author: Kern :

text:
    Airtherm Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100808.
    Promulgated February 28, 1941.

      Joseph H. Deehen, Esq., for the petitioner.

      Carroll Walker, Esq., for the respondent.
   OPINION.

Kern :

This proceeding involves income tax liability for the fiscal year ended March 31,1937. The Commissioner determined a deficiency of $259.66, and in this proceeding petitioner alleges error in such determination to the extent of $215.66. The sole question now presented is whether any written contract entered into and executed by the petitioner restricted the payment of dividends during the taxable year. Subsequent to the filing of the petition respondent conceded that petitioner is entitled to accrue for the fiscal year ended March 31, 1937, a sum of $130 as a capital stock tax, and, consequently, this item is no longer in issue.

The facts in the instant proceeding have been stipulated in toto and, as stipulated, are adopted by us as our findings herein. A short statement of the material facts necessary to an understanding of the issue presented is as follows:

The Airtherm Manufacturing Co., petitioner, was incorporated under the laws of the State of Missouri on April 21,1936, as the result of a written agreement entered into between A. W. D. Weis, the principal creditor of the Old Airtherm Co., and the Machinery & Welder Corporation, hereinafter sometimes referred to as the party of the first part. This agreement, entered into March 25, 1986, contained inter alia, the following clauses:

If the old Airtherm Co. accepts the Machinery & Welder Corporation’s offer to purchase its property, then it is agreed between the parties as follows:
1. The party of the first part agrees to cause to be incorporated under the laws of the State of Missouri a new corporation to be known as the Airtherm Manufacturing Co. [this petitioner] to which corporation the aforementioned assets will be conveyed.
2. Party of the first part further agrees that it will cause to be issued to Weis, party of the second part, preferred stock of the par value of $100 to the amount of $22,500, 5% cumulative preferred, in the new corporation, which will entitle Weis to receive a cumulative dividend in each year at the rate of 5% per an-num, payable out of net earnings of the company before any dividends shall be declared or paid on the common stock.
3. Weis agrees to waive all dividends and cumulations on his preferred stock for a period of the first three years from the date of issuance of the preferred stock.

That agreement was specifically contingent upon the party of the first part being able to work out a satisfactory agreement with the owner of the premises in which the property was then situated for a renewal of the lease thereon, and the working out of satisfactory agreements with the key operating men then employed by the old Airtherm Co.

The new and present Airtherm Manufacturing Co. was incorporated on April 21,1936, and two days later, in accordance with the terms of the aforementioned agreement, issued to Weis $22,500 of the $100 par value preferred stock.

Upon the face of the preferred stock certificates was the following clause:

The owners of tbe Preferred Stock are entitled to receive and tbe company is bound to pay out of its surplus or net earnings a dividend at tbe rate of, but never exceeding five percent per annum, cumulative beginning with the year commencing May 1, 1939, payable annually, before any dividend shall be set apart or paid on tbe Common Stock.

The total authorized capital stock of the corporation was 500 shares of common and 300 shares of preferred. In the absence of any proof to the contrary, we must assume that some or all of the authorized common stock was issued by petitioner.

The amount of undistributed net profits for the fiscal year ended March 31,1937, as stated in the deficiency notice, was $2,876.54. Petitioner has not contested the authenticity of this figure, and, consequently, we adopt it as the true amount.

The preferred stock certificate does not constitute a contract expressly restricting the payment of dividends on common stock in the fiscal year ended March 31,1937.

Petitioner in this proceeding relies upon section 26 (c) (1) of the Revenue Act of 1936 in support of its contention that the Commissioner erred in assessing a tax against its undistributed net income. The express wording of this section should be closely observed, for, when claiming credits, exemptions, and deductions, the taxpayer must come within the letter of the law. Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46. It is significant that section 26 (c) (1) deals only with contracts “executed by the corporation prior to May 1, 1936”, containing a provision which “expressly deals with the payment of dividends.” It is not clear whether petitioner claims that the contract between A. W. D. Weis and the Machinery & Welder Corporation is such a contract. Obviously it could not be, for at the time the parties entered into that contract the petitioner corporation was not yet in existence. Petitioner never entered into that contract nor did it ever take part in its execution. Hence, it is clear that the contract is not of the type mentioned in the section set forth above.

The only other contract in evidence is a copy of a certificate for shares of preferred stock. The petitioner was a party to the issuance of these certificates, and, consequently, if there is any express provision contained therein restricting the payment of dividends during the taxable year, it would appear to be such a contract as is provided for in section 26. As indicated above, the only clause in that contract which deals with payment of dividends is the following:

The owners of the Preferred Stock are entitled to receive and the company is bound to pay out of its surplus or net earnings a dividend at the rate of, but never exceeding five per cent, per annum, cumulative beginning with year commencing May 1, 1939, payable annually, before any dividend shall be set apart or paid on the Common Stock.

Can this clause be said to be a restriction on the payment'of dividends in the years prior to May 1, 1939 ? That is the sole remaining question. The taxpayer contends that no dividends on preferred stock were payable under the provisions of the preferred stock certificates until after May 1,1939, and that, therefore, the payment of a dividend on common stock prior to May 1, 1939, would be in violation of the terms of the preferred stock certificates, which, constituted a written contract entered into by petitioner. The respondent, on the other hand, contends that the provision in the preferred stock certificate does not prohibit the payment of dividends on the common stock in the taxable year. Respondent’s interpretation is that the certificate provides that the dividends on the preferred stock shall be payable and cumulative only after May 1,1939, and only after that date is there a prohibition against the payment of dividends on common stock until dividends on the preferred stock are paid. We agree with the respondent’s interpretation. Even if we read the material provisions of the March contract in connection with the preferred stock certificate, we can not arrive at any other conclusion. The fact that Weis waived the right to dividends on the preferred stock for a period of three years does not mean, in and of itself, that the common stockholders are thereby expressly denied the privilege of receiving dividends for a corresponding period of time.

Petitioner has failed to show us any contract recognized within the terms of section 26, supra, such as would entitle it to the credit claimed.

Reviewed by the Board.

Decision will be entered, under Rule 50.

       SEC. 26. CREDITS OE CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * * * * * * *
      (c) Contracts Restricting payment of Dividends.—
      (1) Prohibition on payment of dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amount which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 193.6, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


source: Caselaw Access Project

author: Haekon :

license: Public Domain

text:
    Dodd, Mead & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94757.
    Promulgated February 28, 1941.

