author: Black : Love,

text:
    Newaygo Portland Cement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36319.
    Promulgated April 6, 1933.

      J. S. Seidman, Esq., and F. E. Seidman, G. P. A., for the petitioner.

      Brooks Fullerton, Esq., and John D. Kiley, Esq., for the respondent.
   OPINION.

Black :

We will first discuss petitioner’s contention that its sale of the hydroelectric plant to the Consumers Power Company took place in 1922, when it entered into a contract to sell, with the Commonwealth Power, Railway and Light Company and not in 1923, when the deed of conveyance was signed and delivered and payments were completed and the purchaser went into complete possession of the property.

The facts in relation to the transaction have been fully stated in our findings of fact and will not be repeated here. Suffice it to say, we think these facts show that the sale was completed in 1923, and that the Commissioner is correct in so treating it. While it is true that the seller and proposed purchaser entered into an executory contract of sale in 1922 and part of the proposed purchase price was paid in 1922, it was not until the deed passed, June 18, 1923, that the sale was consummated. Then it was that the purchaser went into complete possession of the premises and exercised all elements of ownership. Up until that time the seller operated the power plant and used the energy generated therein in the production of its manufactured products, continued to sell some of the surplus power to the village of Newaygo and collected therefor and retained the proceeds in its business. Petitioner in its income tax return for 1923 deducted depreciation on the power plant and equipment computed on the basis of ownership in petitioner to the date of the passing of the deed. These things were inconsistent with the idea that ownership passed from petitioner to the Commonwealth Power, Railway and Light Company at the time of the execution of the contract, October 16, 1922. True it is that after the contract of sale was executed in October, 1922, the purchaser came upon the premises and began the erection of a substation and the making of other improvements on the premises, but this was by the agreement of the parties embodied in the contract of sale and was merely permissive and is not inconsistent with the idea that petitioner remained the owner of the property until the deed passed in June, 1923.

In Lucas v. North Texas Lumber Co., 281 U. S. 11, the question before the United States Supreme Court was whether a sale of timber lahds occurred in 1916 or 1917. There the seller on December 27, 1916, gave the buyer a ten-day option to purchase for a specified price. On the same day title was examined and found satisfactory to the buyer, who was solvent and able to make the purchase. The buyer arranged for the money needed, and on December 30, 1916, notified the seller that it would exercise the option. On that day the seller ceased operations and withdrew all its employees from the land. On January 5, 1917, the papers which were required to effect the transfer were delivered, the purchase price was paid, and the transaction was finally closed. In holding that the sale in question occurred in 1917, the Supreme Court said in part:

An executory contract of sale was created by the option and notice, December 30, 1916. In the notice, the purchaser declared itself ready to close the transaction and pay the purchase price “ as soon as the papers were prepared.” Respondent did not prepare the papers necessary to effect the transfer or malte tender of title or possession or demand the purchase price in 1916. The title and right of possession remained in it until the transaction was closed. Consequently unconditional liability of vendee for the purchase price was not created in that year. [Citations.] The entry of the purchase price in respondent’s accounts as income in that year was not warranted. Respondent was not entitled to make return or have the tax computed on that basis, as clearly it did not reflect 1916 income.

On authority of Lucas v. North Texas Lumber Co., supra, we hold that the title and right of possession to the hydroelectric plant remained in petitioner until the transaction was closed in 1923 and it was then that the sale was consummated and the profits, if any, were taxable. Cf. E. K. Wood Lumber Co., 25 B. T. A., at page 1024.

We will next take up petitioner’s contention that even though the Board holds that the sale took place in 1923, nevertheless there was no taxable profit on the transaction because the March 1, 1913, value of the property after being adjusted to allow for additions made since that date to the date of sale, and to give effect to accumulated depreciation on the depreciable assets, was greater than the total price received for the property.

Much, testimony was introduced on the subject of March 1, 1913, value, and there was a wide difference of opinion between the witnesses.. One witness for respondent who was widely experienced in the valuation of utilities, testified that the March 1, 1913, value of the property was $206,000 and a witness for petitioner, who appeared equally as widely experienced, placed the valuation as high as $652,150. This witness based his valuation on $200,000 for the tangibles and $452,150 for the intangibles connected with the hydroelectric plant. We do not think there would be any profit in discussing the details of this evidence.

The fair market value of assets at any given date is. a question of fact to be decided upon all the evidence admitted and no set rules, methods or formulas are controlling. Huron Building Co., 15 B. T. A. 1107; affd., 53 Fed. (2d) 575; certiorari denied, 53 Fed. (2d) 575; 287 U.S. 632; Keystone Steel & Wire Co., 16 B. T. A. 617; affd., 62 Fed. (2d) 458. From all the evidence we have found that the March 1,1913, value of the entire hydroelectric plant, including tangibles and.intangibles, was $375,000. This should be the basis used in computing petitioner’s gain or loss, if., any, on the sale in 1923. This basis should of course be adjusted down to the date of sale by giving-effect to additions made to the plant from March 1,1913, and also by giving effect to depreciation which had accumulated against the depreciable assets since March 1, 1913. As to additions made to the plant since March 1,1913, and the rate of depreciation on the depre-ciable assets, there seems to be no controversy between the parties and hence we have made no findings of fact on those items.

Petitioner’s third contention is that even though the Board should hold that the sale was made in 1923 and that there was a taxable profit therefrom, nevertheless such profit should be taxed on the installment basis. It is petitioner’s position that the sale price was received in two years, viz., $45,000 in 1922 and $405,000 in 1923, and that since the $45,000 initial payment is less than 25 per cent of the contract price, only 90 per cent of the profit can be taxed in 1923, as 10 per cent (45/450) is attributable to 1922, under sections 1208 and 212 (d) of the Revenue Act of 1926. In Warren National Bank, 22 B. T. A. 759; affd., 61 Fed. (2d) 325, the Board decided adversely a contention similar to that now made by petitioner. Following that decision we hold against petitioner on this issue.

