author: Murdock:

text:
    Carl J. Batter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81875.
    Promulgated April 13, 1938.

      Charles M. Trammell, Esq., for tlie petitioner.

      Benjamin M. Brodsky, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner allowed a number of puts to expire un-exercised during the taxable year and thereby suffered a loss of $8,249.99. The loss was incurred in transactions entered into for profit and was not compensated for by insurance or otherwise. The only question in this case is whether or not this loss was subject to the limitations of section 28 (r). If it was not, then it is deductible in'its entirety under section 28 (e). But if it is subject to the limitation of subsection (r), then no part of it is deductible and it does not benefit the petitioner in any way, since he had no gains from the sale or exchange of noncapital assets which it might offset. Subsection (r) is entitled “Limitation on Stock Losses,” and it provides that losses from sales or exchanges of stock which are not capital assets shall be allowed only to the extent of the gains from such sales or exchanges. The petitioner argues that the losses in question were not losses from sales or exchanges of stocks since the transactions did not result in either the sale or exchange of any stock. The Commissioner, however, contends that these losses must be considered as gains or losses from sales or exchanges of stocks which were not capital assets because of the express provision of subsection (s) (B). Subsection (s) is as follows:

(s) Same — Short Sales. — For the purpose of this title, gains or losses (A) from short sales of stocks and bonds, or (B) attributable to privileges or options to buy or sell such stocks and bonds, or (O) from sales or exchanges of such privileges or options, shall be considered as gains or losses from sales or exchanges of stocks or bonds which are not capital assets.

The profit from a put, like the profit from a short sale, depends upon a decline in the market. In this respect and in the use to which the two transactions may be put, there is some similarity between a put and a short sale. However, there are marked and essential differences between puts and short sales, and the losses in this case, which resulted from the expiration of the puts, or options to sell, are not losses from short sales and the transactions certainly can not be described as short sales. The petitioner, therefore, argues that the title to subsection (s) indicates that it has no application here. He also points to the presence of the word “such” in clause (B) and argues that the phrase “such stocks” must refer to stocks previously mentioned in subsection (s), and, therefore, must refer to stocks involved in short sales. Although the construction and the grammar of the statutory provision in question are obviously open to the two attacks made by this petitioner, nevertheless we have come to the conclusion that the provision was intended to apply and does apply to situations like the one presented in this case.

(B) must be given some reasonable meaning if a proper interpretation is to be found. Yet the petitioner is unable to suggest a possible meaning for (B) which is acceptable. In case any privilege or option to buy or sell stocks and bonds results in a short sale, the cost of the privilege or option becomes a part of the cost of the stock involved in the short sale and the entire transaction is fully provided for in (A). Cf. Realty Sales Co., 10 B. T. A. 1217; Aiken v. Commissioner, 35 Fed. (2d) 620, affirming 10 B. T. A. 553. (B) was wholly unnecessary to cover such a situation and, therefore, its purpose must be sought elsewhere. Sandberg v. McDonald, 248 U. S. Wilson v. Rousseau, 4 How. 645; Carbon Steel Co. v. Lewellyn, 251 U. S. 501. An examination of other section and subsection titles in the Revenue Act of 1932 discloses that the titles are in some instances narrower in their scope than the provisions listed under them. Section 23 itself is entitled “Deductions From Gross Income”, and, although most of the subsections constitute a list of deductions, nevertheless several other subsections do not add to the list of deductions. Subsection (g), instead of providing for another deduction, deals with the basis for determining loss. See also subsections (m), (r), (s), and (t), none of which provides for any deduction.

The uncertainty which gives rise to the present controversy is not present in the Revenue Act of 1934. There, Congress avoided all uncertainty by using language which was more appropriate for expressing the intention which Congress had in mind. If the legislative draftsmen had added “etc.” after the words “short sales” in the title of subsection (s) of the Revenue Act of 1932, and if they had omitted the word “such” in clause (B), there could be no doubt of the applicability of the provision to the facts of the present case.

Congress was placing certain limitations upon losses in the Revenue Act of 1932 in order to protect the revenues. The benefit of losses from the sales of capital assets was limited to the amount of gains from capital assets. Subsection (r) was intended to provide a similar limitation upon the benefit to be derived from losses from the sale or exchange of stocks or bonds which were not capital assets.. The legislative history of subsection (s) indicates that Congress intended by that provision to extend the limitation of (r) to include losses from short sales of stocks and bonds, from unexercised options to buy or sell stocks and bonds, and from the sale or exchange of such options. The following excerpt is from the report of the Finance Committee of the Senate, p. 19, S. R. 665, 72d Cong., 1st sess. :

Subsection (s) requires that gains or losses from short sales of stocks and bonds, or from privileges or options to buy such securities, shall be treated as gains or- losses from the sale or exchange of stocks and bonds held for less than two years. Your committee is of the opinion that there should be no distinction between such transactions and sales or exchanges of stocks and bonds. Accordingly, the limitation on stock losses is extended to this type of transactions.

See also H. R. No. 708,72d Cong., 1st sess., p. 13.

The Supreme Court said in Ozawa v. United States, 260 U. S. 178:

It is the duty of the court to give effect to the intent of Congress. Primarily this intent is ascertained by giving the words their natural significance, but if this leads to an unreasonable result plainly at variance with the policy of the legislation as a whole, we must examine the matter further. We may then look to the reason of the enactment and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail.

See also Hawaii v. Mankichi, 190 U. S. 197; In re Chapman, 166 U. S. 661. Poor draftsmanship is not lightly to be attributed to Congress. Search should be made for an interpretation which will give full meaning, not only to the words used in the provision itself, but to the words used in the title. However, we have been unable to discover any reasonable meaning for the provision in question except one which limits the loss of this taxpayer. We have been forced to the conclusion that in this particular instance the title was not all-inclusive and the word “such” in (B) must have been used inadvertently. Although the title and the use of the word “such” are somewhat misleading, the meaning of the section is the same as it would be had Congress inserted “etc.” in the title and omitted the word “such” in (B). It follows that (s) applies in the present case, with the result that the limitation of (r) also applies.

Decision will be entered for the respondent.

       See section 117 (e) of the Revenue Act of 1934, entitled “Gains and Losses from Shoet Sales, Etc.” and providing in part:
      “Gains or losses attributable to the failure to exercise privileges or options to buy or seU property shall be considered as gains or losses from sales or exchanges of capital assets held for one year or less.” [Italics supplied.]


source: Caselaw Access Project

author: MuRDOck:

license: Public Domain

text:
    Mount Hope Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76039, 76640.
    Promulgated April 14, 1938.

      Benjamin M. Price, E-sq., and Ferris E. Hurd, Esq., for the petitioner.

      Willis B. Lansford, Esq., and E. L. Weber, Esq., for the respondent.
   OPINION.

MuRDOck:

The petitioner in 1930 received $58,001.50 and in 1931 received $48,883.23 from persons to whom it sold burial space in its cemetery. Those amounts are not in dispute. The petitioner now seeks to reduce those amounts by $30,095.76 for 1930 and by $27,338.01 for 1931, as the fair market value on March 1, 1913, of the lots sold in the two taxable years. It claimed smaller amounts on its returns — $15,157.38 for 1930 and $13,721.45 for 1931. The Commissioner in determining the deficiencies allowed even smaller, reductions — $7,635.56 for 1930 and $4,346.08 for 1931. He does not state in his lengthy brief just what values he thinks the evidence establishes, but his contention is that the evidence does not justify the use of any larger reductions than those which he has allowed in determining the deficiencies. We have found as a fact that the proper amounts to be used as a basis in reducing the amount realized in these years are $8,500 for 1930 and $7,000 for 1931.