      R. L. P. Wallace, Esq., and Jacob Kirschenbaum, Esq., for the petitioner.

      S. U. Hihen, Esq., for the respondent.
   OPINION.

Haekon :

The basic questions are whether petitioner realized gain or sustained loss on the disposition of its remaining 225 shares of class A preferred stock of Blue Ribbon in the taxable year, and the amount of such gain or loss.

In a statement attached to its income tax return for the taxable year petitioner stated that it had sustained a loss of $5,000 from the sale of 225 shares of class A preferred stock of Blue Ribbon; that it had purchased the shares on June 18,1933, at a cost of $22,500 and had sold the shares on November 30,1935, for $17,500; that it had realized a gain of $2,520.73 from all other sales of stock; and that thus it had sustained a net loss of $2,479.27 from all sales of stock. In accordance with the limitations imposed by section 117 (d) of the Revenue Act of 1934 petitioner reported a capital loss of $2,000 on its income tax return for the taxable year.

In the statement attached to the deficiency notice respondent disallowed the capital loss of $2,000 and determined that petitioner had realized a profit of $12,777.78 from the sale of the 225 shares of class A preferred stock. Respondent added together $12,777.78, the profit from the sale in question, and $2,520.73, the profit from all other sales, and included the total of $15,298.51 in petitioner’s gross income.

The answer to the question is to be found, in large part, in an analysis of both the transactions in which petitioner acquired the 225 shares of class A preferred stock in 1933 and the transactions in which petitioner disposed of the 225 shares in the taxable year. The transactions in which petitioner acquired the 225 shares in 1933 will be analyzed first.

Petitioner contends that in 1933 it sold to Reynal its entire interest in Blue Ribbon, consisting of 50 shares of old common stock and 50 shares of old preferred stock, for $30,000 and was paid $5,000 in cash and $25,000 in 250 shares of class A preferred stock of Blue Ribbon. The substance of petitioner’s argument is that in May 1933 it, as well as each of the three other publishers, contracted to sell its old common and preferred stock to Eeynal for $30,000; that Eeynal thereupon became the equitable owner of all of the old stock of Blue Eibbon and all the new stock thereafter issued; and that, as the owner of the Class A preferred stock of Blue Eibbon, Eeynal caused the issuance of 250 shares thereof to petitioner in payment of $25,000 of the total purchase price of $30,000.

Eespondent contends that in 1933 petitioner sold to Eeynal only its 50 shares of old common stock after it had received a stock dividend thereon of 177% shares of class A preferred stock. Eespondent argues in substance that the proposal made by Eeynal and Henry and accepted by petitioner and the three other publishers contained the entire contract between those parties; that under the proposal petitioner did not contract to sell to Eeynal its 50 shares of old preferred stock but was to receive in exchange therefor 50 shares of class A preferred stock; that under the proposal petitioner was to receive a dividend on its 50 shares of old common stock payable in 177% shares of class A preferred stock prior to the sale of its old common stock to Eeynal; and that under the proposal, after the receipt of the above stock dividend, petitioner was to sell its 50 shares of old common stock to Eeynal for $5,000 in cash and 22% shares of class A preferred stock which Eeynal was to receive as a dividend on his 25 shares of old common stock.

In our opinion, petitioner did not sell its entire interest in Blue Eib-bon to Eeynal in 1933 but sold only its 50 shares of old common stock, after it had received a stock dividend thereon of 177% shares of class A preferred stock and after it had received 50 shares of class A preferred stock in exchange for its 50 shares of old preferred stock. These conclusions are supported by the provisions of the contract of sale itself, i. e., the proposal which was made by Eeynal and Henry and accepted by the petitioner and the three other publishers. The proposal is stated to be an “offer to carry through a recapitalization and reorganization of Blue Eibbon” and contains no offer on the part of Eeynal to purchase the entire interests in Blue Eibbon of petitioner and the three other publishers. The proposal outlines a series of steps to be taken in carrying through the “recapitalization and reorganization.” The first step is the reclassification of the capital stock of Blue Eibbon; the second step is the transfer of $80,000 from surplus to capital and the declaration of a dividend on the old common stock payable in class A preferred stock at the rate of 3% shares for one share of old common stock; the third step is the exchange of the shares of old preferred stock for the same number of shares of class A preferred stock; and the fourth step is the transfer of the old common stock of petitioner and the three other publishers to Eeynal for $5,000 in cash each and 22% shares of class A preferred stock each. Tims the contract of sale clearly provides only for the sale by petitioner to Eeynal of its 50 shares of old common stock after the declaration of a dividend thereon in shares of class A preferred stock. Under the contract of sale Eey-nal never became the owner of the 50 shares of class A preferred stock, which petitioner received in exchange for its 50 shares of old preferred stock, and the 177% shares of class A preferred stock, which petitioner received as a dividend on its 50 shares of old common stock; and it follows that such shares were not used by Eeynal, as petitioner contends, to purchase its entire interest in Blue Eibbon.

Petitioner urges that evidence dehors the contract of sale shows that the parties to the sale in fact intended that petitioner and the three other publishers were to sell their entire interests in Blue Eibbon to Eeynal in 1933. In our opinion, the evidence dehors the contract further strengthens the conclusion that in 1933 petitioner sold only its 50 shares of old common stock to Eeynal, after it had received a stock dividend thereon of 177% shares of class A preferred stock and after it had received 50 shares of class A preferred stock in exchange for its 50 shares of old preferred stock. In the course of the preliminary negotiations leading up to the contract, the parties apparently agreed that the entire interests in Blue Eibbon of petitioner and of the three other publishers were worth $30,000 each, or a total of $120,000. However, the parties were unable to enter into any contract for the sale of the entire interests of petitioner and the three other publishers for a total of $120,000 because Eeynal could raise but a relatively small amount of cash. It was against this factual background that the proposal to carry through a recapitalization and reorganization of Blue Eibbon was devised. The obvious purpose of the recapitalization and reorganization was to enable Eeynal to purchase the common stock of Blue Eibbon by reducing the value of the common stock through the transfer of $80,000 from surplus to capital and the declaration of a dividend on the common stock payable in class A preferred stock of the total par value of $80,000. The conclusion that in 1933 petitioner sold only its 50 shares of old common stock to Eeynal after it had received a dividend thereon of 177% shares of class A preferred stock finds further support in the testimony of Eeynal himself. He testified that his offer to purchase the interests in Blue Eibbon of petitioner and the other three publishers was contained in the proposal submitted to petitioner and the three other publishers; that “before any purchase was made we took the surplus that was represented at that time as book value of the common stock * * * and we declared a stock dividend in preferred stock which meant that surplus instead of being represented by book value of common stock then all was represented by a fixed value of par for preferred”; and that he “purchased the common stock after this new 'preferred, A was issued.” It thus was Reynal’s understanding that he purchased only the old common stock of petitioner after a dividend had been declared thereon in class A preferred stock. In the light of the provisions of the contract of sale and the testimony of Reynal, little weight can be attributed to the statement made by petitioner’s president that petitioner in 1933 sold “our interests, lock, stock and barrel for thirty thousand dollars.” This statement was obviously a conclusion on the part of petitioner’s president, who displayed much less familiarity with the transactions in question than did Reynal. Likewise, the fact that petitioner treated the transactions in question in its fiscal year ended January 31,1934, as a sale of its entire interest in Blue Ribbon both on its books of account and on its income tax return is entitled to but little weight.

