collector of internal revenue for the twenty-eighth district of New York.

In January 1933 the petitioner purchased a building which it furnished as a brewery, and is still located there. In this transaction considerable debts arose and by January of 1934 petitioner was financially involved and required cash. It was unable to secure capital by the sale of its stock. On January 1, 1934, it entered into a “trust” agreement with Frederick W. Drybrough, “trustee”, and “its creditors”, providing, inter alia:

Whereas, the Corporation is engaged in the brewing business in the city of Buffalo, New York, and has book assets of an amount substantially more than its liabilities, but is unable to meet such liabilities as they mature and desires to pay all of its debts and obligations in full oyer an extended period and to have extended the time for payment of said liabilities in the manner hereinafter set forth:
* * * * * * *
Third: The Corporation specifically agrees to pay to the Trustee, beginning April first, 1934, and until the expiration of this agreement, a stated amount upon each barrel of beer sold by it as hereinafter set forth, such payments to be made on or before Wednesday of each week for all beer sold by it during the previous Calendar Week, the first of such payments to be made on or before Wednesday, April 11, 1934; the rate per barrel to be paid by the Corporation to the Trustee shall be as follows:
Fifty cents (50fi) per barrel, on all beer sold during the months of April and May, 1934, and One Dollar ($1.00) per barrel on all beer sold thereafter.
Fourth: It is mutually understood and agreed that the Trustee shall have the right to waive any such weekly payment required to be made to him by the Corporation if he shall deem such waiver expedient and necessary, but any such waiver shall in no wise operate as a waiver of any other or further payment required to be made by the Corporation to said Trustee.
* «**♦:£*
Eighth : It is mutually understood and agreed that weekly payments made by the Corporation to the Trustee shall be held by the said Trustee in trust for the Creditors, parties of the third part herein, and said Trustee shall make pro rata distribution of said moneys to the Creditors of the First and Second Class from time to time in units of five per cent (5%) or more of the total claims of said Creditors, all such payments to be pro rata in proportion to the amounts of their respective claims, until all of said Creditors shall have been paid in full.
* * * * * $ *
Tenth : It is further mutually agreed that the books of the Corporation shall be open for examination and audit by the Trustee or his duly accredited representative at all times during the usual business hours of the day and that the Corporation shall furnish to the Trustee quarterly financial statements, balance sheets and audits made by a duly accredited certified public accountant.

The agreement fixed the salaries of the president, treasurer, and secretary of the company at $100, $75, and $50 per week, respectively. As collateral security for the performance of the trust agreement, petitioner agreed therein to and did execute and deliver to the trustee two mortgages of $132,000 each, the first being a mortgage on real estate owned by petitioner and the second being a chattel mortgage on the machinery, furniture, equipment, and fixtures of the company, both of which were subsequent to a $25,000 mortgage upon the premises which was extended by the agreement. The amount of $1 per barrel to be paid under the terms of the trust agreement was fixed by the trustee and accountants for the petitioner after going over the sales of petitioner for the month prior to the execution of the contract as an estimate of the profit petitioner would make on each barrel produced and sold, if business conditions were prosperous. Petitioner made weekly payments under paragraph third of the trust agreement, as follows:

The business of petitioner was seasonal and during the last two months of 1936, which was its off season, it was allowed by the trustee to reduce “payment to what we were able to pay.” The petitioner had an oral understanding with the trustee that it should pay its indebtedness from earnings. By virtue of the payments on account of beer produced and sold by petitioner, under the trust agreement, from 1934, that indebtedness was completely paid off during 1937 and the assets of the company were thereafter free of these liabilities. The annual profits of petitioner, together with the barrels of beer sold and profits per barrel, upon an annual basis from 1933 to and including 1939, follow:

The financial position of the petitioner constantly improved from 1934. The payment of the indebtedness secured by the trust agreement was completed in 1937. That agreement was in effect only until 1938.

The petitioner paid the trustee the sum of $47,332.98 during the calendar year 1936, by virtue of the provisions of paragraph third of the trust agreement hereinabove quoted.

The petitioner, in its income tax return for that year, credited such amount in the computation of its surtax on undistributed profits, under section 26 (c) (2) of the Revenue Act of 1936. Respondent disallowed the credit. The propriety of that disallowance presents our only issue.

The petitioner contends that by the quoted third and eighth paragraphs of the trust agreement it was required to make the payments, the aggregate of which is here in controversy.

Respondent denies that those provisions or any others of the contract require that the payments per barrel of beer sold shall be made from earnings or profits of the petitioner for the taxable year or, in fact, earnings and profits at all. It is his position that the contract makes no reference to the source from which the payments are to be made, that they are payable at all events, regardless of whether there be earnings or profits. He argues that this construction is borne out, not only by the wording of the contract, but by its mutual construction by the parties thereto as evidenced by the fact that in 1934 the petitioner paid $30,777.82 under the contract, whereas its operations, during that year, resulted in a loss of $6,805.46.

We agree with petitioner. We think that the provisions of the written contract, upon which petitioner relies, require that the contested payments, per barrel of beer sold, be made from the receipts from such sales. Those receipts necessarily included “earnings and profits of the taxable year”, if such existed. That is sufficient to satisfy the pertinent condition of the statute. The contested credit is allowed. Saginaw & Manistee Lumber Co., 45 B. T. A. 780; Michigan Silica Co., 41 B. T. A. 511 (on appeal, C. C. A., 6th Cir.). Cf. Helvering v. Moloney Electric Co., 120 Fed. (2d) 617; Cumberland Portland Cement Co., 44 B. T. A. 1170.

Decision will be entered for the petitioner.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      (c) Contracts Restricting Payment op Divídenos.—
      * * * * * * *
      (2) Disposition op profits op taxable year. — 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. For 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: Step.nhagen :

text:
    Westland Theatres, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101391.
    Promulgated January 15, 1942.

      Ben S. Wendelken, Esq., for the petitioner.

      Cene W. Reardon, Esq., for the respondent.
   OPINION.

Step.nhagen :

For the petitioner’s excess profits tax of 1936 and 1937 the Commissioner has used the capital stock valuation of $144,-063.27 which appeared on the return filed July 31, 1936. Petitioner demands the use of the valuation of $320,000 which appears on the return dated August 31, 1936, which it tendered for filing and which the collector did not accept.