The respondent has cited a number of cases which hold that a cemetery company does not dispose of the fee simple title to its land and the purchaser of a lot does not acquire a fee simple title, but merely a license or easement to use the land for burial purposes. However, it is apparent that the purchaser of a cemetery lot acquires a property right in the lot which the law recognizes, which can pass to his heirs or representatives at his death, and which may be enjoyed as long as the ground continues to be used as a cemetery. People ex rel Paxton v. Bloomington Cemetery Association, 353 Ill. 534; 187 N. E. 455; Brotan v. Hill, 284 Ill. 286; McWhirter v. Newell, 200 Ill. 583; Mount Hope Cemetery Association v. New Mount Hope Cemetery Association, 246 Ill. 416; Community Mausoleum Co., 33 B. T. A. 19. The respondent agrees that the amount which the petitioner received during the taxable years may be reduced by a basis in order to determine the portion of it that represents taxable income, even though the fee was not sold. Cf. International Cigar Machinery Co., 36 B. T. A. 124; William Robert Farmer, 1 B. T. A. 711. Neither party has presented any argument showing that the basis should be different from that part of the fair market value on March 1, 1913, of the unsold land itself, which is allocable to the lots sold in the taxable years.

Section 113 (b) of the Revenue Act of 1928, which is controlling here, provides that the basis for gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be the cost of such property or its fair market value as of March 1, 1913, whichever is greater. The purpose of Congress was to permit a taxpayer to recover its capital investment on the basic date tax-free before taxing the gains. Cf. United States v. Ludey, 274 U. S. 295. The petitioner in 1930 and 1931 sold burial space in its cemetery which was a part of the land owned and held by it for such use on March 1,1913. The only property involved in those profitable transactions which had any basis for gain or loss was the land. The petitioner’s basis for gain or loss upon the disposition of that remaining burial space in its cemetery was the cost of that land or its fair market value on March 1, 1913, whichever was greater. The cost would include any improvements made up to March 1, 1913. The fair market value on March 1, 1913, was greater than cost, consequently the basis which the petitioner' is entitled to deduct before any excess realized from the disposition of lots is subject to tax, is the fair market value of the land on March 1, 1913.

The land involved in the transactions of 1930 and 1931 was a part of the whole area which the petitioner owned on March 1,1913. This fact must be kept in mind in determining the basis applicable to the space sold in the taxable years because the value of and the basis for the space sold in each year was a part of the value of the larger area. Cf. Reinecke v. Spalding, 280 U. S. 227. In other words, the total basis which the petitioner was entitled to recover from the disposition of its burial space after March 1,. 1913, was the same amount regardless of whether it should sell the entire space in one transaction or whether it should sell a few lots each year for a great many years. The sum of the bases for the space sold in the various years, after the entire area is sold, should exactly equal the value of the whole area as of March 1, 1913. That is, the sum of the bases for all of the separate burial spaces can not, under the circumstances of this case, exceed the fair market value on March 1, 1913, of all of the available burial space in the cemetery at that date considered as a whole. Cf. Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312; James Couzens, 11 B. T. A. 1040, 1161. Therefore, the result should be the same whether the basis applicable to the space sold in the taxable years be determined directly or whether the value of the .whole be first determined and a proper portion thereof allocated to the space sold in these years. Cf. Trustees of New York and Brooklyn Bridge v. Clark, 137 N. Y. 95, 32 N. E. 1054.

hTo attempt will be made to state any precise rule to be used to the exclusion of all others in determining value. The inquiry should be as broad as possible so that no important element or factor may be disregarded. Consideration should be given to all pertinent information available. The record in this case includes the opinions of three witnesses as to values — one for the petitioner and two for the Government. It also contains many facts and figures relevant to the question involved. It is our duty to determine a basis, having due regard for all of the evidence, and if that evidence indicates that the values given by the petitioner’s witness are too high and the values given by the respondent’s witnesses are too low, we must determine whatever intermediate value the evidence supports. Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259. Absolute certainty is, of course, impossible. The Board must make as close an approximation as it can. Cohan v. Commissioner, 39 Fed. (2d) 540.

The petitioner has apparently risked its case principally upon the opinion of its one witness, Little, and the theory of valuation which he adopted. That theory is that the value of any unsold lot or burial space in the cemetery on March 1, 1913, was the same as the amount which the cemetery was obtaining on or about March 1, 1913, from the sale or disposition of comparable lots or burial space. It argues that this method of valuation has been approved by the Supreme Court as the proper method of valuing cemetery lots as of March 1, 1913, and, further, that the Supreme Court has disapproved of methods whereby the selling price of comparable lots at the basic date would be discounted on account of the years required to sell the remaining lots or for any other reason. It cites in support of this argument the decision of the Supreme Court in the case of Elmhurst Cemetery Co. v. Commissioner, 300 U. S. 31; reversing the decision of the Seventh Circuit in the same case reported at 83 Fed. (2d) 4, which had reversed a memorandum opinion of the Board, and the case of Fairmount Cemetery Association v. Helvering, 92 Fed. (2d) 496, which reversed a memorandum opinion of the Board.

We disagree with the taxpayer’s interpretation of the decision of the Supreme Court in the Elmhurst case. The Circuit Court was reversed because it substituted its judgment concerning facts for that of the Board, where there was substantial evidence to support the Board’s finding of fact. Palmer v. Commissioner, 302 U. S. 63; dissenting opinion in Bogardus v. Commissioner, 302 U. S. 34. The Board in the Elmhurst case found the value as contended for by the petitioner, which was based upon sales of other lots just prior to March 1, 1913. It is one thing to say, as the Supreme Court did, that such evidence was substantial, but quite another thing to say, as the Court did not, that no other factors may be considered as bearing upon the question of value, or that the value to be found in all cases is the amount for which other comparable lots were selling on or about the basic date. If the Court of Appeals for the District of Columbia interpreted the Elmhurst case differently in Fairmount Cemetery Association, supra, then we respectfully disagree with that court, which recognized in its prior opinion in the same proceeding (79 Fed. (2d) 163), that “it is reasonable and fair to give consideration to the time element — the period of holding before a market can be had.” The time element must be applied to the whole, not to the particular lots involved in sales in any particular year, since the basis can not change from year to year. Reinecke v. Spalding, 280 U. S. 227.

The witness, Little, upon whose opinion the petitioner relies, had been in charge of the affairs of the cemetery for a great many years. He is a stockholder and an officer of the corporation. He was familiar with the cemetery, with the relative attractiveness of the various sections, and with the sales made. He was a well informed cemetery executive. Although he is interested in the outcome of this case, we do not question his integrity. He gave his opinion of the fair market value on March 1,1913, of a representative square foot of land in each section from which space had been sold during 1930 or 1931 and from which there had been sales made prior to March 1,1913. He also gave his opinion of the fair market value of a representative square foot in the other sections from which sales were made in 1930 or 1931, but from which no space had been sold up to March 1,1913. He arrived at his opinion as to the latter sections by comparing the land in each of those sections with the land in other sections from which sales had been made prior to March 1, 1913. He considered the prices which the petitioner was obtaining for burial space on or about March 1, 1913, and determined the amount per square foot which was being obtained in those sales for land in each section which he thought was fairly representative of all of the land in that section, and then stated that, in his opinion, the fair market value per square foot of all of the remaining land in any particular section was the same as the price determined for a representative square foot in that section. Thus his value for any section could be obtained by multiplying the number of remaining square feet in that section by the value which he gave for a representative square foot.