Petitioner next contends in substance that the certificates of class A preferred stock were evidences of indebtedness owed by Blue Ribbon and that thus the dividends in class A preferred stock which petitioner received in 1933 on its old common stock were taxable dividends.

An examination of the terms and conditions of the certificates of class A preferred stock leads to the conclusion that they were true certificates of ownership in Blue Ribbon and not evidences of indebtedness owed by Blue Ribbon. Dividends were payable “out of the net profits or surplus” of Blue Ribbon. See Jewel Tea Co. v. United States, 90 Fed. (2d) 451; Commissioner v. Schmoll Fils Associated, Inc., 110 Fed. (2d) 611; Haffenreffer Brewing Co. v. Commissioner, 116 Fed. (2d) 465. Blue Ribbon had the option to retire the stock at any time in whole or in part on the condition that such retirement be made “only from surplus profits and without impairment of capital.” It is true that Blue Ribbon was required to retire specified percentages of the entire issue each year over a six-year period, at the end of which the entire issue was to be retired. However, the certificates expressly stated that Blue Ribbon was to be bound by such retirement provisions only if retirement could be made “from surplus profits and without impairment of capital.” Thus, Blue Ribbon “need not redeem any shares unless there was a surplus and only to the extent of that surplus”, and “there was no time fixed when the holders could demand their money.” Jewel Tea Co. v. United States, supra. It is also true that, in the event of a default for one year by Blue Ribbon in the payment of dividends or in the redemption of stock in accordance with the retirement provisions, “without regard to whether or not the failure to redeem is because the retirement cannot be made from surplus funds or without impairment of capital”, the holders of class A preferred stock were to have sole voting rights. However, it does not follow that in the event of such default the holders of class A preferred stock had sole power to dissolve Blue Ribbon. Cf. Jewel Tea Co. v. United States, supra. Section 51 of the New York Stock Corporation Law provides that “unless specifically excluded by the certificate of incorporation or other certificate filed pursuant to law from the right to vote in a proceeding * * * for voluntary dissolution pursuant to section one hundred and five, * * * all shares of stock shall be entitled to vote in every such proceeding.” There is no evidence to show that the holders of the common stock in the event of such default were specifically excluded in the certificate amending the certificate of incorporation so as to reclassify the capital stock of petitioner from the right to vote in a proceeding for voluntary dissolution. Thus, in the event of such default, the holders of the common stock presumably would have the right to vote in a proceeding for voluntary dissolution, and section 105 of the New York Stock Corporation Law requires for “dissolution the vote of two-thirds of all shareholders entitled to vote.” Cf. Jewel Tea Co. v. United States, supra.

Moreover, although in the event of dissolution or liquidation the class A preferred stock was to have priority over the class B preferred stock and the common stock, the class A preferred stock was not to participate in the assets available for distribution to general creditors but was to “participate in the assets available for distribution to stochholdersT Furthermore, there was no obligation on the part of Reynal, Henry, or Blue Ribbon dehors the certificates to pay dividends and to redeem the class A preferred stock in determined installments on dates certain over a period of years regardless of surplus profits. Cf. Palmer, Stacy-Merrill, Inc., 39 B. T. A. 636; affd., 111 Fed. (2d) 809.

The conclusion that the certificates of class A preferred stock were true certificates of ownership in Blue Ribbon and not evidences of indebtedness owed by Blue Ribbon finds additional support in the fact that on its return for the taxable year petitioner included in gross income $2,025 as dividends received from Blue Ribbon, not as interest received, and then deducted that amount as dwidends received from a domestic corporation under section 23 (p) of the Revenue Act of 1934; and also in the fact that all the checks delivered by Blue Ribbon to petitioner on account of dividends on the class A preferred stock expressly stated on their backs that they were in payment of dividends on the class A preferred stock. Moreover, the testimony of petitioner’s president indicates that the parties to the contract of sale wished to avoid the issuance of “notes” by Blue Ribbon because they believed that the issuance of such notes would cripple the business of Blue Ribbon.

It follows that the certificates of class A preferred stock were true certificates of ownership in Blue Ribbon and that the dividend declared on the old common stock in class A preferred stock was a true stock dividend. Under section 115 (f) of the Revenue Act of 1982 the 177% shares of class A preferred stock which petitioner received as a dividend on its old common stock were not subject to tax. Helvering v. Gowran, 302 U. S. 238.

With respect to the transactions in the taxable year in which petitioner disposed of its remaining 225 shares of class A preferred stock, petitioner contends that such transactions constituted a redemption of stock by Blue Ribbon; that the distribution of and redemption of the stock was “essentially equivalent to the distribution of a taxable dividend”; that the amounts distributed to petitioner in redemption of the stock represented “a distribution of earnings or profits accumulated after February 28, 1913”; and that thus the amounts distributed to petitioner in redemption of the stock must “be treated as a taxable dividend” under section 115 (g) of the Revenue Act of 1934, the provisions of which are set forth in the margin. Petitioner then contends that it was entitled to deduct the amounts so distributed to it in redemption of the stock as dividends received from a domestic corporation under section 23 (p) of the Revenue Act of 1934.

In the statement attached to the deficiency notice respondent determined that in the taxable year petitioner had sold the 225 shares of class A preferred stock in one transaction. In his brief respondent contends that petitioner sold the 225 shares of class A preferred stock in two transactions: A sale of 25 shares to Henry for $2,500 and a sale of 200 shares to Reynal for $15,000; and that such transactions did not constitute a redemption of the stock by Blue Ribbon.