Petitioner’s fourth and last contention is that it not only does, not owe any deficiency, but that on the contrary it has made an overpayment of its taxes for 1923 because it failed to deduct $41,230.79 which it should have accrued upon its books as an interest liability on December 31, 1923, but which it did not accrue because of error on its part. We find no basis for this contention.

When petitioner agreed to purchase from the Manitowoc Portland Cement Company $1,500,000 of its bonds at a purchase price of $1,320,000, it was embodied in the agreement that all the purchase price should not be paid at once but that petitioner should advance it in installments as the work progressed on the Manitowoc Company plant. But inasmuch as the bonds of the Manitowoc Company which were delivered to petitioner drew interest from the date of said bonds, June 2, 1923, it was agreed that the Newaygo Company would enter on its books, whenever it made payment of an installment, a credit to the Manitowoc Company representing the amount of interest at 7 per cent per annum on the amount of each installment paid by the Newaygo Company reckoned from June 2, 1923, to the date of such payment, and that the total amount of interest credits so entered should be paid by the Newaygo Company to the Manito-woc Company, when the new cement manufacturing plant of the latter company should have been fully erected and completed. Under the terms of this contract petitioner paid the Manitowoc Company two installments in 1923, upon which interest of $10,206.43 was calculated and credited to the Manitowoc Company on petitioner’s books, December 31, 1923. This amount was not paid until October 15, 1924, but petitioner, keeping its books on an accrual system, was entitled to accrue this liability in 1923, as it did do, and respondent has so allowed.

But no other payments of installments were made by petitioner under the terms of the contract in 1923 and no liability to pay interest accrued against petitioner in 1923 other than the $10,206.43 which it accrued on its books and which the respondent has allowed as a deduction. Petitioner was not entitled to a larger accrual of interest in 1923 than that shown by its books. Interest liabilities of a taxpayer should be accrued when all events have occurred which fix time of accrual. Cf. Continental Tie & Lumber Co. v. United States, 286 U. S. 290.

Under the terms of petitioner’s contract with Manitowoc Company it could not tell what interest it would owe Manitowoc Company in any given year until the installments for that year were determined and paid. Consequently until such installment payments were made all events had not occurred which would enable petitioner to fix the time of its accrual of interest liabilities to the Manitowoc Company. On this issue we hold for respondent.

Reviewed by the Board.

Decision will be entered under Bule SO.

Love,

dissenting: I heard this case and observed the witnesses who testified, and am convinced that the evidence clearly shows that the value of the Riparian Land, Water-Power Rights & Power-House Site Land ” was $300,000, instead of $100,000, as determined by the respondent; and that the basis used by the respondent of $183,526.57 for the “ Power House, Dam & Electric Meters ” should not be disturbed, as petitioner has not questioned the correctness of such determination and the evidence offered by the respondent does not prove that he erred in that respect.


source: Caselaw Access Project

author: Van Eossan:

license: Public Domain

text:
    Pincus Brecher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52741.
    Promulgated April 6, 1933.

      Leo Sobel, O. P. A., for the petitioner.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Van Eossan:

The respondent determined the following deficiencies and penalties due from petitioner:

Petitioner makes only one allegation, phrased as follows: The Commissioner of Internal Revenue has completely disregarded actual disbursements which represent contra charges toi the deposits in question arising from the repayment of loans and exchanges deposited as follows:

1926_$44, 366.10'
1927- 41, 776. 50
1928_ 279, 949.12

The respondent computed the alleged income of petitioner by reference to large unexplained bank accounts. Petitioner contends generally that substantially all of the entries were explainable as loans and repayments.

The record in the case is confusing and contradictory throughout, and in some respects unintelligible. It is filled with statements about loans, repayments, exchanges, double exchanges, deposits and redeposits, without adequate explanations or definitions. At the hearing petitioner’s counsel was specifically advised that petitioner must relate the various checks introduced and items inquired about to the items on the bank statements. Disregarding this admonition, counsel failed entirely to establish the relationship between deposits and alleged repayments. In response to inquiry as to specific items petitioner’s frequent reply was, “ I don’t remember.” To other questions petitioner replied in qualified terms, seldom directly or unequivocally.

Moreover, it was brought out that in an examination under oath before a referee in bankruptcy, when inquiry was made as to many of the same items here under scrutiny, the replies of petitioner were directly opposed to his present answers and, on question by the presiding Member, the petitioner admitted that he gave false testimony before the referee. The reason assigned for so doing was that the truth would have hurt his business.

It would serve no useful purpose to attempt a detailed narration of the evidence. The record establishes that petitioner had bank deposits showing hundreds, perhaps thousands, of entries, aggregating hundreds of thousands of dollars. Throughout the taxable years petitioner was continuously engaged in these financial transactions. It overtaxes credulity to believe that this was merely a pastime from which no profit was derived. Nevertheless, petitioner claims his sole income was a small salary from the firm with which he was connected. His allegation that the deposits were all loans, each being offset by a repayment, is not sustained by the proof. On the record before us petitioner has not proved that respondent’s determination of income was incorrect. The testimony and all reasonable inferences therefrom tend to corroborate the finding. Therefore, we affirm the deficiencies.

As to the fraud penalties, the record shows that an oath means nothing to the petitioner; that he would give false testimony if he thought the truth would hurt his business. The maxim, “ falsum in uno, falsum in omnibus,” may be a harsh rule, but here it seems justified. In M. Rea Gano, 19 B. T. A. 518, we said:

To establish fraud by direct proof of intention is seldom possible. Usually it must be gleaned from the several transactions in question and the conduct of the taxpayer relative thereto.

We also said in that case: “A failure to report for taxation income undoubtedly received, such action being predicated on a patently lame or untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.” Here we are fully convinced that petitioner understated his income with intent to evade tax in the years in which he made returns. It follows that penalties for fraud were properly added to the deficiencies for the years 1926 and 1927.