In Scaife Co. v. Commissioner, 314 U. S. 459, and Helvering v. Lerner Stores Corporation, 314 U. S. 463, it was held that the capital stock value shown on the first return, even though it be the result of a clerical or other mistake, may not he changed by an amended return, irrespective of whether the amended return is tendered within or after the extension period. These decisions compel the approval of the Commissioner’s determination in this proceeding.

The taxpayer contends that the return filed July 31, 1936, must be disregarded because it was unauthorized. The circumstances of the filing are shown in the findings. The petitioner repudiates the first return as an officiously executed document signed by two persons who were not officers of the corporation and were not specially authorized to represent it as officers, and filed by the auditor without authority. The evidence shows that neither of the two was a general officer of the corporation. But they had ample authority to prepare and file the return. The return was required by law to be filed within thirty days after the close of the fiscal year, and this the corporation and its officers are deemed to have known. It can not be supposed that the two persons who were placed completely in charge of the corporation’s affairs were directed, actually or tacitly, to omit to file the return when due. Smullin, the auditor, had signed the previous returns as the chief accounting officer, together with a general officer, presumably with express authority, and he would naturally be expected to look after the proper filing. Federer was called from Pueblo to take charge of the operation of the business during the absence of the general officers. He was a temporary general agent, and his undertakings within the general or apparent scope of his authority may not be repudiated by the corporation. It would be intolerable under such circumstances to permit the corporation, after voluntarily placing itself in such a position, tendering a return ostensibly executed by authorized persons, to renege by saying that the return was not authorized and therefore not binding upon it. The collector was unaware of any lurking question as to authority and had no reason to doubt the efficacy of the filing. The taxpayer may not now profit from a technical defect of its own making.

The evidence shows no repudiation of the filed return until this petition was filed. Before August 11,1936, the corporation requested the collector to accept an amended return showing the higher valuation, and made no suggestion of invalidity of the first return. If the first return was then thought to be unauthorized and not merely an erroneous declaration of value, it would have been necessary to request, not permission to file an amended return, but permission to file a return after the statutory time had expired. Such permission, however, would not have been granted upon application made after the prescribed filing date, Scaife Co. v. Commissioner, supra.

The decisions in Del Mar Addition v. Commissioner, 113 Fed. (2d) 410, and Jordan Creek Placers, 43 B. T. A. 131, do not aid the petitioner. In both those cases the taxpayer was an organization the character of which as a statutory corporation was in doubt and the duty of which to file a capital stock tax return therefore not clear. As to such a taxpayer, it was held that delinquency in filing was not fatal, but involved only the delinquency penalty. The Scaife case, however, intimates no such mitigation in respect of a corporation which simply fails to file its capital stock tax return within the statutory thirty days or within such time fails to get an extension from the Commissioner. It can not be that a corporation which files a first return and fails to get permission to file an amended return, is to be put in a worse position than one which omits entirely to file a timely return. Cf. Lee H. Marshall Heirs, 45 B. T. A. 632.

Whether the July return be regarded as authorized or unauthorized, the result is the same — that there is no foundation for using the valuation of $320,000 declared on the August return.

Decision will he entered for the respondent.


author: Smith :

text:
    The Cable Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104646.
    Promulgated January 15, 1942.

      William P. Heyne, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Smith :

In its return for the year 1936 the petitioner claimed as a deduction for taxes paid during that year the amount of $5,200.44. Of this amount the respondent disallowed the deduction of $2,403.87 and now contends in support of that determination that the payment of the latter amount by the petitioner did not constitute a payment of its taxes.

It has been held frequently that a vendee is not entitled to a deduction for taxes paid when the taxes in question were a charge against the land or a liability of the vendor prior to the date of sale. Lifson v. Commissioner (C. C. A., 8th Cir.), 98 Fed. (2d) 508; Walsh-McGuire Co. v. Commissioner (C. C. A., 6th Cir.), 97 Fed. (2d) 983; Edward C. Kohlsaat, 40 B. T. A. 528; Falk Corporation v. Commissioner (C. C. A., 7th Cir.), 60 Fed. (2d) 204; Merchants Bank Building Co. v. Helvering (C. C. A. 8th Cir.), 84 Fed. (2d) 478; Automatic Sprinkler Co. of America, 27 B. T. A. 160. The petitioner argues that the rule of the cited cases is not to be applied in this proceeding because, under the law of Ohio, the transaction which occurred was a merger of the two companies and the tax liability of Lake Cable, Inc., before the transfer became the tax liability of the petitioner thereafter. The petitioner’s conclusion is that in making the payments in question it paid its own taxes.

The petitioner relies upon section 8623-68 of Page’s Ohio General Code (1938), vol. 6, which provides that the liabilities of a corporation merged into, or consolidated with, another corporation to form a “consolidated” corporation shall become the liabilities of such consolidated corporation. The section by its terms is referable to section 8623-67, which defines the procedure for a merger or consolidation of domestic corporations. Section 8623-68 imposed the liabilities of Lake Cable, Inc., upon petitioner only if the transaction which occurred was in fact a merger or consolidation within the meaning of section 8623-67. Without reference to the statute, the respondent argues that the evidence shows that the transaction in question was merely a sale of assets.

We can not sustain the petitioner’s contention. There is no indication in the resolutions of the directors or of the shareholders that a merger of the two corporations was intended. The minutes of all of the meetings refer to the proposed transaction as a sale. Furthermore, section 8623-67 provides that an agreement of consolidation in considerable detail shall be executed and filed in the office of the secretary of state. Section 8623-68 reiterates this provision, as a condition precedent to merger or consolidation, in the following language:

When the agreement of consolidation is signed, acknowledged and filed as required in the preceding section the separate existence of all of the constituent corporations, or all of the constituent corporations except the one into which such constituent corporations have been merged, as the case may be, shall cease, * * * and the constituent corporations shall become a new corporation, or be merged into one of such corporations, as the case may be, in accordance with the said agreement, * * *

In the instant case no agreement of consolidation was executed by the corporations and none was filed with the secretary of state. For this reason there was no merger of the corporations within the meaning of section 8623-67, and section 8623-68 does not apply.