The record conclusively shows that the transactions in which petitioner disposed of the 225 shares of class A preferred stock did not constitute a redemption of the stock by Blue Ribbon, but purchases of the stock by Henry (25 shares) and Reynal (200 shares) in accordance with their options “to purchase” the stock. It is significant that the document which was executed by petitioner at the time of the sale of the 25 shares to Henry and was attached to the certificate evidencing such shares expressly stated that petitioner had “sold” 25 shares to Henry and “that the purchase of such stock by Mr. Henry shall not be construed to prevent its future retirement” by Blue Ribbon.

In the light of the above analysis of the transactions in 1933 and the transactions in the taxable year, it remains to determine the basis of the 225 shares of class A preferred stock. Petitioner had acquired the 25 shares of class A preferred stock which it sold to Henry in the taxable year in exchange for 25 shares of its old preferred stock. In all petitioner had acquired 50 shares of class A preferred stock in exchange for its 50 shares of old preferred stock. This exchange was nontaxable under section 112 (b) (2) of the Revenue Act of 1932, and the basis of the 50 shares of class A preferred stock for determining gain or loss was the cost of the 50 shares of old preferred stock. The cost of the 50 shares of old preferred stock was $5,000. On June 14,1934, Blue Ribbon paid to petitioner $2,500 in retirement of 25 shares of class A preferred stock which had been acquired in exchange for old preferred stock. No gain or loss resulted from such retirement. On November 30, 1935, in the taxable year, Henry paid to petitioner $2,500 in purchase of the remaining 25 shares of class A preferred stock which had been acquired in exchange for old preferred stock. Thus, as respondent concedes, no gain or loss resulted from such sale.

The 200 shares of class A preferred stock which petitioner sold to Reynal in the taxable year consisted of 22% shares which it had acquired from Reynal on the sale of its 50 shares of old common stock, and 177% shares which it had acquired as a dividend on its 50 shares of old common stock prior to the sale thereof to Reynal. On June 28, 1933, petitioner sold its 50 shares of old common stock to Reynal for $5,000 and 22% shares of class A preferred stock. For determining gain or loss on the sale the amount realized by petitioner from the sale was the sum of the money received plus the fair market value of the 22% shares under section 111 (b) of the Revenue Act of 1932. Thus the basis of the 22% shares for determining the gain or loss on the sale to Reynal in the taxable year was the fair market value of the shares on June 28,1933. Respondent determined that the basis of the 22% shares was $2,222.22, and petitioner introduced no evidence to show a basis other than that determined by respondent.

Petitioner acquired the 177% shares of class A preferred stock as a dividend on its 50' shares of old common stock. The cost of the 50 shares of old common stock was $50. Under section 115 (f) of the Revenue Act of 1932 the stock dividend was not taxable. Helvering v. Gowran, supra. In the statement attached to the deficiency notice respondent determined that the basis for determining gain or loss on the sale of the 177% shares to Reynal was zero on the authority of Helvering v. Gowran, supra. The deficiency notice was mailed prior to the enactment of the Revenue Act of 1939. In his brief respondent concedes that the basis of the 177% shares should be $43.01 instead of zero, under section 214 (e) (1) of the Revenue Act of 1939 and under section 20 B.3 (2) of the regulations promulgated under section 214 (e) (1) in T. D. 4938, C. B. 1939-2, pp. 120,123. Section 214 (e) (l) is retroactive and provides in substance that the basis of new stock acquired as a dividend prior to January 1,1936, is to be determined by allocating between the old stock and the new stock the adjusted basis of the old stock in accordance with the regulations promulgated under that section. Petitioner does not question the correctness of the allocation made by respondent under section 214 (e) (1) and the regulations promulgated thereunder.

However, petitioner contends that section 214 (e) (1) is not applicable. It relies on paragraph (3) of section 214 (e), which provides that paragraph (1) “shall not apply if the new stock was acquired in a taxable year beginning before January 1, 1936, and there was included, as a dividend, in gross income for such year an amount on account of such stock, and after such inclusion such amount was not (before the date of the enactment of this Act) excluded from gross income for such year.” Petitioner argues that it included in its gross income for the fiscal year ended January 31,1934, an amount on account of the 177% shares and that such amount was not excluded from gross income for such year.

Petitioner’s contention is without merit. The record indicates that petitioner did not include, as a dividend, in its gross income for its fiscal year ended January 31, 1934, an amount on account of the 177% shares. Petitioner’s income tax return for its fiscal year ended January 31, 1934, was not offered in evidence. Statements made by the attorneys for both parties at the hearing indicate that on its return for such fiscal year petitioner reported a profit of $24,950 from the sale of its entire interest in Blue Ribbon to Reynal. This amount of profit apparently was computed by adding together $5,000, the cash received from Reynal, and $25,000, the par value of the entire 250 shares of class A preferred stock acquired by petitioner, and by subtracting $5,050 as the cost of petitioner’s entire interest in Blue Ribbon from the total of $30,000. Thus, it is clear that any amount included in petitioner’s gross income for such fiscal year on account of the 177% shares was included as profits and not as dividends. If any amounts had been included as dividends in petitioner’s gross income for such fiscal year on account of the 177% shares, such amounts would have been deductible as dividends received from a domestic corporation under section 23 (p) of the Revenue Act of 1932. Moreover, statements made by the attorneys for both parties indicate that petitioner’s return for such fiscal year disclosed a net loss. The obvious purpose for the enactment of paragraph 3 of section 214 (e) was to eliminate any inequities which might arise from the application of the rule of allocation where the value of the new stock had been included as a dividend in gross income in the year of receipt. See Kept. No. 855, Committee on Ways and Means, 76th Cong., 1st sess., pp. 20-23. Even if it were assumed that the value of the 177% shares had been included as a dividend in gross income in such fiscal year, the application of the rule of allocation will result in no inequities because of the net loss in such fiscal year. Cf. Central Loan & Investment Co., 39 B. T. A. 981; National Bank of Commerce of Seattle, 40 B. T. A. 72.

Since section 214 (e) (1) is applicable, the total basis of the 200 shares of class A preferred stock which petitioner sold to Reynal in the taxable year was the sum of $2,222.22 (22% shares) and $43.01 (177% shanes), or $2,265.23. Reynal paid $15,000 to petitioner for the 200 shares. Thus, petitioner realized a gain of $12,734.77 from the sale of the 200 shares to Reynal in the taxable j^ear.