The petitioner filed no return for 1928. The l'aw (section 291, 1928 Act) requires the Commissioner in such a case to add 25 per cent of the tax found due for such failure to file. This action is mandatory (Rogers Hornsby, 26 B. T. A. 591), and constitutes a separate liability from the fraud penalty under section 293 (b) of the same act. The respondent determined a penalty of 25 per cent for failure to file a return and a further penalty of 50 per cent for fraud. The record proves fraud. Therefore, both penalties were correctly determined. The action of the respondent is approved in all respects.

Reviewed, by the Board.

Decision will Toe entered, for the respondent.

         Seg. 291. Failure to hele return.

        In case oí any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section shall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

       Sec. 293. Additions to the tax in case oe deficiency.
      ****** *
      (b) Fraud. — If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.


text:
    The Caxton Printers, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62142.
    Promulgated April 6, 1933.

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

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

Black.:

In order for petitioner to be entitled to deductions of donations or payments made to a pension trust fund, such payments or donations must be made in compliance with the terms of the statute. We do not think that the facts connected with petitioner’s setting up on its books as a liability in 1929 a reserve designated “ Pension Trust Fund ” of $8,000 are sufficient to entitle petitioner to have such fund allowed as a deduction.

Section 23 (q) of the Eevenue Act of 1928 provides:

An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made.

Section 165, referred to in the above quoted section, provides in substance that a trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the benefit of its employees shall not be taxable, but shall be taxable to the distributee when distributed.

We think it clear that under these sections of the 1928 Act, before payments or donations made by an employer to a pension trust fund can be allowed as deductions from gross income, it must be shown that such payments or transfers claimed were made to a valid, existing trust. Even if it be conceded that the resolutions adopted by the stockholders and directors on December 23, 1929, were within themselves sufficient to establish a valid trust to receive and administer a trust fund to pay pensions to petitioner’s employees, nothing was paid or transferred to the trust in 1929. A mere setting up of a reserve liability on a taxpayer’s books is not a paying into or transfer of funds to the trust. The statute allows a deduction of “ a reasonable amount transferred or paid into such trust ” during the taxable year in excess of any contributions made to take care of the pension liability accruing during the year. There is no evidence that petitioner made any contributions to take care of any pension liability accruing during the year and which would be deductible under section 23 (a) as a business expense. If petitioner is entitled to a deduction of the $8,000 claimed it must come under section 23 (q) above quoted, and we hold there was no such payment or transfer of funds to a pension trust as is contemplated by the terms of said section.

Petitioner cites in support of its contention, Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464; Live Stock National Bank, 7 B. T. A. 413; Lemuel Scarbrough, 17 B. T. A. 311, and Elgin National Watch Co., 17 B. T. A. 339. These were cases which were decided under prior acts which did not contain any such provision as section 23 (q) of the Revenue Act of 1928, which defines and limits the deductions which can be made of payments and contributions to a pension trust fund. However, we do not think there is any conflict between what we held in those cases and what we now hold in the instant case. In those cases we ruled that amounts actually paid into a fund by an employer during each year for pensioning its employees are deductible from gross income for the year as ordinary and necessary expenses of carrying on the employer’s business, where the facts and circumstances connected with the creation and operation of the fund show that it is a valid, existing trust. And here as there, we hold that such deductions are only allowable where there is an actual payment or transfer of funds to a legal, enforceable trust. Cf. Merrill Trust Co., 21 B. T. A. 1409. For reasons we have already stated, there was no such payment or transfer of the $8,000 in question as to entitle petitioner to deduct it from gross income. On this issue we hold for respondent.

The reserve of $600, which petitioner set up as an insurance fund and claimed as a.deduction from 1929 income, was for the purpose of paying for a group insurance premium on certain employees, to provide for payment of insurance liability between December 23, 1929, when the insurance was authorized and January 3, 1930, when the group policy by the insurance company was actually issued, and to cover insurance on the life of petitioner’s president, which petitioner proposed to carry itself. This reserve was disallowed by the respondent on the ground that it was a contingent liability and not allowable as a deduction, which we think was correct. Horn & Hardart Baking Co., 19 B. T. A. 704; Naitove & Co. v. Commissioner, 32 Fed. (2d) 949; Spring Canyon Coal Co., 13 B. T. A. 189; affd., 43 Fed. (2d) 78; certiorari denied, 284 U. S. 654.

It seems clear that the $114.73 policy premium charged by the Prudential Insurance Company for writing the group policy was both incurred and paid in 1930. Therefore, whether petitioner kept its books on the cash receipts and disbursements basis, or whether it kept them on the accrual basis, this $114.73 premium expense would only be deductible in 1930. The only basis for allowing the $600 reserve as a deduction for 1929 would be on the theory that petitioner was entitled to set up and take as a deduction such a reserve to carry its own insurance on its president for an indefinite length of time and insurance on its employees from the date of December 23, 1929, to January 3,1930, the date when the group policy was written. From the cases already cited, we have seen that such a contingent reserve is not an allowable deduction under the provisions of the statute. On this issue, we hold for respondent.

The remaining issue concerns depreciation. An examination. of the revenue agent’s report upon which respondent’s deficiency notice is based shows that for the year 1929 petitioner claimed depreciation deductions aggregating $7,166.54 and these were reduced by the revenue agent to $6,120.93, resulting in a net disallowance of $1,045.61 of the depreciation claimed by petitioner. This adjustment was made by increasing the depreciation on buildings $948 over the amount claimed by petitioner, and increasing the depreciation on autos and trucks $390.63 over the amount claimed by petitioner and by decreasing the amount claimed on machinery and fixtures $2,384.34. Petitioner does not of course contest respondent’s action in increasing the amount of depreciation allowance on buildings and on autos and trucks, but does contest his action in reducing depreciation on machinery and fixtures. An examination of the revenue agent’s report with respect to this decrease shows that it is based upon the determination that of the total value of machinery, equipment, fixtures, etc., carried on petitioner’s books in 1929, $25,602.27 thereof had been fully exhausted by prior deductions for depreciation.