We are also constrained to disagree with the petitioner because the transaction which occurred here falls squarely within the permissive terms of section 8623-65 of Page’s Ohio General Code. This section provides that a corporation may sell all of its assets by action of its directors duly approved by shareholders having two-thirds of the voting power in the corporation. An Ohio corporation has no authority to sell its entire assets except as provided by statute. Cyclone Drill Co. v. Zeigler, 99 Ohio St. 151; 124 N. E. 131. The actions of the two corporations in the instant case follow section 8623-65 precisely. There is no statutory provision similar to section 8623-68 which is applicable in the case of a transaction under section 8623-65. It therefore can not be argued that the tax liability of Lake Cable, Inc., became the tax liability of the petitioner by virtue of an Ohio statute. The payment by the petitioner of the Lake Cable, Inc., tax liability was made in order to free the land from the tax lien and was a part of the cost of acquiring the land. Walsh-McGuire Co. v. Commissioner, supra. The respondent’s determination is approved.

American Shipbuilding Co. v. Commonwealth S. S. Co. (C. C. A., 6th Cir.), 215 Fed. 304, and Ruedy v. Toledo Factories Co., 61 Ohio App. 21; 22 N. E. (2d) 293, are not in point. The court in the American Shipbuilding Co. case held that a transaction substantially similar to that in the instant case was, in equity, sufficiently similar to a merger or succession in interest to pass to the vendee company the vendor’s right to rescind a contract for fraud. The court sper cifically pointed out that while the similarity of the transaction to a merger was sufficient for a court of equity decreeing rescission, it would be not at all important for some purposes. The case clearly has no application in this proceeding. The Ruedy case held that the creditors of the vendor corporation may not be prejudiced by its act in ridding itself of all of its properties. The result is primarily an equitable one arrived at solely to protect the creditors of the vendor and is premised upon considerations not present in this proceeding.

Decision will be entered for the respondent.


author: Kern -.

text:
    Mary E. Bellingrath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100965.
    Promulgated January 15, 1942.

      Robert A. Littleton, Esq., for tlie petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Kern -.

The ultimate question presented here for our determination is whether certain contributions made by petitioner through partnerships of which she was a member to the Alabama Bottlers’ Association in the taxable year, are deductible as ordinary and necessary business expenses under section 23 (a) of the Revenue Act of 1936, or are not deductible by reason of being expended for the defeat of legislation and, therefore, coming within the purview of article 23 (q)-l of Regulations 94.

Petitioner urges that a decision of this question on its merits is unnecessary and improper because it is res adjudicata by reason of our decision in the case of Mary E. Bellingrath, Docket No. 97947 (memorandum opinion, April 27, 1940), in which we held that contributions made by this petitioner in 1935 to the same association were deductible. With this contention we do not agree. Engineer's Club of Philadelphia v. United States, - Fed. Supp. - (Ct. Cls., Nov. 3, 1941). While the activities of the association in 1936 were comparable and similar to those of 1835, they were not identical. “They were a different, though similar, set of events. They consisted of a whole course of conduct from day to day in all its details of an enterprise of considerable scope.” Log. cit. In such circumstances the principle of res adjudicata does not apply.

We proceed, therefore, to a consideration on its merits of the ultimate question presented.

Petitioner’s partnership and other bottlers of soft drinks in the State of Alabama were concerned over proposed legislation which would have imposed on them a considerable additional tax burden. They proceeded to take legitimate and unobjectionable steps through their association to forestall the passage of this legislation in its proposed form. These steps consisted of gathering facts, figures, and arguments to be presented before the proper committees of the legislature, which would also be available to individual members of the association in presenting the question from the standpoint of the bottlers to their respective representatives in the legislature. All these activities were normal and in no way sinister or objectionable. They were not engaged in “lobbying” for hire and there is no evidence that they were attempting to debauch the public morals of the legislators of Alabama. They were engaged in a proper and legal attempt to prevent injury to their business by persuading the legislature that the proposed legislation was unwise, unfair, and unwarranted. In order to defray the expenses of these activities of the association, petitioner made the contributions in question.

It seems evident to us that such contributions were “money expended for * * * the * * * defeat of legislation”, and therefore come within the phraseology of the quoted regulation.

The question thereupon arises whether this regulation has the force and effect of law. We have, in the past, felt that “obligatory application of the regulation would result [under certain circumstances] in misapplication of the statute”, and have refused to recognize the validity of the regulation in cases where the expenditures were, apart from regulation, ordinary and necessary business expenses. Textile Mills Securities Corporation, 38 B. T. A. 623. However, the Supreme Court of the United States, in the recent case of Textile Mills Securities Corporation v. Commissioner, 314 U. S. 326, has unequivocally approved the regulations as a valid exercise of the rule-making authority making nondeductible the “special group of expenses” set out in the regulation.

Whatever may have been our views on this subject before the Supreme Court spoke, we must now accord complete validity to the regulation. Since we have already held that the regulation is applicable to individuals as well as to corporations, Mrs. William P. Kyne, 35 B. T. A. 202,

Decision will he entered for respondent,

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — 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; * * *

       * * * Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income.


author:
Black :
      KeRN, Meiaott,

text:
    R. W. Creech, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of H. G. Randall, Luther H. Randall, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101780, 104905.
    Promulgated January 16, 1942.

      Sidney J. Eayles, G. P. A., and Noah J. Stowie, Esq., for the petitioners.

      F. L.Ycm Haaften, Esq., for the respondent.
   OPINION.

Black :

In each of these consolidated proceedings, in his determination of the deficiencies, the Commissioner has held:

(b) It is held that tbe acquisition by tbe Creecb Coal Company of 285 shares of its common capital stock from you for a total consideration of $128,250.00 was essentially equivalent to the distribution of a taxable dividend under Section 115 (g) of the Revenue Act of 1936.

Each petitioner, by an appropriate assignment of error, has contested the correctness of this determination, and that presents the principal issue which we have for decision. If it is decided in favor of the Commissioner, then the result is an affirmation of the deficiencies because other more or less minor adjustments made by the Commissioner in each taxpayer’s return for the taxable year are not contested.

On the other hand, if we decide the principal issue in favor of the petitioners, there are other issues enumerated in our preliminary statement which we must decide.

Section 115 (g) of the Revenue Act 1936, upon which the Commissioner relies, is printed in the margin.

The pertinent part of article 115-9 of Regulations 94, which is the applicable regulation, is also printed in the margin.

It will be noted that as an example of a distribution which will be generally considered as coming within the provisions of section 115 (g) the regulation gives the following: “A cancellation or redemption by a corporation of a portion of its stock pro rata among all the shareholders will generally be considered as effecting a distribution essentially equivalent to a dividend distribution to the extent of the earnings and profits accumulated after February 28,1913.”

Such a situation as described in the above quoted regulation was present in A. E. Levity 43 B. T. A. 1077 (petition for review dismissed, Ninth Circuit, Sept. 2, 1941), a case strongly relied upon by respondent in his brief.