In view of the fact that petitioner realized no gain from the sale of the 25 shares to Henry in the taxable year, it realized a total gain of $12,734.77 from the sale of its remaining 225 shares of class A preferred stock of Blue Ribbon in the taxable year, as respondent concedes, instead of a total gain of $12,777.78 as originally determined by respondent in the statement attached to the deficiency notice. Respondent stated at the hearing that the reduction in the amount of the gain realized on the sale of the 225 shares from $12,777.78 to $12,734.77 caused a reduction in the amount of the deficiency in income tax from $2,331.80 to $2,325.89 p and in the amount of the deficiency in excess profits tax from $529.07 to $526.92.

Decision will he entered that there is a deficiency of $2,325.89 in income tax and $526.92 in excess profits tax.

       SEC. 115. DISTRIBÜTIONS BY CORPORATIONS.
      (g) Redemption of Stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

       SBC. 214. BASIS OP STOCK DIVIDENDS AND STOCK RIGHTS.
      * it! Sit * * * *
      (e) Basis ukder Prior Acts. — The following rules shall be applied, for the purposes of the Revenue Act of 1938 or any prior revenue Act as if such rules were a part of each such Act when it was enacted, in determining the basis of property acquired by a shareholder in a corporation which consists of stock in such corporation, or rights to acquire such stock, acquired by him after February 28, 1913, in a distribution by such corporation (hereinafter in this subsection called “new stock”), or consisting of stock in respect of which such distribution was made (hereinafter in this subsection called “old stock”) if the new stock was acquired in a taxable year beginning before January 1, 1936, * * *
      (1) The basis of the new stock and of the old stock, respectively, shall, in the shareholder’s hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock; such allocation to be made under regulations which shall be prescribed by the Commissioner with approval of the Secretary.


author: Van Fossan :

text:
    John M. Aufiero, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100035.
    Promulgated February 28, 1941.

      O. Leo De Orsey, Esq., and Maurice Friedman, Esq., for tbe petitioner.

      James G. Maddox, 'Esq., for tbe respondent.
   OPINION.

Van Fossan :

The petitioner contends that he created a trust fund in 1926 for the purpose of erecting a school building for the benefit of the youth of Sturno, Italy, and that gifts made by him to that fund in 1934 and 1935 are deductible from his gross income under the provisions of section 23 (o) (2) of the Revenue Act of 1934.

Respondent denies that any such trust was established and contends that the relationship existing between the petitioner and Ci-ampo (succeeded by Grella) was one of agency.

Addressing ourselves to the difference between a trust and an agency, in Scott on Trusts, vol. I, sec. 8, p. 62, we find the following comments:

§ 8. Trust and agency. — Although an agent is in a fiduciary relation to his principal, as a trustee is to the beneficiaries of the trust, the two relationships have a different history and different consequences flow from them. * * *
* * * An agent acts for and in behalf of his principal and subject to his control; a trustee as such is not subject to the control of his beneficiary, although he is under a duty to deal with the trust property for his benefit in accordance with the terms of the trust and can be compelled by the beneficiary to perform this duty. The agent owes a duty of obedience to his principal; a trustee is under a duty to conform to the terms of the trust. An agent as such does not have title to the property of the principal, although he may be entrusted with possession and although he may have power to pass title; a trustee has title to the trust property.
* * * >5* * * *
The agency relation may be terminated at the will of the principal or of the agent, and in any event ends on the death of either, although there are situations in which there is what is loosely called “a power coupled with an interest,” where the relation involves more than mere agency, where it does not so terminate. On the other hand the trust relation cannot ordinarily be terminated at the will of the settlor or of the beneficiary or of the trustee, and does not end on the death of any of these persons, unless it is so provided by the terms of the trust.
* * * * * * *
Whether a relationship of trust or agency is created depends upon the intention of the parties. The mere fact that a person describes himself as agent does not necessarily mean that an agency rather than a trust is created. * * *
****** *
A person may be both agent and trustee for another. If he undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to property which he holds for his principal, he is also a trustee. In such a case, however, it is the agency relation which predominates, and the principles of agency, rather than the principles of trusts, are applicable. * * *

Various other distinctions, not pertinent here, are noted. See also Restatement of the Law of Trusts, vol. I, sec. 8, p. 28; the Law of Trusts and Trustees by Bogert, vol. I, sec. 15, p. 45.

Applying the principles so set forth to the facts of record, we entertain no doubt that the relationship between petitioner and Ci-ampo for the erection of the school building was one of agency and that no trust, within the meaning of the statute, was created or existed for the purposes described in section 23 (o) (2).

Throughout the entire record of the case, including the testimony of the petitioner and others, the correspondence, contracts, conveyances and cablegrams, there is nothing which leads us to conclude that a trust or trust fund was established; that a trust was to be administered according to specific terms; or that the public and private officials with whom Ciampo dealt were aware at any time that the operation was being carried on by a trust. On the contrary, the personal participation of the petitioner was emphasized at every point. It is true that, on occasion, Ciampo was referred to by the petitioner as “trustee” but obviously that word was used in the general sense of a “fiduciary” or one who occupies a confidential relationship to another and not in the technical sense in which the petitioner now asks us to construe it.

Many relationships, such as bailment, guardianship, executorship, and agency, are alike in that they involve an element of faith, confidence, and “trust”, but the legal significance of the terms varies with the underlying facts and circumstances of each case. So here, the petitioner apparently considered Ciampo his trustee in a broad sense of reposing confidence in bis integrity but with no intention to create the legal relationship which must support his claim for deduction.

The petitioner’s intentions must be determined by his actions. From the time of his first discussion of his proposed donation with Ciampo and others, until the final transfer of the property in October 1937, his dealings with Ciampo (later Grella) were on the basis of agency. The petitioner retained entire control of the project. The title to the iand, the plans and drawings of the building, the contract for its erection, the transmission and deposit of funds, the method and time of making payments for construction, and the final transfer of title and possession to the town of Slurno were all under the petitioner’s domination and were neither controlled nor influenced in any way by Ciampo. Ciampo had only to carry out his principal’s instructions, precisely given and duly supported by power of attorney.

Deductions are a matter of legislative grace. Not every charitable gift is deductible. The statutory requisites must be satisfied. The Board has no power to read into the record an intent or purpose to create a trust when the fundamental characteristics of such a relationship are not to be found. We have no doubt of the petitioner’s intention to donate the building to the town of Sturno. The actual gift was made in 1937. The record shows that the petitioner, through Ciampo, bought the land in 1929; that he retained ownership, possession, and control of it until 1937. At no time did Ciampo have either title to or control over it. The funds to pay for the construction of the building were deposited in the bank and retained in the petitioner’s name until they were needed for disbursement to the contractor and for other costs. In this situation we are of the opinion that petitioner has not brought himself within the statute.