A complete detailed schedule was furnished petitioner by the revenue agent, showing how respondent’s depreciation computation was made, and at the hearing petitioner offered no satisfactory evidence to combat the correctness of respondent’s determination.

The determination made by respondent is presumably correct and the burden of proof to show the contrary is upon petitioner. As said by the court in Rieck v. Heiner, 25 Fed. (2d) 453 (certiorari denied, 277 U. S. 608), “nor is there a burden on the Commissioner, when he has formally determined an amount of depreciation to prove it right as a condition to sustaining the assessment by showing the investigation he has pursued and the matters that have influenced his judgment, for having found the depreciation and having made an assessment based on it, the law presumes his action right and the assessment prima facie valid.”

Petitioner further contends that it is entitled to depreciation of 15 per cent annually on its machinery and plant equipment, which would mean a life of only 6% years. We think the evidence would not sustain such a short life as that. The rate allowed petitioner by respondent in the current year, as well as in prior years, was 10 per cent, and we think that rate is just and reasonable and should not be disturbed.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Murdock :

text:
    Aaron Straus, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65091.
    Promulgated April 6, 1933.

      Frederick S&hwertner, Esq., and S. Frank Levy, O. P. A., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   opinion.

Murdock :

The Commissioner determined a deficiency of $14,284.44 in the petitioner’s income tax for the calendar year 1929. The sole issue relates to the deduction to which the petitioner is entitled for charitable contributions. The parties filed a stipulation of facts as follows:

1. The petitioner, a resident of Baltimore, Maryland, had during the calendar year 1929 an “ ordinary net income,” of $43,079.90 as defined by section 101 (c) of the Revenue Act of 1928, but without any allowance of a deduction for contributions as provided by section 23 (n) of said Act. There were no items of capital loss or capital deductions for the year 1929. The petitioner also had during the year 1929 a “capital gain,” of $766,463.96, as defined by section 101 (c) of said Act, but without any allowance of a deduction for contributions as provided by section 23 (n), and he elected to have the capital gain taxed at 12% per cent under section 101 (a) of the Revenue Act of 1928. The gross income of the petitioner for 1929, excluding capital gains, was $159,831.87 and the amount of the ordinary deductions without any deduction for contributions was $116,751.97. The total amount of contributions made by the petitioner during the calendar year 1929 of a character deductible from net income subject to the limitations provided in Section 23 (n) of the Revenue Act of 1928 was $144,695.04. The petitioner in his tax return for 1929 deducted the amount of $117,667.90 upon the claim that in determining the amount of 15 per cent of petitioner’s net income for the year 1929 under section 23 (n) of the Revenue Act of 1928, ordinary net income and eápital gain should both be included, which contention is asserted by petitioner and denied by the Commissioner, and this stipulation shall not prejudice the rights of either petitioner or respondent as to the legality of such deduction in excess of 15 per cent of ordinary net income. The said sum of $117,667.90 was based upon the ordinary net income and capital gain as originally computed by the petitioner, but the revised figures of $43,079.90 and $766,463.96, representing respectively the petitioner’s ordinary net income and capital gain as determined by the Commissioner are accepted as correct. The Commissioner allowed as a deduction for contributions under section 23 (n) of the Revenue Act of 1928 the sum of $6,461.99, being 15 per cent of the petitioner’s ordinary net income of $43,079.90, and disallowed as a deduction the balance of .contributions.
2. The petitioner filed his tax return for the year 1929 with the Collector of Internal Revenue, Baltimore, Maryland, on May 6, 1930, showing a total tax liability of $82,288.35, which was assessed on the May, 1930 list, and this amount together with interest in the sum of $24.89, or a total of $82,313.24, was paid to the said Collector in four quarterly installments of $18,750.00, $22,419.07, $20,515.22 and $20,628.95 on March 12, 1930, June 14, 1930, September 15, 1930 and December 15, 1930, respectively. The petitioner also paid to the said Collector on July 26, 1932 as an advance payment $3,028.69 of the deficiency of $14,284.44 asserted by the respondent in his deficiency notice dated February 27, 1932 for the year 1929, as the entire amount of the deficiency asserted for said year is not in controversy. The respondent assessed the said sum of $3,028.69, together with interest in the amount of $427.00, or a total of $3,455.69 on the January 14, 1933 list.

The only question in this case is to determine the amount of the deduction to which the petitioner is entitled on account of charitable contributions. The parties concede that the contributions were in excess of the deduction however it is to be determined. This is because there is a limitation upon the deduction. Section 23 (n) of the Revenue Act of 1928 allows the deduction and fixes the limitation as follows:

In the ease of an Individual, contributions or gifts made within the taxable year to or for the use of:
(1) the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes;
(2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual;
(3) the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act;
(4) posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if such posts, organizations, units, or societies are organized in the United States or any of its possessions, and if no part of their net earnings inures to the benefit of any private shareholder or individual; or
(5) a fraternal society, order, or association, operating under the lodge system, but only if such contributions or gifts are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals;
to an amount which in all the above eases combined does not exceed 15 per centum of the taxpayer’s net income as computed without the benefit of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. (For unlimited deduction if contributions and gifts exceed 90 per centum of the net income, see section 120.)

Net income is the gross income computed under section 22 less the deductions allowed by section 23. See section 21. These are general provisions of the act and apply to every individual taxpayer. Gross income, as defined in section 22, includes capital gains, and, consequently, net income likewise includes capital gains. Cf. American Can Co. v. Bowers, 35 Fed. (2d) 832, 834; certiorari denied, 281 U. S. 736. Nor would capital gain be excluded from net income in computing the limitation on the deduction for contributions unless some other provision of the act requires its exclusion.