Frequently sales of similar or comparable property on or about the basic date are regarded as the best evidence of the value of the property in question. However, if that be the general rule, there are exceptions to it. Bennett Gravel Co., 10 B. T. A. 513; Alfred A. Wheeler, 11 B. T. A. 579; Gould Paper Co., 26 B. T. A. 560, 576; H. D. Shelden, 25 B. T. A. 5; Cape Henry Syndicate, 30 B. T. A. 794. The cases cited above involved the valuation as of the basic date of a large number of units which brought their owners no return until they were sold. Due to the limited demand, one could reasonably anticipate on March 1,1913, that a considerable period of time would elapse before the retail price could be realized on all of the units. They had to be marketed and the risks of the business had to be assumed. The method of valuation whereby the value of the whole was determined simply by multiplying the current retail price by the number of units was rejected. It confused the total amount of gross sales, ultimately expected, with present fair market value as of March 1, 1913, and overlooked other important factors.

The method of valuation urged by the petitioner here and used by its main witness is substantially the same as that which was unsatisfactory in the cases just cited. This petitioner had on hand on March 1, 1913, a large supply of land which it was holding for sale as burial space. There was a limited demand for burial space, and any reasonable person on March 1, 1913, would have foreseen that, in all probability, the space could not all be disposed of until many years had passed. The unsold portions of the cemetery would not carry themselves, i. e., until the petitioner could get its money out of its investment through sales, it would not receive any return on its investment. Instead, expenditures of one kind or another would have to be made by the petitioner. The cemetery would have to be maintained and sales expense would have to be paid. This discussion should not be read as indicating that the current retail prices as of the basic date for similar properties have no evidentiary value. Such sales are substantial evidence, as the Supreme Court said in the Elmhurst case, but they must be considered as parties negotiating for the purchase and sale of all of the space available on March 1, 1913, would consider them. Fair market value has been defined as the price.at which property might be expected to change hands between a willing buyer and a willing seller where neither is under any compulsion. Each of these parties would consider the favorable as well as the unfavorable factors. They would consider not only the current retail price being obtained for space in the cemetery, but many other factors such as the demand for space, the probable delay which might be expected in selling all of the property and in receiving the purchase price for that property, the risk, the selling expenses, and any other expenditures which might have to be made. They might compare the probable return on this investment with the return which might reasonably be expected with no greater risk if a like amount of money were used for some other purpose. In short they would consider all of the factors having any bearing upon the value, and they might be expected to agree upon the amount that the property as a whole was worth. The willing purchaser must have some prospect of profits to compensate him for the use of his money, time, and efforts, and for the assumption of the risk involved. The petitioner, in attempting to fix the retail sales price as the fair market value of the property, does not give due consideration to the necessary process of realizing those retail prices. Obviously, a purchaser of what the petitioner had on March 1,1913, would not pay on that basis. The case of Stern v. Paper, 183 Fed. 228, involved the value of a stock of clothing owned by a retail dealer. The court held that the term “fair valuation”, as used in the Bankruptcy Act, did not mean the retail price that could be realized in the slow process of trade involving large expenses and many risks. The same may be said in regard to “fair market value” as used in section 113 of the revenue act.

If all of the available burial space in the cemetery as of March 1, 1913, were valued, by using the figures given by the petitioner’s witness and supplementing them with comparable figures for the sections which he did not value, the result would be a value of about $6,000,000. Yet it is utterly ridiculous to suppose that the space could have been sold for as much as $5,000,000 in 1913. An investor with $5,000,000 to invest might have compared his probable returns from an investment in the cemetery with the return which he might reasonably have expected from an investment of his money in some other way which involved no greater risk. His annual income would have been $200,000 had he invested his money in safe investments at 4 percent. Cf. Simpson v. United States, 252 U. S. 547. The annual income of the petitioner from all sources as shown by its books was rather insignificant in comparison — 1912, $16,710.37; 1913, $12,864.71; best year, 1928, $85,074.68; average 1913 to 1936, inclusive, less than $41,000. The record does not indicate that the actual book earnings subsequent to March 1, 1913, were less than might have been reasonably anticipated on March 1, 1913. Prospective earnings, of course, furnish but one test of value, yet here that test demonstrates rather conclusively that the values placed upon the property by the petitioner’s witness were grossly excessive. Furthermore, the evidence in this case otherwise demonstrates the excessiveness of his valuation. Thus, not only was his method faulty, but his result was wrong.

The respondent argues with considerable force that the amount which the petitioner received in its so-called sales of lots included, in addition to the amount paid for the land alone, an amount which the petitioner had to collect at that time for the future services which it would be required to render. Although the granting of the burial privilege exhausts the petitioner’s direct source of income from the land, the petitioner obligates itself to furnish certain things in the future, as its witness, Little, stated. For example, it must continue to keep up the roads, walks, drains, fences, essential buildings, landscaping, and at least a part of the cemetery organization. The Commissioner points out that some, or all, of those expenditures would have to be made regardless of whether or not a separate amount was paid for perpetual care of the lot. The expenditures are not the same as those to be paid from the perpetual care income. Apparently the price of a lot at March 1, 1913, was the same whether or not the purchaser entered into a separate contract for perpetual care. The Commissioner argues that the petitioner well knew that it would be paid but once and would have to recover in that payment, not only a fair price for the land, but, in addition, enough to compensate it for the expenditures which it would have to make later. Therefore, he says, the amounts which the petitioner was receiving on or about March 1,1913, must be reduced to find even the current retail price of the land. The decision in the present case, however, need not and does not turn in any way upon this argument.

One witness for the respondent stated that, in his opinion, the value of the stock of the petitioner on March 1, 1913, was $300,000. The record does not show the amount of the liabilities, if any, of the petitioner on or about March 1, 1913. Apparently the witness assumed that it had no liabilities. The record shows that it had de-preciable assets on March 1, 1913, including buildings, fences, gates, roads, sewers, and some other equipment. The petitioner had a right to recover, and apparently was recovering through depreciation, the fair market value as of March 1, 1913, of its depreciable assets. If the value of the capital stock and the amount of the liabilities were known, the value of the depreciable assets might be deducted and the value of the land determined. The land and the improvements, however, had cost the petitioner far more than $300,000 prior to March 1, 1913, only a small part of the burial space had been disposed of up to March 1, 1913, land values were increasing, and there is no doubt that the fair market value of the remaining space was far greater than the value attributed by this witness to the entire cemetery properties of the petitioner.