The respondent also argues that the trust relationship, if any, was created in Italy and that the Italian laws governing it have not been proved; that a gift to a town is not a gift to a corporation organized and operated exclusively for religious, charitable, scientific or educational purposes and that, at the most, until 1937 the school building was to be donated at some time in the future. We need not consider the merits of these arguments, since the record itself does not warrant our finding that a trust, as contended by the petitioner, was actually created.

Decision will he entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (o) Charitable and Other Contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
      *******
      (2) a 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, and no substantial part of the activities, of which is carrying on propaganda, or otherwise attempting, to influence legislation.


author: Disney :

text:
    Vim Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99693.
    Promulgated February 28, 1941.

      James V. Giblin, G. P. A., William Cogger, Esq., and Julius W. Baer, G. P. A., for the petitioner.

      Leonard A. Spalding, Jr., Esq., for the respondent.
   OPINION.

Disney :

This proceeding involves the income and excess profits tax liability of the petitioner, the Yim Securities Corporation, for the calendar year 1936. The petitioner requests the redetermination of proposed deficiencies asserted by the Commissioner of $9,405.42 in income tax and $3,820.10 in excess profits tax. The proposed deficiencies are due to the Commissioner’s determination that the profit realized by the petitioner upon the condemnation by the city of New York of certain property, alleged to have been theretofore owned by petitioner, is not exempt from taxation under the provisions of section 112 (f) of the Revenue Act of 1936.

The errors assigned are as follows: “(a) Inclusion in the year 1936 [the year in controversy] of an alleged profit of $36,350.00 [the amount is not in dispute] as a taxable gain from condemnation of realty and the fixtures of its tenant, Yim Electric Co., Inc.; the Commissioner alleging that the proceeds of condemnation were .not forthwith invested in similar realty, (b) The taxing of the alleged gain in 1936; if taxable at all it appears to be gain in 1935.”

By motion to amend to conform to proof and in brief and argument petitioner makes issues of the following:

(1) That tbe tax was barred by the statute of limitations.
(2) That the amount of the gain relied upon by the Commissioner in computation of the tax was subject to diminution by the value of the personalty owned by one other than the petitioner.
(3) That the petitioner was not “doing business” within the purview of the Revenue Act, and was not amenable to the capital stock tax. Hence not subject to an excess profits tax.

The motion to amend to conform to proof is granted. The matters raised by the motion are in a sense largely preliminary, and will therefore be first considered.

(1) With respect to the first question, as to bar of the three-year statute of limitations, the record shows and we find as facts: That the Commissioner’s deficiency notice is dated May 11,1939, and is for taxes for the year ended December 31, 1936, in the aggregate amount of $13,225.52; that the petitioner keeps its books and makes its tax returns on the accrual basis; that title to the property involved herein was taken by the city of New York June 28, 1935; that the matter proceeded in court during 1935 and the early part of 1936, the tentative decree as to awards being signed April 21, 1936, and filed April 22, 1936, and objections being heard on May 20, 1936; that the final decree, awarding damages or compensation to petitioner for the property taken, was rendered July 14, 1936, and that the petitioner, on October 9,1936, received the amount of the award from the city of New York, which resulted in the alleged gain to petitioner of $36,350.

The petition merely alleges that “if the gain is taxable, it is for property taken in 1935, not in 1936, hence taxable in 1935”, and “now outlawed.” Whether there is any proper plea of the statute of limitations in the petition is questionable. However, be that as it may, on the facts found and above stated, there is no merit in the petitioner’s contention on this issue, since the Board and the courts, in circumstances substantially identical to those involved in the instant case, have held that the profit or gain is taxable as income, to one on the accrual basis, in the year when the condemnation proceedings are completed, the award made, and compensation is received, and not in the year when title to the property is taken prior to completion of the condemnation proceedings and payment. McGuirl, Inc. v. Commissioner, 74 Fed. (2d) 729; certiorari denied, 295 U. S. 748, involving a condemnation in New York, as herein. We hold that the taxes proposed are not barred by the statute of limitations.

(2) The position of, the petitioner upon the second question presented in the motion and urged in brief for petitioner, that the gain, $36,350, relied upon by the Commissioner in computing the tax was subject to diminution by the value of the personalty owned by one other than the petitioner, i. e., the Yim Electric Co., is not borne out by the record. The facts proven, in our opinion, fail to show that any one other than the petitioner owned any personalty or fixtures embraced in the property taken as petitioner’s by the city of New York and compensated for in the final decree of condemnation involved in these proceedings. The petition alleges: “The gain, if taxable, from the old realty, was $36,350.00.” This is admitted in the answer. There is no evidence in the record that the sum of $9,454 awarded to the petitioner in the decree of the court was for fixtures of petitioner’s tenant, the Vim Electric Co. There is, in fact, no evidence in the record indicating that the city of New York took or condemned any property of the Vim Electric Co., nor that the petitioner accounted to Vim Electric Co. for $9,454 received on the condemnation proceedings.

(3) The third question or issue raised by the motion and in brief for petitioner is that the petitioner was not doing business within the purview of the internal revenue law, so as to make it subject to the excess profits taxes proposed by the Commissioner. The record on this matter is confused and inconsistent. The petitioner in its petition asserts that its “business in 1935 and 1936 was the ownership of realty and the leasing thereof to the Vim Electric Co., Inc.” The petition, however, contains no assignment of error with reference to excess profits taxes. The respondent in his answer admits that the petitioner’s business in 1936 was the ownership of realty, but denies the remaining allegation. No reply was filed. Thus we find the petitioner asserting, in a sense, that it was in business, yet now denying it. Yet if we considered the use of the expression “business” as general and that the allegation in effect was that the petitioner was not doing business, but only owning leased realty, we see that the respondent in effect admits that the business was owning realty. Mere ownership and leasing, without operation, of a parcel of real estate is not such transaction of business as to subject the owner to excess profits tax. Kingkade Hotel Co. v. Jones, 30 Fed. Supp. 508; Rotorite Corporation., 40 B. T. A. 1304 (reversed on other grounds, 117 Fed. (2d) 245, and cases cited; Sears v. Bassett, 111 Fed. (2d) 965. In stating his case, petitioner’s counsel stated that this point “is not in the petition.” There clearly being no issue made on the question, objection was sustained to a question as to whether1 the petitioner did anything else for the next year after losing its building. Some evidence, however, in the record does bear upon the point and we think demonstrates that the petitioner was in business. We find that the petitioner’s income tax and excess profits tax return states the “Kind of business (in detail) ” was “Owners and Operators — Neal Estate” and that precisely the same answer is given in the capital stock tax return to the question, “Nature of business in detail”; that on the income tax and excess profits tax return the “Nature of Business” is checked as “Neal estate, realty holding, real estate agents”; and that the income tax return lists under “Other Deductions Authorized by Law” items of Attorney’s Fees $2,050.39, Professional Fees $25.00.” These claims are consistent only with a contention of trade or business carried on. These returns were offered and admitted for the purpose of showing, accrual basis, that stockholders were individuals, and “to correct errors”, so that it can not be said that the admission thereof does not cover the above stated facts. Moreover, the petitioner relies upon them as evidence that there was no business done. We think the petitioner’s proof is clearly to the contrary, that the petitioner has shown itself to be in business as an operator of real estate and a real estate agent and not a mere owner, and that petitioner’s contention that no excess profits tax is applicable should be denied.