The Commissioner contends that where section 101 (a) is applied, the deduction for contributions may not exceed 15 per cent of “ ordinary net income ” computed without any deduction for contributions. He would thus exclude from the computation of the deduction allowed by section 23 (n), all items of capital gain, captial loss, and capital deductions. In the present case there are no items of capital loss or capital deductions, so he has excluded only capital gain. He would support his action by the decisions of three divisions of the Board. Ralph W. Harbison, 26 B. T. A. 896; Susan Dwight Bliss, 27 B. T. A. 205; Mary Colgate, 27 B. T. A. 506. There is also the case of Hallie D. Elkins, 24 B. T. A. 572, which involved the related question where there was a capital net loss. That case was ieviewed by the Board and was followed in Charles J. Living ood, Executor, 25 B. T. A. 585. The cases involving capital net losses may or may not be distinguishable from those involving capital net gains. We express no opinion on that subject, but confine ourselves strictly to the question before us. In the present case and in three others now pending before the Board, counsel for the petitioners contend that the Board has decided incorrectly at least the first three cases listed above. What authority is there in the Revenue Act of 1928 for the view thus taken by the Board and adopted by the Commissioner ?

Section 101 contains no specific reference to a special limitation upon a deduction for charitable contributions. Neither in the words of the section nor in its legislative history is there any indication that Congress had the subject in mind while framing the section. The possibility of section 101 affecting the deduction for contributions probably did not occur to the legislators, since the two subjects are so unrelated and the alleged effect is so indirect. This should be borne in mind while reading section 101. If any such limitation exists it must be due to the use of some precise language from which the limitation inevitably follows by necessary implication.

Congress in this section does not abandon the general definitions of gross and net income contained in sections 21 and 22, or does it change the deductions allowed by section 28 in so far as the section relates to capital net gains. On the contrary, gross income, net income, and the allowable deductions are the same for the capital net gain purposes of this section as they are in sections 21, 22, and 28. Section 101 merely distinguishes income and deductions of a capital nature from ordinary income and ordinary deductions and provides for a special method of calculating the tax where there has been a capital net gain. The deductions allowed by section 23 are thus divided into “ ordinary deductions ” and “ capital deductions ”—

[Sec. 101 (c)] (3) “Capital deductions” means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.
(4) “ Ordinary deductions ” means the deductions allowed by section 23 other than capital losses and capital deductions.

But no part of the deductions allowed by section 23 is lost to the taxpayer in this process.

Apparently the Commissioner places his chief reliance upon the language of section 101 (c) (Y), which is as follows:

“ Ordinary net income ” means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.

This language does not mean that net income is to be computed after excluding certain items of a capital nature. It means that “net income ” is to be computed in the regular way and “ ordinary net income ” is what remains of this “ net income ” after the capital items have been excluded from it. This is clearly indicated by the punctuation used by Congress. The phrase “ computed in accordance with the provisions of this title ” is set off by commas and modifies “ net income.” Section 101 (c) (Y) is not to be read as if one or both of the first two commas had been omitted, or as if it provided that ordinary net income means net income computed after excluding all items of a capital nature. “ This title ” means Title I. Net income computed in accordance with Title I is obviously net income as defined in section 21 of Title I, i. e., gross income as defined in section 22 less the deductions allowed by section 23. There is in section 101 (c) (Y) no further limitation on the deduction for contributions beyond that contained in section 23 (n). Since there is nothing to indicate that Congress had this subject in mind while framing this section, we should be slow to read the intent into the words used by Congress on an unrelated subject. We may not read this thought into the statute where the words used do not contain it. Note the difference in section 101 (c) (5), where Congress used the words “gross income computed without including capital gains.”

“Capital net gain ” means tlie excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.

If Congress, in section 101 (c) (Y) had used the words “net income computed without including capital gain ” the Commissioner would be supported in his contention. But it did not use these words or any of like import.

Section 101 (a) is as follows:

(a) Taw in case of capital net gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12% per centum of the capital net gain.

This provision bases the partial tax on the “ ordinary net income.” We have seen that “ ordinary net income ” is computed by allowing a deduction for contributions limited only as provided in section 23 (n). Section 101 (a) further provides that the partial tax shall be computed “ in the manner as if this section had not been enacted,” which certainly indicates no limitation on the deduction allowed by section 23 (n). It does not provide that the partial tax shall be levied upon the ordinary net income computed as if that income had been all o': the taxpayer’s income. Thus we have exhausted the special provisions of section 101 relating to a capital net gain without finding any justification for the Commissioner’s determination. Consequently, we must conclude that Congress did not intend any such limitation on the deduction allowed by section 23 (n). Cf. secs. 120, 168, 186, and 706.

The case of Sadowshy v. Anderson, 29 Fed. (2d) 677; certiorari denied, 279 U. S. 849, is based upon an entirely different legislative provision. The court recognized this difference, as the following excerpt from the opinion indicates:

It is true that the business income remained that of an individual, but section 330 not only says that it shall “ be taxed as the net income of a corporation is taxed,” but that it “ shall be computed as if such corporation had been in existence on and after January 1, 1918.” By this language the method of computation and rate and mode of taxation are brought under sections 232 to 236 of the act (40 Stat. 1077, 1080), and the taxpayer receives no benefits from section 214 (a) (11).
The fact that the allowance of charitable gifts was not cut off where income of individuals derived from capital gains was taxed at special rates under section 206 of the Revenue Act of 1921 (42 Stat. 232), and that it was similarly available where dividends of prior years were received in 1917, or subsequent years, but taxed at prior years’ rates, can not extend the deduction to income derived from plaintiff’s clothing business. The option in those cases related merely to rates, and was accompanied by no language providing for the “ computation ” of the income as that of a corporation.