The other witness for the respondent, who expressed an opinion of value, was a theorist. He had had no experience in or special knowledge of sales of comparable properties. His method was to examine the records of the petitioner showing sales, expenses, earnings, and other details of the business to anticipate the profits which might reasonably be expected in future years, and, by means of a formula, to reduce those future profits to their present worth as of March 1, 1918. Earnings are frequently an important aid in determining values. 'A formula need not be cast aside merely because it is a formula. It may be helpful, if there is evidence showing its applicability and the proper factors to be used. The same may be said of various discount methods. But in the present case we are unable to say from the demonstration made by this witness that the values determined by him may be safely relied upon as the actual fair market values as of March 1, 1913. There is also evidence of the purchase price brought by nearby vacant land at times somewhat remote from March 1,1913. This latter evidence is not very helpful.

The decision in this case is difficult because the parties have failed to introduce the testimony of well informed and sound witnesses on valuation. However, the evidence in the case, including records of sales, expenses, earnings, dividends, and other information, is such that the Board must render a decision no matter how great the difficulty. Like a jury, it must render its decision on the evidence. It has used its best judgment to fix a reasonable figure within the bounds of the evidence, fully conscious that others may differ and that some forceful objections to its determination may logically be made from the evidence. But the same would be true no matter what the determination of the Board.

In determining the proper amount to be used as a basis in 1930 and 1931 for reducing the amount realized in order to arrive at the net income from the transactions, we have also determined a value for the entire unsold burial space as of March 1, 1913. We have considered the methods suggested for allocating a portion of that basis to the various subdivisions. The primary contention of the petitioner, of course, has been that the Board should follow the opinion of its witness and determine directly a certain value for a representative square foot- of ground in each section in which sales were made in the taxable years. The Commissioner, on the other hand, has merely divided the cemetery into improved and unimproved land. Our computations indicate that the method urged by the Commissioner will give the petitioner a slightly larger deduction for each year than would be obtained by dividing the total value among the various sections in proportion to their relative values as indicated by the petitioner’s witness. Therefore, we have followed the Commissioner’s method in checking our figures for the areas sold. The final amounts which we have determined for the two years áre given in round figures. This is partly because we realize that our computations are at best not accurate and the few odd dollars, one way or the other, are much less than the probable percentage of error to which any determination or computation which we could make would be subject. We have not made the value which we have determined for the entire available burial space as of March 1,1913, a part of our findings. One reason for that deliberate omission is that such a finding is not necessary, since the case is determined, not by the total basis, but by the part applicable to the area sold in 1930 and 1931.

The record shows that between March 1, 1913, and December 31, 1931, the petitioner expended $28,242.57 for land improvements, exclusive of sewers and roads. The petitioner claims that 10 percent of these expenditures should be allowed as a further reduction of the amount realized from the sales made in 1931. A witness stated that he thought 10 percent would be a proper amount to allocate to the year 1931, but he did not give satisfactory reasons for his opinion. It does not appear just what portion of the cemetery benefited by the improvements in question or that the lots sold in either of these years represented 10 percent of that area. The record does not show whether or not any part of the $28,242.57 expended for land improvements was charged off as an expense in prior years. If the record justified any increase of the basis on account of these expenditures, we would make some allocation, but, under the circumstances, the basis is not to be increased in this manner. Cf. Firemens Insurance Co., 30 B. T. A. 1004.

The only other issue in the case is whether or not the petitioner may deduct $1,163.06 from its income for 1931 as a debt ascertained to be worthless and charged off. This debt represented the unpaid interest on a mortgage which the petitioner had accrued for the years 1928, 1929, and 1930. The record does not show that this debt became worthless in 1931. It does not show what information the petitioner had when it charged off the debt. It shows that the property itself was not worth the face amount of the mortgage some years after the close of 1931. Obviously, a taxpayer has to make a better showing than is made in this case before the Board can reverse the Commissioner’s disallowance of a bad debt item.

Decision will Toe entered wnder Bule 50.

       It would also prepare the way for a double deduction, since it would not eliminate from the basis the cost of sales which is separately deductible.

         The figure of $6,000,000 is but an approximation. The record does not show exactly how much burial space the petitioner had in the cemetery on March 1, 1913, but a reasonably accurate computation can be made. The witness did not give values for some of the sections and values had to be assigned to those sections comparable to the values which the witness gave for other comparable sections.

       The record shows that the petitioner’s gross income from sources other than the sale of land was at least equal to its gross income from sales of-land, and the Commissioner argues that the earnings from other sources should not be considered as having any effect upon the value of the land. We think, however, that the willing buyer and the willing seller would consider the possibility of those additional earnings and the effect of that circumstance upon the value of the land, gee, however, Gatliff Coal Co., 8 B. T. A. 726; affd., 36 Fed. (2d) 545.


author: OppeR :

text:
    National Contracting Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78882.
    Promulgated April 14, 1938.

      H. V. Mercer, Esq., for the petitioner.

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

OppeR :

Issues (I) and (5). — The first issue is whether there was a failure to file a return as defined in the Revenue Act of 1926 so that respondent’s determination of a deficiency has not been barred by the statute of limitations. For convenience the fifth issue, whether the 25 percent addition to tax for failure' to file a return (imposed by section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926) is collectible, will be discussed at the same time.

Neither the “tentative return” filed by the petitioner in March 1926 nor the further document filed by it shortly thereafter and not designated “tentative” contain the itemized statements of gross income and deductions and credits required by section 239 of the Revenue Act of 1926. These documents were not the returns required by the act and consequently petitioner did not thereby set the statute of limitations in operation. Florsheim Brothers Drygoods Co. v. United States, 280 U. S. 453. Nor did the examination or audit of petitioner’s books by the Commissioner have that effect. Cem Securities Corporation, 28 B. T. A. 102; affd., 72 Fed. (2d) 295; S. Feather Co., 28 B. T. A. 432.

The real issue between the parties is whether the revenue agent’s report, and accompanying papers, introduced as Joint Exhibit 3, either separately or collectively constitute such a return within the meaning of the act as would have the effect in 1927 of setting the period of limitation in operation so that by 1935, the date of respondent’s 90-da,y letter, further action by respondent was barred. No cases are cited by counsel for either side which appear to be directly determinative of this question. It is clear, however, that the burden of proof of any facts necessary to sustain the defense of the statute of limitations is upon the petitioner. M. A. Nicholson, 22 B. T. A. 744.

Joint Exhibit 3 consists of four parts — a revenue agent’s report of the ordinary type covering an examination of the books of the petitioner ; a letter from the office of the internal revenue agent in charge transmitting a copy of this report to the taxpayer; a form (No. 875) acknowledging receipt and stating acceptance of the examining officer’s findings which was submitted for the taxpayer to sign; and a copy of a letter from the petitioner acknowledging receipt of the revenue agent’s report. The letter of transmittal is headed “Office of Internal Revenue Agent in Charge.” It is signed “G. W. Kurtz, Internal Revenue Agent in Charge.” The preliminary statement of the agent’s report begins:

Tears Additional Tax Overassessment
1925 - -
Net additional tax or overassessment: None.

The acknowledgment of receipt signed by petitioner refers to “report covering the examination made by Revenue Agent Alfred Greguson of the income tax returns of the above-named taxpayer for the year 1925.” (Italics ours.) “Assessments are frequently based on audits of the Income Tax Unit. However, the purpose of these audits is not to eliminate the necessity of filing the return but to safeguard against error or dishonesty.” Florsheim Brothers Drygoods Co. v. United States, supra.