We come now to the principal issue whether the profit or gain, $36,-350, realized by the petitioner corporation upon condemnation by the city of New York of certain real estate and fixtures, is exempt from taxation under the provisions of section 112 (f) of the Revenue Act of 1936. The statute and regulations involved are as follows:

SEC. 112. RECOGNITION OF GAIN OS LOSS.
* * * lit * * *
(f) Involuntary Conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.
Art. 112 (f)-l [Regulations 94). Reinvestment of proceeds of involuntary conversion. — In order to avail himself of the benefits of section 112 (f) it is not sufficient for the taxpayer to show that subsequent to the receipt of money from a condemnation award he purchased other property similar or related in use. The taxpayer must trace the proceeds of the award into the payments for the property so purchased. It is not necessary that the proceeds be earmarked, but the taxpayer must be able to prove that the same were actually reinvested in such other property similar or related in use to the property converted. The benefits of section 112 (f) can not be extended to a taxpayer who does not purchase other property similar or related in service or use, notwithstanding the fact that there was no other such property available for purchase.
If, in a condemnation proceeding, the Government retains out of the award sufficient funds to satisfy liens and mortgages against the property and itself pays the same, the amount so retained should be included in determining the amount of the net award. An amount expended for replacement of an asset, in excess of the recovery for loss, represents a capital expenditure and is not a deductible loss for income tax purposes.

Ill connection witfi this issue, we find the following facts: The petitioner is a corporation, duly chartered under the laws of the State of New York, with its principal office at 325-327 Gold Street, Brooklyn, New York, and kept its accounts and made its returns on the accrual basis. Prior to June 28,1935, the petitioner was the owner of a parcel of real estate located at 16 Concord Street, Brooklyn, New York. On June 28,1935, the Supreme Court of the State of New York entered an order granting the application of the city of New York to condemn certain real estate located in the county of Kings, which condemned real estate included the property at 16 Concord Street. The city of New York took title to the 16 Concord Street property as of June 28, 1935. Prior to and at the time of the taking of the 16 Concord Street property, it was occupied by the Vim Electric Co., as a tenant of the petitioner. Subsequent to the condemnation on June 28, 1935, of the 16 Concord Street property, the Vim Electric Co., under temporary arrangement with the city of New York, continued to occupy the premises and paid rent therefor until the latter part of December 1935, when it moved to 325-327 Gold Street, Brooklyn, New York, and it has since occupied the same as a tenant, paying rent to the 325-327 Gold Street Corporation, Inc., hereinafter called Gold Street Corporation.

The building, fixtures, and land involved herein were about September or October 1935 appraised by appraisers representing the city of New York. The building and land were appraised separately from the fixtures. The final decree of July 14,1936, awarded to the petitioner for land, improvements, and fixtures, $85,000, and $5,312.50 interest, subject to a $12,000 mortgage on the property. On October 9, 1936, the amount of the award, with interest, when paid was $91,604.09 and the petitioner as a result of the award received $79,604.09 from the city of New York. The $12,000 mortgage was satisfied out of the award.

After the taking of title to the 16 Concord Street property by the city of New York a contract was executed on August 19, 1935, between Julius Kassover and the Dime Savings Bank of Brooklyn, under which Kassover agreed to buy, and the bank agreed to sell, land and buildings located at 325-327 Gold Street, Brooklyn, New York, hereinafter designated Gold Street property, for a consideration of $110,000; $10,000 to be paid on the signing of the contract and $100,000 in cash on delivery of the deed, which the contract provided should be delivered at the office of the Dime Savings Bank of Brooklyn on or before October 1, 1935, upon receipt of said payments. On October 4, 1935, the contract was assigned to the Gold Street Corporation. Thereafter, on the same day, October 4, 1935, the Dime Savings Bank of Brooklyn deeded the premises located at 325-327 Gold Street to the Gold Street Corporation, which deed was duly recorded on October 7,1935, at the Kegister’s Office, Kings County, New York.

The Gold Street Corporation is a corporation organized on October 1, 1935, and existing under the laws of the State of New York, with an authorized capital stock of $10,000, divided into 100 shares of the par value of $100 each. It was organized for the purpose of acquiring ownership of the above-mentioned Gold Street property. Its minute book, under date of September 19, 1935, indicates that the Dime Savings Bank of Brooklyn had offered to sell the Gold Street property to the Gold Street Corporation upon terms proposed by it. The Gold Street Corporation filed separate Federal income tax returns, kept separate books of account, and had its own separate bank account. The original incorporators of the Gold Street Corporation were Morris Borden, Anna Vinarsky, and Hyman Kaplan, each subscribing for one share of stock. All three immediately after the incorporation signed waivers and assigned their subscription rights respectively to Samuel Kassover, Julius Kassover, and Max Kass-over, brothers, who on the minutes of the corporation appear as the only stockholders thereof. The stock certificate book of the corporation contains all certificates, still in blank, and indicates that no certificates of stock were ever issued from it. The record fails to show that any certificates of stock of the corporation were ever issued to anyone. The tax returns of the Gold Street Corporation for the calendar years 1935 and 1936 refer to Samuel, Max, Nathan, and Julius Kassover, as each owning 12% shares of the stock of the corporation.

The stock of the Vim Securities Corporation and of the Vim Electric Co. was owned in equal proportions by four brothers, Samuel, Julius, Max, and Nathan Kassover. Samuel Kassover was the president of the Vim Securities Corporation, the Vim Electric Co., and the Gold Street Corporation.