The case supports the petitioner rather than the respondent.

In our three prior decisions we took the view that the scheme of section 101 was to separately compute ordinary net income and capital net gain. In this, we now think, we were in error. The computation is made under sections 21, 22, and 23. Section 101 (a) requires only that the various items thus computed be separated into those of a capital nature and those not of a capital nature, called for convenience, ordinary. Our three prior decisions on the present question will no longer be followed.

Reviewed by the Board.

Decision will be entered for the petitioner under Rule 50.

       § § 21, 22, and 23 appear under “ Subtitle B — General Provisions ” and are, in so far as material hereto, as follows:
      SEC. 21. NET INCOME.
      “ Net Income ” means the gross income computed under section 22, less the deductions allowed by section 23.
      SEC. 22. GKOSS INCOME.
      (a) General definition, — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
      *»**•*•
      SEO. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses *** ; (b) Interest ***; (c) Taxes generally ***; (d) Taxes of shareholder paid by corporation ***;
      (e) Losses by individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit though not connected with the trade or business; or
      (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.
      (f) Losses by corporations ***; (g) Basis for determining loss ***; (h) Loss on sale of stock or securities ***; (i) Net losses ***; (j) Bad debts ***; (k) Depreciation ***; (1) Depletion ***; (m) Basis for depreciation and depletion ***; (n) Charitable and other contributions *** ; (o) Future expenses in case of casual sales of real property *** ; (p) Dividends received by corporations ***; (q) Pension trusts ***.

       SEC, 101. CAPITAL net gains and losses.
      (a) Taw in case of capital net gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12% per centum of the capital net gain.
      (b) Taw in case of capital net loss. — In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been .enacted, and the total tax shall be this amount minus 12% per centum of the capital net loss; but in no ease shall the tax o£ a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.
      (c) Definitions. — For the purposes of this title—
      (1) “ Capital gain ” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
      (2) “ Capital loss ” means deductible loss resulting from the sale or exchange of capital assets.
      (3) “ Capital deductions ” means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.
      (4) “ Ordinary deductions ” means the deductions allowed by section 23 other than capital losses and capital deductions.
      (5) “ Capital net gain ” means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.
      (6) “ Capital net loss ” means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.
      (7) “ Ordinary net income ” means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.
      (8) “ Capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. For the purposes of this definition—
      (A) In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 113, the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.
      (B) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.
      (C) In determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under the provisions of section 112(g) of this title or under the provisions of section 203(e) of the Revenue Act of 1924 or 1926, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.


author: Sternhagen :

text:
    DeForest Hulburd and Hugh McBirney Johnston, Individually and as Executors of and Trustees Under the Will of Charles H. Hulburd, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22028.
    Promulgated April 7, 1933.

      John E. Hughes, Esq., for the petitioners.

      Arthur Oamduff, Esq., and J. R. Johnston, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent, having determined a deficiency and a penalty for the fiscal year ending September 30, 1919, in respect of the Van Sicklen Company, mailed a notice dated October 27, 1926, addressed to “ Estate of Charles H. Hulburd, % DeForest Hulburd,” as follows:

As provided by Section 280 of the Eevenue Act of 1926, there is proposed for assessment against the estate the sum of $24,000 constituting its liability as a transferee of the assets of the Van Sicklen Company, Elgin, Illinois, representing unpaid income and profits taxes assessed against the company for the fiscal year ended September 30,1919, in accordance with the attached statement, plus any penalty and accrued interest.

A petition was filed with the Board by DeForest Hulburd and Hugh McBirney Johnston, individually and as executors of and trustees under the will of Charles H. Hulburd, deceased, in which the petitioners assail the determination of the deficiency, of the penalty, and of the liability of the estate. The respondent answered by a denial. After a hearing upon the issue whether the statute of limitations had barred the petitioners’ liability, it was decided on October 14,1930, that such liability was not barred. DeForest Hulburd, 21 B. T. A. 23. The proceeding is now submitted for final decision after trial on the merits.

For the petitioners it is argued, first, that, assuming a proper determination as to the taxpayer corporation and a liability in respect thereof of the decedent as a transferee of the corporation’s assets, there is no liability of the estate, because the estate was at no time such a transferee. This argument takes as its postulate a construction of the respondent’s notice as one to the estate directly in its capacity as a recipient in its own behalf of assets for which in its own behalf it may be liable as a transferee. The respondent argues that he has not proceeded against the estate in that capacity, but in its capacity as a representative of the decedent, whereby any liability of the decedent is to be imputed to his estate.

There is nothing in the notice of liability which expressly indicates that the determination of the respondent was made in respect of the estate in its representative capacity. The language as above quoted does not mention the liability of the decedent as a transferee and does not indicate that the respondent treats the decedent as a transferee. The expression, “ Constituting its liability as a transferee,” would on its face convey the idea that the estate was determined to be a transferee and as such was liable. If, however, the language be regarded as ambiguous, the ambiguity is caused by the respondent, and should therefore be resolved adversely to him. To him it was well known that a decedent’s estate has a dual existence before the tax law. By section 219, it stands as a taxpayer, in respect of income derived subsequent to the death of the decedent. A dissolution and distribution by a corporation of which it is a shareholder occurring after the decedent’s death may impose upon it directly a liability as a transferee of the corporation’s assets. In such case, the language quoted would be apt. But the estate is also liable as the decedent’s representative for tax upon income derived by him during his lifetime, and for his lifetime liability as a transferee, if properly demanded. This is not “its liability as a transferee,” but its liability as a representative of the transferee. It seems but natural for the executors or administrators of a decedent’s estate, who perchance know nothing of the affairs of the decedent prior to his death, to treat the Commissioner’s notice as meaning what it so clearly says, and not to assume an inadvertent use of language and seek for a possible correct meaning for a latent intent. It may not be forgotten that the letter of the executors of April 16, 1924, requesting a prompt determination of decedent’s taxes was, in the Board’s earlier opinion, 21 B. T. A. 23, strictly construed against them so as to exclude application to the decedent’s transferee liability and prevent a consequent release by limitation.