In the instant case, however, there was no redemption of a portion of its stock by the corporation pro rata among all its shareholders such as described in the Treasury regulations and as was present in the Levit case. There was a purchase by the corporation from two of its principal stockholders of a portion of their stock for the purpose of substantially reducing their indebtedness to the company. The circumstances attending this purchase of stock have been fully detailed in our findings of fact and will be discussed to some extent presently.

While in the instant case, as we have already pointed out, the corporation did not purchase stock from its shareholders pro rata, nevertheless it is true that the Board has held that a pro rata redemption of stock is not necessary to bring the transaction within the provisions of section 115 (g) if other facts and circumstances show that the distribution was essentially equivalent to the payment of a dividend.

Such a case was J. Natwich, 36 B. T. A. 866, another case upon which the Commissioner strongly relies. In that case the taxpayer was the owner of 2,914 shares of the corporation’s 3,000 shares of outstanding stock. Within the taxable year he delivered to the corporation 843 shares of his stock in consideration for the cancellation of his note for $66,679.22 given to the corporation in a prior year to settle up withdrawals which he had made from the corporation over a period of years. We held that the redemption was one essentially equivalent to the distribution of a taxable dividend under section 115 (g) of the Revenue Act of 1932. We based our decision in that case largely upon the fact that the taxpayer, who was in absolute control of the corporation, had failed to show any plausible motive other than tax evasion for causing the corporation to pursue the form of the transaction which was used. After enumerating certain things which the taxpayer in that case had failed to prove, we said: “* * * the failure, in short, on the part of petitioner to put forward any convincing affirmative reason for the redemption other than the motive apparent on the record of tax evasion, convinces us that the redemption of the 843 shares of the Natwick Co.’s stock on December 31,1932, was essentially equivalent to a taxable dividend within the meaning of section 115 (g) and should be, accordingly, so treated.”

Do the facts of the instant case bring it within the ambit of the Natwich case ? Respondent strongly argues that they do. We disagree.

The facts show that R. W. Creech and H. G. Randall, the two principal stockholders of the Creech Coal Co., over a period of years had become indebted to the corporation in large amounts. At the end of the year 1933 the debit balance of R. W. Creech was $210,383.29, and the debit balance of H. G. Randall was $221,166.67. In addition to these sums they owed the corporation $75,000 on joint stockholders’ account which represented the purchase price of 300 shares of stock acquired from the corporation prior to 1920. In December 1933 H. G. Randall died and left an estate heavily indebted to the corporation. The principal asset of the estate was the stock which it owned in Creech Coal Co. The remaining assets of the estate were of comparatively small value and if sold would have paid only a very small part of the debt which the estate owed the corporation. L. H. Randall, who was the surviving executor of the estate and one of the officers and directors of the Creech Coal Co., testified that in 19B6 he was anxious to get the indebtedness of his father’s estate to the corporation reduced and that he knew of no other way that it could be done except to sell part of the stock which the estate owned in the corporation to the corporation, and have the sale price of the stock credited to the estate’s debit accounts on the books of the company. He also testified that as officer and director of the corporation he was anxious to get the indebtedness of R. W. Creech correspondingly reduced on the books of the corporation, that the indebtedness had stood for a long time, and that all parties in interest were anxious to get both debit accounts reduced.

He testified that in 1936 negotiations were begun with R. W. Creech and certain minority stockholders of the corporation, and that it was finally agreed that R. W. Creech and the estate of H. G. Randall would each sell to the corporation 285 shares of stock at $450 per share, and that the corporation would credit the resulting amounts to the respective accounts of the debtors. The price of the stock was largely based upon its book value at the time of purchase, which was approximately $433 per share. This agreement was carried out on December 22,1936.

On December 21,1936, a cash dividend of $50,000 was declared, being a dividend of $25 per share. Each of the personal accounts of R. W. Creech and H. G. Randall was credited on December 22, 1936, with $7,125 representing the dividend of $25 per share on the 285 shares sold. Other stockholders were paid their dividends in cash.

If it be contended that the corporation, at the time of the purchase of the 570 shares in question, could have declared out of its surplus large enough dividends to have credited the indebtedness of R. W. Creech and the Randall estate with as much as was paid them for the stock and still have been in no worse cash position, that, of course, would be true if these two had been the only stockholders. But they were not the only stockholders. They owned only 1,150 shares of the corporation’s outstanding stock and other members of the Creech and Randall families owned 850 shares of the corporation’s stock. To have declared a dividend sufficient to credit R. W. Creech and the estate of H. G. Randall with $256,500 on their accounts (which was the aggregate of the amounts credited by reason of the stock purchase), would have required a dividend in excess of $220 per share. Of course, in so far as R. W. Creech and the estate of H. G. Randall were concerned, that could have been done without the outlay of any cash. But to have paid a similar dividend and have paid it in cash to the other stockholders who were not indebted to the corporation, and it may be remarked that corporate dividends are usually paid pro rata, would have required approximately $180,000 in cash. Evidently the corporation was in no position to pay such a dividend at that time and there is no reason to believe that the directors would have agreed to pay a dividend of $220 per share to R. W. Creech and the estate of H. G. Randall and leave the minority stockholders out of the distribution.

The $50,000 dividend which the corporation paid in December 1936 was substantially twice the earnings of the corporation in the combined years of 1935 and 1936 and was apparently as much as the corporation could have reasonably disbursed in dividends at that time.

This case is not like such cases as Flanagan v. Helvering, 116 Fed. (2d) 937, where stockholders turned in a ratable number of shares for cancellation and when the redemption and cancellation had been completed the stockholders owned exactly the same proportional interest in the corporation as they did before. That sort of a case falls squarely within the Treasury regulations which we have printed in the margin. As we have already pointed out, we have no pro rata redemption in the instant case. Here, after the purchase of the 570 shares of stock, the several stockholders owned substantially different proportional interests in the corporation than they did before. The 570 shares of stock which were sold to the corporation were not canceled and retired, but were retained in the treasury of the corporation, and carried on its books as an asset at the cost figure of $256,500.

In 1940 the corporation purchased additional coal lands adjacent to the coal seam which was then being mined, and paid $190,000 therefor. This additional coal land was absolutely necessary for carrying on the corporation’s coal mining business. The negotiations for such purchase extended over a period of years, the corporation trying to buy for a less price than the owners asked. When it was finally purchased in 1940, the corporation had to borrow $132,000 of the money for the purchase from the First National Bank of Cincinnati, Ohio. It placed with the bank as collateral security for the loan the 570 shares of stock involved in this proceeding, and such shares are still held by the bank as collateral security for the loan.