It will thus be seen that nothing appears in this exhibit which purports to treat any part of it as a return. It is true that the revenue agent in his report says: “The result of this examination was explained in detail to Mr. J. O. Shulind, President of the company, and with [sic] Mr. A. G. Shulind, Vice President of the company. They concurred with the examining officer in all findings.” But the form attached to the report (No. 875) was evidently not signed on behalf of the corporation, as it appears in Joint Exhibit 3 in blank. This form includes the statement “the undersigned has reviewed this report and hereby accepts as correct the finding of the examining officer.” Failure to execute this statement precludes petitioner from taking the position, even if it were otherwise able to do so, that its formal acceptance of the revenue agent’s report resulted in the adoption of that report by it as its return.

Petitioner calls attention to the following language in section 3176 : “Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes.” This provision, far from leading to the conclusion advanced by the petitioner, appears to require an exactly contrary result. No evidence whatever was introduced by petitioner that any part of Joint Exhibit 3 was either subscribed by a collector or deputy collector or subscribed or approved by the Commissioner. A ruling promulgated in 1925 specifically denies to revenue agents and inspectors any authority to exercise the power of filing returns for delinquents under section 3176. S. M. 3389, C. B. TV-1, p. 49. Even had the document purported to be a return, which as we have seen it did not, no action by an unauthorized subordinate by way of approval or subscription could have had the statutory effect.

It follows that petitioner has failed to sustain the burden of proof that any return whatever was filed at any time which so complies with the requirements of the Revenue Act of 1926 that the statute of limitations constitutes a bar to respondent’s action.

This conclusion necessarily results in the further consequence that the 25 percent additional tax is applicable. It is only “when a return is filed after such time” that, if there is reasonable cause and absence of willful neglect, the additional tax is not imposed. Cf. Jockey Club, 30 B. T. A. 670. Here no return was ever filed. In such a case imposition of the additional tax is mandatory. Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519.

Issue (8). — It is not entirely clear from the pleadings and briefs upon what theory the respective parties are proceeding. The Commissioner’s 90-day letter states: “The Bureau has held that the alleged assignments were invalid, and that the profits from these contracts constituted income to you. * * * In order to deduct such payments from gross income it must be shown that they represented ordinary and necessary expenses of doing business, * * - The petition alleges that the Commissioner “erred in holding that a deduction of $73,500 should not be allowed to the taxpayer on account of amounts paid by it to Tollef Jacobson, A. G. Shulind and J. O. Shulind paid to them in 1920 by reason of a certain resolution dated May 16, 1920 and assignment dated June 10, 1920 and his ruled invalidity of such resolution and assignment and that as a result that the money so paid was not an ordinary or necessary business expense. * * (Italics ours.)

It is, however, sufficiently apparent that the questions are: Whether the assignment was valid; whether, even though valid as between the parties, the assignment operated as a valid transfer of income from the petitioner for tax purposes; and whether (if the assignment be invalid or if despite its validity amounts received by petitioner must nevertheless be included within its gross income) the circumstances under which the payments were made by the petitioner made them deductible as ordinary and necessary expenses of its business.

Whatever may have been the form of the transaction, it is evident from the action of the parties under it that the assignment in question was no more than an assignment of petitioner’s expected profits. The contract, itself forbade its assignment without the consent of the school district and no such consent appears; the work was done, even after the assignment, by the petitioner; petitioner’s books carried items in connection with these contracts after, just as before, the assignment; and, perhaps most significantly, even in the present proceeding petitioner treats the contracts as its own and attempts to secure the benefit of expenses and deductions connected with the contracts during periods subsequent to the date of assignment. These facts sufficiently distinguish the present proceeding from Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777.

Whether the assignment was valid and particularly whether it could be enforced as between the parties does not now call for decision. Suffice it to say that at most the assignment was a transfer of a future right in earned income without any accompanying transfer of the services or property from which the income is derived. Such a transfer is insufficient to avoid the requirement that the proceeds be included in gross income by the assignor. Burnet v. Leininger, 285 U. S. 136; Van Meter v. Commissioner, 61 Fed. (2d) 817; Saenger v. Commissioner, 69 Fed. (2d) 631. See also Traylor Engineering & Manufacturing Co. v. Lederer, 271 Fed. 399.

There remains for discussion however the question whether the amounts paid by petitioner to the three individuals were ordinary and necessary expenses of carrying on petitioner’s trade or business. Financing is of course ordinary and necessary in many business enterprises. However, the burden of proof is on the petitioner to show “that extraordinary, unusual and extravagant amounts paid by a corporation” are in reality “ordinary and necessary expenses.” Botany Worsted Mills v. United States, 278 U. S. 282; Alexander Sprunt & Son, Inc. v. Commissioner, 64 Fed. (2d) 424.

The evidence shows that Tollef Jacobson advanced nothing to the corporation in consideration of the $24,500 paid to him under the assignment. He was a banker who sometimes served as the personal surety required by the companies which bonded the petitioner, and the petitioner’s borrowings were largely obtained from Jacobson’s banks or through his banking connections. It was for his continued cooperation in these matters that he was paid $24,500. While these were services rendered to the petitioner by Jacobson, there is no showing of details as to their time or extent, nor of their entire applicability to contract 60-63-64, nor that $24,500 or any other sum represented their reasonable value. The statute specifically limits deductions for compensation for services to “reasonable” allowances, and since there is no showing that Tollef Jacobson’s compensation was reasonable the deduction therefor can not be allowed. Reynard Corporation, 30 B. T. A. 451.

The payments to A. G. Shulind and J. O. Shulind did not purport to be compensation for services, but payments in consideration of loans to the petitioner. The advances totaled $33,100, for which the two individuals received $49,000 from the petitioner within the same year, chiefly in stock. The advances remained as liabilities owing to them as open accounts on the books of the petitioner. The two Shulinds were its principal stockholders. In such a case the petitioner must show that it is not merely distributing profits to its stockholders in another guise. L. Hyman & Co., 21 B. T. A. 159, 167; Moxa Building Co., 31 B. T. A. 457; affirmed per curiam, 79 Fed. (2d) 1004; Samuel Heath Co. v. United States, 2 Fed. Supp. 637; C. S. Ferry & Son, Inc., 18 B. T. A. 1261. Far from showing this, what evidence there is indicates the contrary. One significant circumstance is that an issue of preferred stock accounting for $25,000 of the payment to the Shulinds is recorded on May 20, 1920, contemporaneously with the advances and prior to the actual assignment under which it purports to be authorized, which was not executed until June 10, 1920. Again, in addition to these payments, a 20 percent cash dividend on the common stock was declared as of the end of the same year. Finally, there is the disproportionate return which the compensation represents compared to the amount of the advances. The petitioner failed to show the impossibility of borrowing money elsewhere more cheaply. We do not accept as sufficient proof the general and unsupported statement that the petitioner “had no other means of financing itself at that time.”

We conclude therefore that whether the transaction entered into be considered from the standpoint of possible reduction of gross income on the one hand, or a deduction on account of ordinary and necessary expense on the other, the petitioner has not sustained its burden of proof that respondent’s determination was erroneous.

Issues (3) and (4-). — For convenience of discussion issues (3) and (4) will be treated together, since we are of the opinion that they involve two aspects of the same question. Issue (3) is the claimed deduction of $60,204.16 paid or incurred up through. 1925 as expenses growing out of an injunction proceeding against the petitioner with respect to contract 60-63-64; ai^d issue (4) is a claimed bad debt of $21,665.15 resulting from a failure to recover that sum which had been accrued in 1919 as a claim partly for profits and partly for reimbursement of expenditures under contract 53, the performance of which was permanently halted by injunction in 1919.