The evidence clearly establishes that the estate itself was not a transferee of the assets of the Van Sicklen Company. The corporation distributed its assets and was dissolved prior to decedent’s death, and it does not appear that any part of such assets as were transferred by the corporation to him during his life were owned or possessed by him at the time of his death or in any way came into the hands of the executors of his estate.

But it is not satisfactory to rest the decision on a literal interpretation of the notice of deficiency. Hulburd, the decedent, was the owner in his own right of 80 shares of the Van Sicklen Company, and the respondent says that his share in the final distribution was $8,000. Assuming, arguendo, that it was, it does not follow that his estate is necessarily in this proceeding to be held liable as his representative as he would have been had he lived. The liquidation occurred in 1919, and Hulburd died in January, 1924, leaving a will. The executors were duly appointed, February 20, 1924. With reasonable promptness, on April 16, 1924, they requested the Commissioner in writing to determine the decedent’s outstanding income taxes within a year (see section 250 (d), Revenue Act of 1921). Thus the Commissioner was fully advised of Hulburd’s death and of the pending administration of his estate and the opportunity for the presentation of claims against it. Although the executors’ written request for a prompt determination of the decedent’s income taxes did not refer to any liability he may have incurred as a transferee, nevertheless the Commissioner was thereby made aware of his right to enforce any such transferee liability by a claim against the estate before final distribution. No such claim was filed, although the deficiency and penalty of the Van Sicklen Company were assessed on November 17, 1924, while the estate was being administered. By an order of the probate judge, dated February 26, 1925, the estate was declared settled and the executors, having made final distribution and submitted their final account, were discharged. On April 20, 1925, the Commissioner replied to the executors’ earlier request and stated that no further taxes were due for 1919 to 1921 and that there were deficiencies for 1922 to 1924. These were promptly paid and the Commissioner called the case closed under section 277 (a) (3), Revenue Act of 1924. All this occurred before the enactment of any such provision as section 280, Revenue Act of 1926, providing the administrative remedy for transferee liability. On October 27, 1926, the notice of liability which has already been described was mailed to the estate.

We are of opinion that at the time the notice was mailed there was no liability of the estate or of the petitioners as executors. Both were at that time out of existence, and it would be an anomaly to recognize an existing transferee liability of a nonexisting transferee. Section 280 of the Revenue Act of 1926 did not create new liabilities, but only provided a new remedy for enforcing existing liabilities. Phillips v. Commissioner, 283 U. S. 589. No authority is cited for giving it a retroactive application as a remedy to enforce defunct liabilities, or as reviving them. And, however possible it may be to find some retroactive effect in the statute under other circumstances, there is nothing in the present case to justify the belief either that Congress so intended or that it would produce a just result. With full knowledge of his opportunity and ample time within which to use it, the Commissioner took no step to present a claim, but permitted the estate to be closed and the executors discharged without knowledge of the possible liability. It is not suggested that there were, any circumstances indicating lack of good faith or diligence by the executors or that their representations to the probate- court resulting in their discharge were disingenuous. If they were, there may still be a remedy for the Government to enforce personal liability of the executors under the Revised Statutes, section 3467. The respondent disclaims any attempt in this proceeding to invoke such a remedy. Section 281, Revenue Act of 1926, and section 312, Revenue Act of 1932, were not in effect during the existence of this estate, and imposed no duties upon the executors here. The decisions under those sections are therefore not pertinent. There is also a plain distinction between this case relating to transferee liability for another’s tax and cases involving posthumous deficiencies in the decedent’s own tax. Cf. Elna S. Evans, 12 B. T. A. 334; Karl J. Kaufmann, 15 B. T. A. 141; Elnora Haag, 19 B. T. A. 982; affd., 59 Fed. (2d) 516.

Whatever may be the liability of the decedent for his own tax deficiency, or the persistence of such liability at law against his estate and against the discharged executors who failed to pay the deficiency before their discharge, there is a different question in equity after their bona fide discharge as to their liability for the tax of a corporation of which the decedent was a shareholder prior to its dissolution and liquidation which took place long before his death and of which they were during administration without actual or constructive notice.

We hold, therefoi’e, that there was no liability of the estate as a transferee in its own behalf; and we hold also that in its representative capacity, the estate had no liability at the time of its determination by the respondent. We do not hold that there was no deficiency or penalty in respect of the Van Sicklen Company, and we do not hold that the decedent had no liability in respect thereof, or that the estate had no liability at any time. Nor do we say anything about the liability of any of the beneficiaries under the will or the dis-tributees of the assets of the estate. See Lindley v. United States, 59 Fed. (2d) 336. Those questions are academic in this proceeding and need not therefore be decided.

Reviewed by the Board.

Judgment will be entered for the petitioners-


author: McMahon :

text:
    The New York Trust Company, as Trustee Under Trust Indenture, Dated December 24, 1921, by and Between Conrad Henry Matthiessen and Said The New York Trust Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28250.
    Promulgated April 10, 1933.

      Russell D. Morrill, Esq., and Henry Mamá®, Esq., for the petitioner.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

McMahon :

We must first determine the proper basis for the computation of gain or loss upon the sale by the petitioner in 1922 of 6,000 shares of common stock of the Corn Products Refining Company which were acquired by petitioner as trustee in 1921.

The respondent has held that subdivision (2) of section 202 (a) of the Revenue Act of 1921 is here applicable and that the proper basis to be used is the cost of such stock to the donor.