Thus, after weighing all the facts and circumstances of this case, we conclude that the purchase by the corporation of 570 shares of its common stock from two of its stockholders was for legitimate business purposes of both the corporation and the two stockholders involved and was not essentially equivalent to the distribution of a taxable dividend. On this issue we hold in favor of the petitioners. Cf. Bona Allen, Jr., 41 B. T. A. 206.

Another case urged by respondent, in favor of his determination that the acquirement by the corporation of the 570 shares in question was essentially equivalent to the distribution of a taxable dividend under section 115 (g), was L. B. Hirsch, 42 B. T. A. 566. In that case a 500 percent stock dividend was declared in 1920, thereby capitalizing earnings to that extent, and in the taxable year 1935 each stockholder was given the privilege of turning in 10 percent of his stock at $100 per share rather than book value which was considerably more than $100 per share. Some of the stockholders, including the two principal stockholders, turned in their percentage of the stock for redemption in 1935 and others did so in subsequent years. In the Hirsch case, following J. Natwich, supra, we held for the Commissioner. In this holding we said:

Although it may not be said in these proceedings that there was any relation between the declaration of the 500 percent stock dividend in 1920 and the redemption of the shares in 1935, we think that the evidence supports the determination of the respondent that the redemption of the shares was essentially equivalent to the distribution of a taxable dividend. * * *

Our decision in the Hirsch case was affirmed by the Ninth Circuit on the ground that the Board’s finding that the redemption of the stock was essentially equivalent to distribution of a taxable dividend is supported by substantial evidence. See Hirsch v. Commissioner, 124 Fed. (2d) 24.

In the instant case the Creech Coal Co. had never paid a stock dividend and there was no pro rata redemption of the corporation’s outstanding stock nor was any offer made to the stockholders of a pro rata redemption such as there was in the Hirsch case. In the Hirsch case the stock redeemed was canceled and retired, whereas in the instant case the 570 shares acquired have not been canceled, but are still held as treasury stock of the corporation. Because of these and other differences between the facts of the instant case and the Hirsch case, we do not regard the latter as controlling in the instant case.

It may well be that the Commissioner would have been justified in treating the withdrawals made by Creech and by Randall from the corporation in prior years as taxable dividends to them in the years in which such withdrawals were made, but we do not have that question before us and we, therefore, make no attempt to decide it. All the parties, the corporation, Creech, the estate of Randall, and the Commissioner, have treated the withdrawals as representing loans made by the corporation to these two stockholders and we have no cause to treat them otherwise.

Regarding the respondent’s alternative contention that the purchase by the corporation of the 570 shares in question was a partial liquidation of the Creech Coal Co., we hold upon the authority of William A. Smith, 38 B. T. A. 317, and W. C. Robinson, 42 B. T. A. 725, that the credits to each petitioner of $128,250 did not represent “amounts distributed in partial liquidation” as that term is used in section 115 (c) and defined in section 115 (i) of the Revenue Act of 1936. We hold further that the transactions were ordinary sales of stock by petitioners to the Creech Coal Co. at a price of $450 per share. Stock which is purchased by a corporation and held in its treasury is not retired stock. Borg v. International Silver Co., 11 Fed. (2d) 147.

This brings us to a consideration of the proper basis to be used in the case of each petitioner.

Petitioner Creech in his return claimed a cost basis for the 285 shares sold as follows:

The parties have stipulated that the 110 shares acquired June 13, 1917, cost $11,000 and that the 125 shares acquired July 14, 1917, cost $31,250; and the evidence shows that the 50 shares acquired July 24, 1925, cost $25,230.77. Petitioner Creech in his brief concedes that he is entitled to a cost basis of only the sum of these three amounts, which is $67,480.77, instead of $128,500 used in his return. On the other hand, the respondent contends that petitioner has failed to identify the shares sold and that, therefore, under the first in, first out rule, petitioner is limited, under the stipulation mentioned in our findings, to a cost basis for the 285 shares of $100 per share or $28,500. Cf. Helvering v. Rankin, 295 U. S. 123; Snyder v. Commissioner, 295 U. S. 134; Davidson v. Commissioner, 305 U. S. 44.

We think the evidence clearly proves that petitioner has identified the 285 shares sold as coming from certificate Nos. 18, 49, and 91, as fully set out in our findings, and that the cost basis of these shares is the above amount of $67,480.77. The gain to petitioner Creech should be recomputed upon that basis.

The estate of H. G. Randall in its return claimed a basis for the 285 shares sold of $128,250, which incidentally is the same as the selling price. Section 113(a)(5) of the Revenue Act of 1936 provides that “If the property was acquired * * * by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition.” The parties agree that the estate acquired the 285 shares of Creech Coal Co. stock in question from the decedent at the time of his death on December 3, 1933. They disagree only as to the fair market value of the stock on that date, petitioner contending it was $450 per share and the respondent contending on brigf it was $157.13 per share. The respondent made no determination of the value of this stock in his deficiency notice, but in his brief he arrives at the value of $157.13 by taking the book value of the stock from the balance sheet of the company as of December 31, 1933, after eliminating as an asset the entire amount of the stockholders’ accounts receivable in the amount of $545,261.01. We think that the elimination of this $545,261.01 is unwarranted. There is nothing in the record to indicate that these stockholders’ accounts were not worth their face value.

The stock of the Creech Coal Co. at the time of the death of decedent Eandall on December 3,1933, had a book value of approximately $429 per share. We don’t think it can be held, however, that it had a fair market value at that time equal to its book value. For five years prior to decedent’s death in 1933 the corporation had very substantial losses. Its losses as shown by its books were: 1928 loss, $15,175.17; 1929 loss, $46,292.35; 1930 loss, $52,271.00; 1931 loss, $79,-741.27; 1932 loss, $47,206.29.

It is true that the corporation had a profit in 1933, the year of the death of the decedent, of $27,645.21, and for the next three years 1934, 1935, and 1936, the corporation also had profits. The fact that the corporation had made profits in the four years 1933, 1934, 1935, and 1936 probably accounts for the fact that in 1936 the corporation was willing to purchase the shares involved in this proceeding at $450 per share, which was somewhat in excess of book value. It must be remembered, however, that it is not as of December 22, 1936, that we have to value the stock. The basic date as of which we must value the stock is December 3, 1933, and, as we have already pointed out, that date followed several years of very substantial losses, with the exception of the year 1933 itself. We have no evidence as to what value was placed upon the stock for estate tax purposes, following the death of H. G. Eandall.