The parties are agreed that the petitioner is properly subject to the completed contract provisions and that contract 60-63-64 was completed in 1925; and the petitioner’s claim is not disputed that contract 53 was completed so far as the petitioner was concerned in 1919 and was so treated. It is not, therefore, necessary for us to consider whether the petitioner might, under the completed contract method of accounting and in accordance with a consistent practice, have treated each contract as open until all claims arising out of it were settled (cf. Rice, Barton & Fales, Inc. v. Commissioner, 41 Fed. (2d) 339, 341; Carolina Contracting Co., 32 B. T. A. 1171). No such contention is made by the petitioner and no showing of any such attempted treatment or consistent practice is in evidence. The contracts were, therefore, properly treated as closed in 1925 and 1919, respectively, when the work under them was completed. See National Contracting Co., 25 B. T. A. 407; affd., 69 Fed. (2d) 252. We are concerned, however, with the question of the correct method of accounting for the two contracts when completed in 1925 and 1919, respectively, since that appears to be determinative of both of the deductions which are claimed under these issues by the petitioner.

In the case of contract 53 the petitioner’s claim for profits and reimbursement for expenditures was accrued by the petitioner when the contract was completed in 1919. In the case of contract 60-63-64 no accrual of the petitioner’s claim for reimbursement of the injunction expenditures incurred in the performance of that contract was made when the contract was completed in 1925. Both items were disputed claims in litigation, so that no reason appears for the petitioner’s failure to show a consistent treatment in closing its contracts. Only one of the two methods can in any event be permissible; the petitioner must at least be held to a uniform practice, and if the accrual of the litigated claim in the one case is not proper the same result must follow in the othei\

Under the completed contracts method of accounting the ordinary rule in the case of items outstanding when a contract is “completed” is that “it is the right to receive and not the actual receipt that determines the inclusion * * Unless this accrual of outstanding items is made in the year of completion, the purpose of the completed contracts method, namely, to account for the entire results of a contract at one time, is defeated. However, as a general principle, when outstanding items are “contingent and uncertain,” such as disputed claims in litigation, accrual is not proper. Commissioner v. John Thatcher & Son, 76 Fed. (2d) 900; North American Oil Consolidated v. Burnet, 286 U. S. 417. While no case has apparently purported to determine this question under the long term contracts method, no reason appears why the rule should be less applicable to that type of accrual. And that this procedure may leave the exact profit or loss open for future adjustment is not fatal. W. J. Scholl Co., 30 B. T. A. 993, 997.

We conclude therefore that it was improper for the petitioner to accrue in 1919 its outstanding claim under contract 53. Consequently no deduction can be allowed in 1925 for the failure to recover $21,-665.15 thereof. Commissioner v. John Thatcher & Son, supra. The $60,204.16 claimed as a deduction under contract 60-68-64 is, however, allowable since it represents expense actually paid or incurred and not disputed. Commissioner v. John Thatcher & Son, supra. The petitioner was not required to accrue in 1925 an equal amount representing its outstanding claim for reimbursement which would have offset the deduction; nor, what would have been similar in result, to suspend the accrual of this item of deduction until the outstanding claim was finally determined.

Decision will he entered u/nder Rule 50.

       (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. * * *

       Revenue Act of 1926—
      Sec. 277. (a) Except as provided in section 278—
      (1) The amount of income taxes imposed by this Act shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
      *******
      Sec. 278. (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. * » *

       Section 3176, Revised Statutes, as amended' by section 1103, Revenue Act of 1926 :
      “If any person, corporation, company, or association fails to mate and file a return or list at the tíme prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. * * * ”

       Section 3176, Revised Statutes, as amended by section 1103, Revenue Act of 1926:
      “ * * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * ”

       Revenue Act of 1926—
      Sue. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
      (1) 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 * * *.

       Art. 334, Treasury Regulations 74. See National Contracting Co., Docket No. 79290 (memorandum opinion) decided herewith.

        Cameron, Joyce & Co. v. United States, - Fed. Supp. - (U. S. Dist. Ct., Iowa, Dec. 7, 1937). See Owen-Ames-Kimball Co., 5 B. T. A. 921, 927.

        Cameron, Joyce & Co. v. United States, supra; Vansant v. Crooks, 43 Fed. (2d) 166; see Rosa Orino, 34 B. T. A. 726, 730.

       See James C. Ellis, 16 B. T. A. 1225, 1228.


author: SteRNhagen':

text:
    John Edward Rovensky, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91209.
    Promulgated April 15, 1938.

      George H. Craven, Esq., for the petitioner.

      Lloyd W. Creason, Esq., for the respondent.
   OPINION.

SteRNhagen':

For 1934 the Commissioner determined a deficiency of $3,783.14 in the petitioner’s individual income tax. The petitioner contests the holding that the income of a trust, $14,784, is taxable to him because, in the words of the deficiency notice:

* * * According to the terms of the trust instrument it is evident that you had retained a certain interest in the corpus of the trust and, therefore, same is held in. article 166, Regulations 86, to constitute a revocable trust, the income of which is taxable to you as grantor.

The facts are all stipulated and for the purpose of this decision may be regarded as found in the language of the stipulation. The essential question is whether by the terms of the trust instrument there is vested in the petitioner as grantor of the trust such a power as is described in section 166 of the Eevenue Act of 1934, thus requiring that the trust income shall be attributed to him.

The petitioner, in 1930, established a trust for the benefit of his seventeen-year old daughter. Until she reached twenty-one, the income was to be used for her maintenance and the excess accumulated for her. Thereafter until she reached forty, the income was to be used for her maintenance and the excess currently paid over to her. At forty, the trust was to terminate and the corpus and accumulated income was to be transferred to her. The trust instrument is elaborate and covers a multitude of conceivable circumstances. The provision which comes nearest to that described in section 166 of the statute is (FiRst, B), after making the trust irrevocable during the lives of the daughter and wife, it is provided that if the daughter shall die before reaching the age of forty or if the wife shall die, the “grantor” has the power to terminate the trust by a writing signed by himself and one of his brothers or his sister, whereupon the trustee shall transfer the trust fund either to the grantor or to such other person as the grantor, together with a brother or sister, may designate. The other sets of circumstances in which the grantor may reacquire the trust fund are all more remote than this.

This is not a power to revest, except upon the contingency of the daughter’s death before reaching forty and the grantor’s surviving her. Since the contingency alone makes possible the exercise of the power, it is no power at all until the contingency occurs, or at most an incipient or inchoate power, Sugden on Powers, vol. 1, §§ 320, 321. It is a mere hope or expectancy which may never attain reality. This hardly fits the statutory language, “Where at any time the power to revest is vested.” Here, rather, the poAver to revest may possibly at some future time become vested; which is far from the present indicative of the statute.

The notice of deficiency indicates a conception of the statute looser than its language justifies. It is not enough that one may be said in a layman’s way to have “retained a certain interest in the corpus of the trust”, nor is it correct or sufficient to say that “therefore same is held to constitute a revocable trust” within the regulations, even if the regulations are assumed to reflect the statute. The statute must be applied, if not strictly according to its language, Kaplan v. Commissioner, 66 Fed. (2d) 401; Warren H. Corning, 36 B. T. A. 301 (on review C. C. A., 6th Cir.), at least according to the fair legal interpretation of the words used. A vested power has a legal significance which Congress did not disregard. To say that it is met by a finding of “a certain interest” which in turn is held to “constitute a revocable trust” is to distort the language used to the point of depriving it of any meaning, and to give the administrator a power to rewrite the statute more broadly than Congress obviously intended.