The respondent has held that the irrevocable indenture dated December 24, 1921, accomplished a gift of the 6,000 shares of stock in question. There is no evidence to show that it did not accomplish a gift. On the contrary, it appears that Conrad Henry Matthiessen parted with all dominion over the subject matter. A gift may be made by a transfer in trust where, as here, the grantor relinquishes all dominion over the subject matter. Murray Guggenheim,, 24 B. T. A. 1181, affirmed by the Supreme Court in Burnet v. Guggenheim, 288 U. S. 280, which reversed the United States Circuit Court of Appeals decision in Guggenheim v. Commissioner, 58 Fed. (2d) 188. See also Bok v. McCaughn, 42 Fed. (2d) 616. The petitioner, however, contends that subdivision (2) of section 202 (a), in referring to property “ acquired by gift after December 31, 1920,” means property acquired by the taxpayer, that the trustee is the taxpayer herein involved, and that since the trustee did not acquire the property by gift, but as trustee, subdivision (2) of section 202 (a) does not apply here. This contention is not well founded. In Security Trust Co. et al., Trustees, 25 B. T. A. 29, 38, we stated :

* * * Here the testator actually created the trust by his will. The trust, not the trustees, is the taxpayer. The trustees are only one of the component parts of the taxpayer. They hold legal title to and possession of the property and act for the taxpayer. They never acquired a beneficial interest in the trust property — that goes to the cestuis que trustent, who are also a part of the trust. * * *

Upon the record before us we can not hold that under subdivision (2) of section 202 (a) the property in question was not “ acquired by gift after December 31,1920.” This view is, we believe, in accord with the purpose of the section of the revenue act in question.

The Ways and Means Committee report and the Finance Committee report upon the Revenue Act of 1921 contain the following discussion of subdivision (2) of section 202 (a) :

* * * An essential change, however, is made in the treatment of property acquired by gift. No explicit rule is found in the present statute for determining the gain derived or the loss sustained on the sale of property acquired by gift; but the Bureau of Internal Revenue holds that under existing law the proper basis is the fair market price or value of such property at the time of its acquisition. This rule has been the source of serious evasion and abuse. Taxpayers having property which has come to be worth far more than it cost to give such property to wives or relatives by whom it may be sold without realizing a gain unless the selling price is in excess of the value of the property at the time of the gift. The proposed bill in paragraph (2) of subdivision (a) provides a new and just rule, namely, that in the case of property acquired by gift after December 31, 1920, the basis for computing gain or loss shall be the same as the property would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *

In Rice v. Eisner, 16 Fed. (2d) 358, the following appears:

The act of 1921 was apparently passed for quite another reason, that is, in the future to prevent donors from escaping the high taxes prevailing by giving property to their wives or children. As the latter would be allowed on any subsequent sales to subtract the value of the gift when' they received it, and as a gift was not a sale as regards the donor, all increment escaped taxation which had accrued during the ownership of the donors. As to earlier gifts the rule remained as it had been in practice applied before the act of 1923. was passed.

Francis Francis, Guardian, 15 B. T. A. 1332, cited by petitioner, is distinguishable from the instant proceeding. In that case there was clearly no gift of the property involved after December 31, 1920, so as to render section 202 (a) (2) of the Revenue Act of 1921 applicable. The taxpayers there acquired the property “ pursuant to a vested legal right and this right had been theirs since long before the adoption of the Sixteenth Amendment in 1913.”

Bankers Trust Co., Trustee, 24 B. T. A. 10, cited by petitioner, is also distinguishable. There the beneficiaries, under the indenture, “ took absolutely nothing until the grantor’s death, and even then would receive nothing in case their deaths occurred prior to his. The final reversionary interest was to the grantor’s estate.” We there held that there was no gift inter vivos.

Subdivision (2) of section 202 (a) of the Revenue Act of 1921 provides that the basis of the property shall be the same as that which it would have in the hands of the donor. The stock herein involved was acquired by the donor in 1906 at a cost of $141,375, which amount exceeded the value of such stock on March 1, 1913. Under subdivision (b) of section 202 of the Revenue Act of 1921, set forth in the margin, the basis in the donor’s hands would be the cost to him. We hold, therefore, that the basis to be used in the computation of gain derived by the petitioner upon the sale of the stock in question is $141,375.

The contention of the petitioner that section 202 (a) (2) is unconstitutional is without merit. Taft v. Bowers, 278 U. S. 470, and Cooper v. United States, 280 U. S. 409.

The petitioner also contends that in the event the Board finds that section 202 (a) (2) of the Revenue Act of 1921 is constitutional and that the basis used by respondent in computing the profit is correct, then respondent erred in computing the tax upon such property at the full normal and surtax rates instead of at the rate of 12% per cent in accordance with section 206 of the Revenue Act of 1921. However, following the decisions in Magdaline McKinney, 16 B. T. A. 804; William Kempton Johnson, 17 B. T. A. 611; affd., Johnson v. Commissioner, 52 Fed. (2d) 726; and Sydney M. Shoenberg, 19 B. T. A. 399; affd., Shoenberg v. Burnet, 55 Fed. (2d) 543, we hold that petitioner is not entitled to have its tax computed under section 206 of the Revenue Act of 1921, since the property in question was not held by the taxpayer for more than two years.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that—
      * * * * * * *
      (2) In the case of such property, acquired by gift after December 81, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the value of such property, as found by the Commissioner as of the date or approximate date at which, according to the best information the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner. * * *

       Sec. 202. (b) The basis for ascertaining the gain derived or loss sustained from' the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a) ; but—
      (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value;
      (2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value as of March 1, 1913, over the amount realized therefor; and
      (3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less than such basis but not less than such fair market price or value, no gain shall be included in and no loss deducted from the gross income.

       Sec. 206. (a) That for the purpose of this title :
      **#<£***
      (6) The term “ capital assets ” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), * * *
      (b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
      A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12% per centum of the capital net gain; but if the taxpayer elects to be taxed under this section the total tax shall in no such case he less than 12% per centum of the total net income. * * *