No sales of the stock in question were shown at or near the basic date. The sales of the stock for $450 and $500 per share which are shown in the record occurred either in the years of big profits, 1917 to 1920, or within a few years thereafter.

After considering all the evidence, such as the factors above mentioned and opinion evidence at the hearing, which was rather meager, we have found as a fact that the fair market value of the stock of the Creech Coal Co. at the time it was acquired by the estate of H. G. Eandall from the decedent was $350 per share. The gain on the 285 shares sold by the estate of H. G. Eandall in 1936 should be computed accordingly.

Eeviewed by the Board.

Decision will be entered v/nder Rule 50.

KeRN,

dissenting: I respectfully dissent, for the reason that m my opinion the circumstances present in this case require the application of the principle stated by the Board in the case of J. Natwick, 36 B. T. A. 866.

Meiaott,

dissenting: I agree with the views expressed by Mr. Kern in his dissent. The two families, each of which owned 50 percent of the stock of the corporation, have collectively received more than a quarter of a million dollars of its earnings and profits. If the Commissioner had attempted to treat the withdrawals by the stockholders in the earlier years as dividends they would have successfully resisted. See Irving T. Bush, 45 B. T. A. 609. Shall this substantial portion of the earnings go wholly untaxed? If “actualities” are considered the whole transaction was nothing more than a reciprocal cancellation of the indebtedness of the two families to their wholly owned corporation.

But if the holding of the majority that section 115 (g) is not applicable is correct, then I have considerable doubt as to the holding that section 115 (c) is not applicable. That is premised upon the assumption the stock, under the rationale of William A. Smith and W. C. Robinson, cited in the majority opinion, was treasury stock. The provision contained in the minutes of the special meeting making the stock not subject to withdrawal or sale except “upon the unanimous vote of the stockholders” prevents it being true treasury stock; for “Treasury stock is an asset in the company’s treasury and may be resold at any time as suits the corporate owner’s purpose * * Cohen Trust v. Commissioner, 121 Fed. (2d) 689. (For the general effect of a restrictive covenant see Tex-Penn Oil Co. v. Commissioner, 83 Fed. (2d) 518, and 300 U. S. 481.)

The majority place great reliance upon the testimony of the interested parties to the effect that all were anxious to reduce the indebtedness of the two principal stockholders. They collectively — ignoring in this connection the stock owned by other members of their families— owned 57% percent of the stock and the corporation had an earned surplus of more than two-thirds of a million dollars. There was no real reason for the corporation to fear that the indebtedness would never be paid or for the stockholders to fear that they would be unable to make payment. A portion of their stock could have been retired and their indebtedness liquidated at any time. Perhaps all were conscious of the fact that this would make the amounts previously withdrawn then taxable to them. This may well have been the reason they undertook to make it appear that the stock, though effectively retired, was «till outstanding.

Opper agrees with this dissent.

       SEC. 115. DISTRIBUTIONS BX CORPORATIONS.
      * * * * * * *r

      (g) Redemption of Stock.- — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

       Art. 115 — 9. Distribution in redemption or cancellation of stoeJc taxable as a dividend.—

      The question whether a distribution in connection with a cancellation or redemption of stock is essentially equivalent to the distribution of a taxable dividend depends upon the circumstances of each case. A cancellation or redemption by a corporation of a portion of its stock pro rata among all the shareholders will generally be considered as effecting a distribution essentially equivalent to a dividend distribution to the extent of the earnings and profits accumulated after February 28, 1913. On the other hand, a cancellation or redemption by a corporation of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, does not effect a distribution of a taxable dividend. * * in all other eases the facts and circumstances should be reported to the Commissioner for his determination whether the distribution, or any part thereof, is essentially equivalent to the distribution of a taxable dividend.


author: Smith:

text:
    U. S. Universal Joints Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102704.
    Promulgated January 20, 1942.

      Samuel E. Gawne, Esq., and John M. Hudson, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Smith:

The single question is whether 80 percent or more of petitioner’s gross income for the year 1937 consisted of royalties within the meaning of section 351 of the Revenue Act of 1936, as amended by section 353 (a) of the Revenue Act of 1937. If such was the case the petitioner concedes that it was a personal holding company in that year. It is not disputed that $4,245.03 of petitioner’s gross income was personal holding company income within the meaning of the statute. If more than $10,236.03 of the amounts received under the license agreements was compensation for services and not “royalties”, the petitioner’s contention must be sustained, since in that event more than 20 percent of the petitioner’s gross income was not personal holding company income within the .meaning of the statute.

The respondent contends that the amounts received under the license agreements were royalties in their entirety and that we can not determine that such amounts were in part consideration for services rendered. The petitioner argues that it is not bound by the contractual designation of the payments as “royalties”, nor by the fact that the payments were based on a percentage of net selling price, and that the evidence clearly shows that more than the required portion of such payments was compensation for services. In the alternative, the petitioner argues that if the payments were “royalties” they were “overriding royalties” and for that reason are not royalties within the meaning of the statute.

The evidence clearly provides a basis for the allocation of the aggregate amount received by petitioner from the licensees to compensation for services and to royalties. At the time the contracts were executed it was understood and agreed by the parties that substantial services were to be rendered by the petitioner and the payments provided for in the contracts were accordingly fixed at a much higher percentage of net selling price than would have been the case had the payments been for the use and manufacture of the patented joint alone. The parties found, it impossible to draft a contractual provision which would clearly outline the respective rights and duties with regard to engineering services. For that reason alone no express provision for such services was made in the agreements. The licensees were protected in their right to the services of the petitioner by the fact that the agreements were subj'ect to cancellation at their option and by the further fact that since the payments were based upon percentages of net selling price it was to the petitioner’s self-interest to furnish the services which might enlarge the market for the product. The evidence overwhelmingly shows that more than one-half of the total payments made under the license agreements during 1937 was compensation for the services of the petitioner as distinguished from compensation for the use and manufacture of the universal j’oint. Thus, the petitioner must prevail unless we are required as a matter of law to treat the payments as royalties in their entirety.