The respondent has filed no brief, but at the hearing cited Warren H. Corning, supra, as sustaining Regulations 86, article 166. That decision involved a peculiar case, substantially different from this in circumstance, and the Board, considering such unique facts, said that the “regulations are reasonable in so far as they apply to the facts in this proceeding.” This is not a blanket holding that article 166 of the regulations is to be regarded as the criterion of decision in all cases in substitution for the statute. The Board’s function is but the adjudicative one of deciding how the law applies to the particular facts of each controversy, and in conformity with that recognized limitation the Corning decision expressly dealt only with the impact of the regulations on the particular facts.

The facts in the Coming case have little in common Avith those here, and there is no occasion to doubt the validity of that decision. But the respondent places reliance here upon this statement (p. 307):

Petitioner thus reserved the vested right to revest in himself the corpus of ’both trusts at some time in the future. The power to exercise this right, not its existence, during the tax year, was contingent.

Such a statement could not be made here, for what the present petitioner had was not a vested right but the hare possibility that a power might spring up in the future upon his young daughter’s death before his own. The language quoted from the Corning opinion may not be used to require that such a contingent power in the grantor is within section 166. See William E. Boeing, 37 B. T. A. 178.

The Commissioner’s determination is reversed.

Reviewed by the Board.

Judgment toill be entered under Bule 50.

Leech dissents.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.

       It is manifest from the whole instrument that the power to revoke in subdivision First B, so far as it is affected by the life of the wife, does not arise except in the event fif .the death of the daughter before reaching forty.


author: Black:

text:
    Joseph R. Seeds, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87155.
    Promulgated April 15, 1938.

      George F. Lowenthal, Esq., for the petitioner.

      Sidney U. Hiken, Esq., for the respondent.
   OPINION.

Black:

The Revenue Act of 1934 made considerable changes in the treatment of capital gains and losses provided in the 1932 Act and prior acts. After extended consideration of the subject by both the House and the Senate, the results were statutory provisions which depart from the theory of the prior acts in that capital gains and losses are taken into account in computing net income. Thus if a taxpayer’s income tax return shows capital gains, these are subjected to both the normal tax and the surtax instead of the flat rate of 12y2 percent under the prior acts. However, both capital gains and losses are limited to certain percentages when so taken into account, the percentage being dependent upon the period during which the capital asset sold has been held. For a full discussion of the changes made in the 1934 Act from the provisions of the 1932 Act and prior acts, see paragraph. 19.03, volume 2, Paul and Mertens Law of Federal Income Taxation.

Section 117 (a), (d) of the Revenue Act of 1934, dealing with capital gains and losses, is printed in part in the margin.

The Treasury has promulgated Regulations 86, dealing with the tax imposed on income by the Revenue Act of 1934. Article .117-2 thereof, which deals with limitations on capital gains and losses, is printed in the margin.

The respondent has followed these regulations in determining the deficiency. This much petitioner concedes, but petitioner contends that the regulations are wrong; that they limit a taxpayer’s deduction for capital losses to an extent not warranted by the applicable statute. Petitioner contends that when Congress wrote 117 (d) it failed to qualify the word “gain” with the word “recognized” so that it would read “recognized gain”, and that because of this failure, a taxpayer who has had capital losses of a sufficient extent, figured on the percentage basis, to exceed his full capital gains as distinguished from the percentages of capital gains recognized in 117 (a), is entitled to. a deduction of his capital losses, thus figured on the percentage basis, to the full extent of his capital gains without reference to the percentages provided in section 117 (a), plus $2,000.

We do not agree with this contention and sustain the Commissioner in following the method prescribed in article 117-2 of Regulations 86, supra.

In construing the meaning of section 117 (d) we think the entire section must be read, and when that is done it seems reasonably clear to us that it was the intent of Congress to allow to a taxpayer a deduction for capital losses computed in accordance with the percentages provided in the act, equal to the amount of his capital gains computed also on the percentage basis. If a taxpayer should have capital losses figured in this manner greater than his capital gains figured on the same basis, then he is entitled to a deduction of such excess but not to exceed $2,000. That is the limitation which we think Congress intended to provide in section 117 (d).

In the instant case petitioner had capital gains of $2,848.65 in 1934 after applying the percentages provided in section 117 (a). He had capital losses figured in the same manner of $8,891.63. Therefore we think petitioner is entitled to a deduction of his percentage capital losses to the full extent of $2,848.65, the amount of his percentage capital gains, plus $2,000. This is the deduction which the Commissioner has allowed, and we sustain it.

H. R. 7835, which later became the Revenue Act of 1934, was reported to the House of Representatives on February 12, 1934, and, as reported to the House and passed by that body, it would have allowed capital losses as deductions to the extent only that they did not exceed capital gains both figured on the percentage basis as provided in the bill. See Ways and Means Committee Report No. 704, 73d Cong., 2d sess. The Senate amended the provision limiting the allowance of capital losses as a deduction from capital gains to the extent that they did not exceed capital gains both figured under the provisions of section 117 (a), by permitting an additional deduction of not more than $2,000.

Report No. 558 of the Senate Finance Committee, to accompany H. R. 7835, says with reference to the provision now under consideration :

Third, in the case of the general limitation provided in the House bill that capital losses should only he allowed to the extent of the capital gains, your Committee recommends that $2,000 of such excess of losses may be charged off from ordinary income. This protects the little taxpayer with little or no capital from being assessed a tax which he may be unable to pay. * * *

We think, taking into consideration the language and evident purpose of the entire section 117, Revenue Act of 1934, that Congress meant under the provisions of section 117 (d) to allow to a taxpayer a deduction of his capital losses to the full extent of his capital gains, both figured under the percentage basis as provided in section 117 (a) and then if the capital losses thus figured exceed the capital gains thus figured, the taxpayer is allowed an additional loss up to $2,000 if he has that much loss taken into account under the provisions of section 117 (a).

Reviewed by the Board.

Decision will ~be entered for respondent.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      ****** *
      (d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges.

         Art. 117-2. Limitations on capital gains and capital losses. — In computing the net income of a taxpayer, other than a corporation, the amount of the gain or loss, computed under section 111 and recognized under section 112, upon the sale or exchange of a capital asset shall be taken into account only to the extent provided in section 117 (a). The percentage of the gain or loss to be taken into account ranges from 100 per cent to 30 per cent, depending upon the period for which the asset was held. For instance, if unimproved real estate which is a capital asset, purchased for $20,000, is sold for $25,000 after having been held for more than 10 years, only 30 per cent of the recognized gain ($5,000), or $1,500, shall be taken into account in computing net income; or if such property was sold for $14,000, only 30 per cent of the recognized loss ($6,000), or $1,800, shall be taken into account.
      Section 117 (d) provides a limitation on deductions for capital losses affecting ail taxpayers including corporations, that is, losses from sales or exchanges of capital assets shall be allowed as deductions only to the extent of $2,000 plus the gains from such sales and exchanges. However, in the ease of certain banks or trust companies, this limitation is subject to the modification provided in that section.
      The provisions of this article may be illustrated by the following example:

        Example: During the taxable year, A, an individual, had gains and losses from sales and exchanges of capital assets as follows (the deduction for the losses not being prohibited by any section of the Act other than sections 111, 112, and 117) :

      Applying the limitation of section 117 (d), the losses of $7,600 taken into account are allowable as a deduction only to the extent of $6,400 ($2,000 plus the gains of $4,400 taken into account).


author: HaeROn: SteRNi-iageN,

text:
    Adolph Bernard Spreckels, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85651.
    Promulgated April 15, 1938.