The designation of the payments as “royalties” in the agreements is obviously not conclusive. Such a label might be evidence that the payments were royalties if other facts did not show that they were not royalties as intended by the statute. Kiesau Petroleum Corporation, 42 B. T. A. 69.

In Anton Dolenz, 41 B. T. A. 1091, the taxpayer received payments under an agreement licensing a patented process. The license agreement termed the payments “royalties.” The Board held that in fact a part of the “royalties” was compensation for services rendered by the licensor to the licensee in accordance with a provision of the agreement which was as follows:

* * * “The licensor agrees to instruct representatives oí licensee, first to be designated in writing by the licensee, in the details of the operation of ‘the patent’ and to give such supervision to the manufacturing operations of the licensee, of its various products, as in his opinion may be necessary and that shall and will not conflict with his other activities including absences in Europe and/or from San Francisco and/or the State of California.”

This agreement by the taxpayer in the Dolenz case did not bind him to furnish the services, and amounts to no more than an indication on the face of the contract that such services might be rendered if the taxpayer considered them necessary. In the instant case there is nothing on the face of the contract to indicate the agreement between the parties with regard to petitioner’s services. The remaining question in the instant case is therefore whether we may look outside the contract itself to discover the true nature of the payments in question.

It is manifest that we may do so. It is well to note that the parol evidence rule is not and can not be invoked in this case. Macon, Dublin & Savannah, Railroad Co., 40 B. T. A. 1266. It is necessary for us to define the word “royalties” in order that we may ascertain whether the petitioner used that word in a statutory sense. We have defined a royalty as a payment or interest reserved by an owner in return for permission to use the property loaned and usually payable in proportion to use. Lane-Wells Co., 43 B. T. A. 463; Kiesau Petroleum Corporation, supra. Upon examination of the facts in this case we have found that the payments made to the petitioner were only partially intended as compensation for the use of the patented joint. To the extent that the payments were compensation for services rendered and not compensation for the use and manufacture of the joint, they were not royalties as we have defined them and they were not royalties within the meaning of the statute.

Noteman v. Welch, 108 Fed. (2d) 206; Logan Coal & Timber Association, 42 B. T. A. 529, and Lane-Wells Co., supra, are cases relied upon by the respondent. They are distinguishable upon their facts. The questions involved in those cases were similar to the question in the instant case. However, it is apparent that in each of those cases the taxpayer failed to present evidence upon which the requested allocation of the payments in question could be made. In the instant case the petitioner has clearly proved that part of the payments made by each licensee was made in consideration of services rendered. The cited cases are not in point.

It is not necessary to consider the petitioner’s alternative contention.

Decision will be entered under Rule 50.


author: AetjNdell :

text:
    Wisconsin Farmer Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105917.
    Promulgated January 20, 1942.

      Denver A. Busby, O. P. A., for the petitioner.

      Edward G. Adams, Esq., for the respondent.
   OPINION.

AetjNdell :

The question before us is whether or not petitioner is entitled to deduct from gross income of the taxable year an amount representing additional income taxes and interest thereon asserted against petitioner by the State of Wisconsin for years prior to the taxable year.

Petitioner contends that three of the years to which the additional taxes relate were barred by limitation prior to the taxable year but were reopened for assessment purposes by a statute passed by the State of Wisconsin in the taxable year. It asserts that the passage of the statute in the taxable year caused the additional taxes to accrue in that year. Petitioner maintains that, in "any event, no liability for the additional taxes existed until the officers of petitioner decided to admit liability in a compromise settlement. Respondent argues that neither the additional taxes nor the interest thereon accrued in the taxable year. He maintains that the additional taxes accrued in the years in respect of which they were imposed and that the Interest accrued in the year following the taxable year.

The provisions of Wisconsin law which are material to our consideration of petitioner’s argument with relation to the additional state taxes imposed for 1931, 1932, and 1933 are section 71.11 (5) of the Wisconsin Statutes of 1931 and section 71.115 (1) (a) of the Wisconsin Statutes which was enacted in 1937 at a special session of the legislature.

We turn first to petitioner’s contention that the passage of section 71.115 (1) (a) in the taxable year caused a liability for some of the additional taxes to spring up in that year. Petitioner’s argument is presumably based upon the premise that the expiration of the statutory limitation period contained in section 71.11 (5) of the Wisconsin Statutes of 1931 erased not only the authority of the tax commission to collect the tax, but also petitioner’s obligation to pay the tax. We are of the opinion that this premise is not sound. It is true that under the law of Wisconsin the expiration of a statutory limitation period usually erases not only the remedy (in this case the assessment), but also eliminates the substantive right upon which a cause of action might be based. Eingartner v. Illinois Steel Co., 103 Wis. 373; 79 N. W. 433; Long v. Mates, 219 Wis. 414; 263 N. W. 371; but cf. Banking Comm. v. Buchanan, 227 Wis. 544; 279 N. W. 71. The Wisconsin authorities, however, have enunciated a different rule with regard to limitations for additional assessments of tax by the state tax commission. In State ex. rel. Globe Steel Tubes Co. v. Lyons, 183 Wis. 107; 197 N. W. 578, the Supreme Court of Wisconsin stated that a state statute imposing a period of limitation upon the assessment or reassessment of taxes was not a statute of limitation under which expiration of the statutory period would eliminate the taxpayer’s obligation to pay the tax. The rule of the Globe Steel Tubes case was recently applied by the Supreme Court of Wisconsin to section 71.11 (5) of the 1929 Statutes of Wisconsin, a provision similar in all material respects to 71.11 (5) of the 1931 statutes upon which petitioner here relies. The court stated in its opinion in Schuette v. Wisconsin Tax Commission, 234 Wis. 574; 292 N. W. 9:

Under the rule of the Globe Steel Tubes Co. case, the statute is not a limitation in favor of the taxpayer and against the state but rather a limitation upon the commission’s authority to go back and to make new assessments for years not permitted at a given time by the legislature. Under that ruling it may not be said that the taxpayer has acquired any vested rights against the state as to assessments which properly should have been made. Under the construction which we have given to similar statutes, taxpayers acquire no vested rights against the state, as to such assessments. We consider therefore that sec. 71.115 (1) (a), is a valid and constitutional enactment.

Thus, under Wisconsin law petitioner remained under an obligation to pay any additional taxes of the barred years even though such taxes might not be assessed because of the expiration of the limitation period. So long as the 1931 limitation remained in effect the state tax commission could not make a valid reassessment. When the legislature passed a new limitation statute in the taxable year, however, the tax commission was permitted to make additional assessments of taxes which petitioner was already under a duty to pay. We conclude, therefore, that the enactment of section 71.115 (1) (a) in the taxable year created no new liability for tax which could be accrued by petitioner in the taxable year.

Our conclusion that no new liability for tax arose by the removal of the limitation period would seem to answer petitioner’s argument that the events of the taxable year provided a basis for the accrual within the taxable year before us of the deficiency determined by the Wisconsin Tax Commission. But if we are wrong on that point we are still of the opinion that the events of the taxable year did not serve to provide a basis for the accrual of the additional liability. The protest filed with the Wisconsin Tax Commission by the petitioner on June 26, 1937, the notice of deficiency mailed to petitioner by that commission on March 15,1938, the hearing held April 7,1938, and the conclusion reached by petitioner’s officers among themselves to make a compromise settlement, all taken together, are not enough. The actual submission of petitioner’s two alternative offers of settlement occurred in the following taxable year and it was not until August 2,1938, that the tax commission advised petitioner of its decision to accept one of the offers. It was at that time that the amount of petitioner’s liability to the State of Wisconsin for additional taxes was determined.

Wbat has heretofore been said has been largely in answer to the argument advanced by petitioner in its brief. The time when additional taxes may be accrued has been settled by the Supreme Court of the United States in United States v. Anderson, 269 U. S. 422. In that case it was decided that taxes are to be accrued in the year in which the events fixing the liability have occurred. The differences between the taxpayer and the State of Wisconsin as to how to apply the law do not change the situation. It follows that the taxes should be accrued in the years to which they relate. Red Wing Potteries, Inc., 43 B. T. A 841; Rawlings Manufacturing Co., 44 B. T. A. 161.

There remains for disposition only the proper determination of the interest due on the deficiency found by the Wisconsin Tax Commission. Petitioner accrued as of the taxable year approximately the amount of interest due on the entire deficiency imposed. It is our opinion that only so much of the interest as is properly attributable to the taxable year may be deducted from petitioner’s gross income of that year. Brooklyn Union Gas Co., 22 B. T. A. 507; affd., 62 Fed. (2d) 505. The administrative difficulties to which respondent objected in G. C. M. 9575, X-1 C. B. 381, cited in respondent’s brief, are not present in the instant proceeding.

Decision will be entered under Rule 60.

       71.13 5 Years open to audit and adjustment. (1) Additional assessments and corrections of assessments by office audit or field investigation may be made of income of any taxpayer if notice pursuant to section 71.12 is given within the time specified in this subsection.
      (a) Subsequent to the enactment of this subsection and prior to April 1, 1938, such notice may be given with respect to income received in any year or years subsequent to the calendar year 1926 or corresponding fiscal year. A notice pursuant to section 71.12 given prior to the enactment of this subsection shall not preclude the tax commission or the assessor of incomes from giving a notice within the time herein specified unless heretofore the assessment or correction based upon such prior notice has become final and conclusive under the provisions of sections 71.12, 71.13, 71.14, 71.15, and 71.16. In instances where an additional assessment or correction of an assessment based upon such prior notice has not become final and conclusive, the record and proceedings in respect thereto shall be applicable to any notice given within the time herein specified, unless, within twenty days after such latter notice, an application for hearing is filed in accordance with section 71.12, in which case the former record and proceedings shall be vacated and new proceedings taken in accordance with sections 71.12, 71.13, 71.14, 71.15, and 71.16. [Effective date, Oct. 6, 1937.]

      (5) Additional assessments and corrections of assessments may be made of income of any taxpayer if such corrections are made within seven years after the close of the period covered by the income tax return, provided that after July 1, 1933, additional assessments or corrections and assessments may be made if such assessments and corrections are made within four years after the close of the period covered by the income tax return, but if no return is filed for any of the years since January 1, 1911, income of such years may be assessed when discovered.


author: SteRniiagen:

text:
    James A. Hogle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104473.
    Promulgated January 20, 1942.

      Benjamin H. Saunders, Esq., G. A. Mair, Esq., and G. W. Wilkins, Esq., for the petitioner.

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

SteRniiagen:

The issue in this proceeding grows from the determination by the Commissioner that the income of the Copley trust, of the three trust account, of the accounts for the children, and of the Rico Argentine commission, is all within the petitioner’s gross income. The petitioner contends as to all that it did not “belong” to him and is therefore not the subject of his tax liability. His argument is upon the familiar pattern in which emphasis is placed upon a nice regard for the limits of his power over the accounts and the income to prove that his power, control, use, and satisfaction are less than legal ownership. But this pattern is no longer sufficient to overcome the tax. Much more in substance must be demonstrated before the creator and controller of such a trust, account, or similar legal edifice can separate himself from the tax upon the income to which it is so closely related.

The general rationale of Helvering v. Clifford, 309 U. S. 331, now provides the supreme standard by which such cases are to be judged. That decision, considering a “temporary reallocation of income within an intimate family group”, admonishes that “technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue.” “No one fact is normally decisive, but all considerations and circumstances of the kind mentioned are relevant.”

The petitioner has retained and exercised over the subject of the trusts and accounts such dominion and control that for purposes of the income tax he has not divested himself of such ownership of income as is the basis of the tax. See Commissioner v. Barbour, 122 Fed. (2d) 165; certiorari denied, 314 U. S. 691; Commissioner v. Buck, 120 Fed. (2d) 775; Sterling Morton, 45 B. T. A. 771; cf. Jones v. Norris, 122 Fed. (2d) 6; Commissioner v. Branch, 114 Fed. (2d) 985. See Pavenstedt, The Broadened Scope of Section 22 (a) : The Evolution of the Clifford Doctrine, Yale Law Review, Dec. 1941. The petitioner had ample income for the needs of himself and family; the children were beneficiaries and the income remained in the family, which was harmonious; petitioner’s control over the accounts was essentially the same as without the alleged trust arrangements, the “trustees” being completely subject to his direction by the terms of the arrangement as well as by reason of their subordinate relation to him. The fact that the stated period during which the arrangements were to be effective was longer than the five year term of the trust in the Clifford case is of slight consequence in view of the petitioner’s sweeping power throughout their existence to direct trading and reinvestment. If the accounts and their interim income and profits had been wiped out by trading at petitioner’s direction, his liability is difficult to state.

It is held that the income in all the accounts is properly part of petitioner’s gross income for the respective years, and the Commissioner’s determination is sustained. •

Decision will be entered for the respondent.