      Walter Slade, Esq., for the petitioner.

      E. A. Tonjes, Esq., and Frank M. Thompson, Jr., Esq., for the respondent.
   OPINION.

HaeROn:

(1) The amount of $625 attorney’s fees paid from petitioner’s funds by his guardian in 1932 was a personal expense, which is not deductible. The expenditure was not a business expense. Clara Hill Lindley, 26 B. T. A. 742; affd., 63 Fed. (2d) 807. This issue involves the same question as was before the Supreme Court in Van Wart v. Commissioner, 295 U. S. 112, and that opinion of the Court is controlling here. The respondent’s determination in this issue is sustained.

(2) The second issue in this proceeding involves the question whether a trust or a beneficiary of a trust is taxable in 1982 on income of the trust for that year paid to the beneficiary in that same year. Bespondent contends that the income is taxable to the beneficiary under the provisions of section 162 (b), Bevenue Act of 1932. We agree with respondent’s contention.

Subsection (b) of section 162 is set forth in the margin. This subsection is one of three subsections prescribing the manner of determining the net income of a trust for taxation of income of the trust. It is phrased in positive terms and not permissive terms, viz: “There shall he allowed as an additional deduction * * *, but the amount so allowed as a deduction shall he included in computing the net income of the beneficiaries whether distributed to them or not?’ (Italics supplied.)

Turning to what deduction shall be allowed a trust and shall be included in the net income of a beneficiary, we find the following specified : “the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries.”

In this proceeding, we are concerned with the question of who is taxable upon the amount of $8,042.65 in the taxable year, the fiduciary or the beneficiary. This amount represents income of a trust received by it during tbe taxable year in the interval between January and October. There is no question regarding the nature of the amount involved. It is income from principal of a trust. The trust provides that any distribution of principal to the beneficiary, who is our petitioner, shall be made upon such contingencies as the facts show will be subsequent to the taxable year, i. e., on or after March 9, 1934, when petitioner’s younger sister attains her legal majority. Also, the trust does not provide that any of the net income of the trust should be added to the principal of the trust. The trust, by its terms, directs the manner of distributing income of the trust. Congress intended that income of trusts should be taxed as other income is taxed and so provided in sections 161 and 162 of the Eevenue Act of 1932. We conclude that the amount of $8,042.65 in question was income. See Irwin v. Gavit, 268 U. S. 161; Codman v. Miles, 28 Fed. (2d) 823.

Turning to the question of who is taxable for this income, we deem it pertinent to observe that consideration of the issue presented should be given with recognition of the oft-stated principle that taxation is a practical matter. The trust and the petitioner had the same calendar year and at the close of that year each was required to prepare his respective income tax return. At the close of the year 1932, one contingent right, referred to in the trust, had matured, namely, the petitioner, a beneficiary, had attained his legal majority. His right to receive current income of the trust held for him during the period from January 1 to October 30,1932, had become an enforceable right to receive payment of such income. Within the taxable year it became the duty of the fiduciary to distribute such income to our petitioner. Cf. Commissioner v. Stearns, 65 Fed. (2d) 371. In fact, he had received it; the fiduciary had paid it to him. While we do not have the trust before us as a petitioner, we may refer to the intent of the statute as to what deductions it allows the trust to receive in computing its taxable net income. It appears to be clear that section 162 (b) allows the trust a deduction for the amount of its income for the taxable year which is distributed in the taxable year to a beneficiary.

The meaning of sections 161 and 162 has been considered before now. Those sections are not new in the revenue acts. Sections 161 and 162 of the Revenue Act of 1932 are substantially the same as sections 219 (a) and (b) of the Revenue Act of 1924. This latter section was involved in Butterworth v. Commissioner, 63 Fed. (2d) 944, which was affirmed by the Supreme Court in Helvering v. Butterworth, 290 U. S. 365. In the latter case the Supreme Court made the following statement upon the meaning of the pertinent statutory provisions:

The evident general purpose of the statute was to tax in some way the whole income of all trust estates. If nothing was payable to beneficiaries, the income without deduction was assessable to the fiduciary. But he was entitled to credit for any sum paid to a beneficiary witMn the intendment of that word, and this amount then became taxable to the beneficiary. [Italics supplied.]

We consider that the proper determination of the issue here turns upon the fact that within the taxable year of the trust the $8,042.65 income it had received in that year was properly payable to and paid to our petitioner and that the trust was entitled to deduction from its gross income for such amount in computing its taxable trust income. This being so, the statute prescribes that the beneficiary shall include in his net income the amount of such deduction. The amount in question was distributed to our petitioner and we conclude that he is taxable for it.

In arriving at the above conclusion, we have followed the reasoning expressed in Helvering v. Butterworth, supra. The petitioner relies upon Roebling v. Commissioner, 78 Fed. (2d) 444, which reversed the Board’s decision in Robert C. Roebling, 28 B. T. A. 644. The following is noted. In this proceeding the amount in question, distributed to the petitioner, was income of the trust and it was distributed to petitioner as income. In the Roebling case, a will created a trust by the terms of which the trustees were to pay to a beneficiary a share of principal with any accumulated income thereon. The Circuit Court of Appeals construed the terms of the trust to mean that accumulated income of a trust came to the beneficiary as part of the principal of the trust. Both principal and accumulated income of the trust were distributed to the beneficiary in the taxable year. The court held that Avhat had been income to the trust became something totally different when it was received by the petitioner and that, since the petitioner did not receive “income” from the trust, he was not taxable upon the distribution to him by the trustees. The Butterworth case dealt with current income of a trust paid to a beneficiary. This proceeding, likewise, is concerned with current income of a trust paid to a beneficiary. We find no terms in the trust involved here which change the character of what was income of the trust to something else when distributed to our petitioner. He received no principal from the trust in the taxable year. We, therefore, believe that there are differences in the facts in this proceeding which distinguish it from the Roebling case. However, to the extent that this proceeding is not distinguishable from the case of Roebling v. Commissioner, supra, we respectfully decline to follow the conclusions reached by the Circuit Court.

Reviewed by the Board.

Decision will be entered for the respondent.

SteRNi-iageN,

dissenting: The amount of the trust income which the petitioner received in 1932 was, in my opinion, not what the statute describes as income “which is to be distributed currently by the fiduciary to the beneficiaries.” The distribution was entirely because the beneficiary had reached his majority, and I do not think the word “currently” can be appropriately applied to it. The conclusion of Roebling v. Commissioner, 78 Fed. (2d) 444, seems to me to he correct.

Arundell, Smith, Van FossaN, and Murdock agree with this dissent.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
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      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

       SEC. 161. IMPOSITION OP TAX.
      (a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
      (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
      (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
      (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.