The payments for the Gold Street property were made in the following manner: The sum of $2,000 was paid to the Dime Savings Bank of Brooklyn, by check of the Vim Securities Corporation, S. Kassover, president-treasurer, drawn on the Chase National Bank of the City of New York, bearing date of August 13, 1935. The check was endorsed and deposited by the Dime Savings Bank of Brooklyn and constituted a part of the down payment on the $10,000 required under the contract of purchase. The check of the Vim Electric Co., S. Kass-over, president-treasurer, dated August 19, 1935, to the order of the Dime Savings Bank of Brooklyn in the sum of $8,000 and endorsed and deposited by it, constituted the remainder of the $10,000 deposit required.

Under date of October 4, 1935, the Vim Electric Co. drew its check on the National City Bank of New York for $100,000, payable to the order of the Dime Savings Bank of Brooklyn, to pay the remainder of the total which was due on the Gold Street property. The check, though certified, was not accepted nor used by the Dime Savings Bank of Brooklyn, because the bank did not wish to transfer title to the property to another corporation when the amount was being paid by the Vim Electric Co. The check was redeposited to the credit of the Vim Electric Co. Thereupon, on October 5, 1935, three checks of the Vim Electric Co., by S. Kassover, president, were drawn on the National City Bank of New York, one payable to the order of Julius Kassover, another payable to the order of Max Kassover, and a third payable to the order of Samuel Kassover, the first two being for $25,000 each and the third being for $50,000. The check for $50,-000 was drawn for that amount because one of the four Kassover brothers was out of town. All three of the checks were endorsed to J. Kassover in order that he might have sufficient money to pay the Dime Savings Bank of Brooklyn the $100,000, balance due on the purchase from it of the Gold Street property. On October 5, 1935, J. Kassover drew his individual check, which was certified, on the National City Bank of New York, for $100,000, payable to the order of the Dime Savings Bank of Brooklyn, which was accepted in full payment of the balance due on the Gold Street property.

On November 27, 1935, the Vim Securities Corporation, S. Kas-sover, president-treasurer, drew its check, payable to the order of the Vim Electric Co., on the Chase National Bank of New York for $8,000, being a refund to the Vim Electric Co. for the $8,000 which it had given the Dime Savings Bank of Brooklyn in its check of August 19,1935, for the same amount.

The Vim Electric Co. account appearing on the books of the petitioner was charged with $8,000 as of December 31, with the notation: “Deposit 325 G. St.” The remaining $2,000 was on May 31, 1936, charged to the same account with the notation: “325 Gold St.” The journal of the petitioner contains an entry debiting the Vim Electric Co. with $2,000, with the notation: “To transfer and take up by V. E. Co. Inc. amount paid by V. S. Corp. for a/c 325 G. St. Corp.” The full amount of the cost of $110,000 was set up on the books of the Vim Electric Co. as an account receivable from the Gold Street Corporation. An account payable was set up under date of “10/4/35” on the books of the Gold Street Corporation to the Vim Electric Co. in the amount of $110,000, with the notation: “Bldg cost.” The corresponding entry in the journal reads:

Vim Electric Co. Inc. 27_$110,000
To record the purchase of 325 Gold St. Brooklyn from Dime Savings Bank 8/19/35 per their closing statement & the advance to 325 Gold St Corp by V. E. Co. of the purchase price

The Gold Street property which was purchased for $110,000 was considered more valuable than the 16 Concord Street property which was being condemned, and it was thought if that fact was publicly known it might lessen materially what otherwise might be obtained for the 16 Concord Street property by condemnation proceedings, for which a larger amount, $135,000, was being claimed.

After the payment of the $85,000 to the petitioner as the result of the condemnation award, the petitioner issued its checks to the Vim Electric Co. as follows:

The foregoing amounts are claimed in behalf of petitioner, as payments of loans made to it when the Gold Street property was purchased. During the above period there were with negligible exception no other financial transactions between the two companies.

On a combination general ledger and general journal prepared and kept for the Gold Street Corporation by a bookkeeper under instructions of the corporation’s officers and its accountant, there appears an entry on page 2, which indicates that $110,000 was due the Vim Electric Co. There is on page 3 another item called: “Interest, Vim Electric Co., Inc.”, being a debit and credit of $5,500, representing the interest that is accrued up to the time the money had been paid back to the Vim Electric Co. There appear on page 6 items under “Profit and Loss — Real Estate Taxes, Insurance, Interest on Mtges., Taxes, Depreciation”, all representing expenses of the Gold Street Corporation. Another item entered covers interest paid to the Vim Electric Co. in the amount of $3,208, being interest on $110,000 at 5 percent from June 1 to December 31,1937. This is an accrued item of expense. The tax returns of the Gold Street Corporation were made up from the book in which the foregoing entries appear.

In a book in which the accounts of the Vim Securities Corporation and the Gold Street Corporation are entered, among other items are the following: Interest, debit $2,291.67 to Vim Electric Co., Inc., credit $2,291.67; interest on $110,000 at 5 percent per annum, January 1, 1937, to May 31, 1937. On page 1 of the same book, the following entries appear:

A corporation organized under the laws of the State of N. Y. under the name of 325-327 Gold St. Corp. with an authorized capital stock of 100 shares of the par value of $100 each, for the purpose of owning and operating property. The subscriber to the capital stock was the Vim Securities Corp. In view of pending condemnation proceedings before the court, regarding the property leased to the Vim Electric Co., Inc. known as 16 Concord St. The stock subscription was transferred to the stockholders of the Vim Sec. Co. to be issued in the same proportion, namely 14 each.
* * * * * * *
Capital Stock Subscribers_$5000
To Capital Stock Subscription- $5000
To record subscription to 50 shs at $100 each per share
* * # * * *
Capital Stock Subscription_ 5000
Capital Stock Issued_ 5000
Eor issuance of capital stock in accordance with original Subscription Transferred to sundry individuals

A page, a ledger sheet, from the books of the Vim Electric Co. represents an account called Gold Street Corporation, representing various charges and credits incurred by and for the corporation. The entry thereon shows a balance of $112,149.18 due by the Gold Street Corporation to the Vim Electric Co. as of June 1, 1936. It represents a balance of the account.

On page 2, opening entry, in the ledger or1 account book of the Gold Street Corporation it is stated that $110,000 was owed by the Gold Street Corporation to the Vim Electric Co. for land and building. At the time the entry was made the bookkeeper who made it did not know that $10,000 already had been paid on the indebtedness for the Gold Street land and building. Under date of May 31, 1937, on page 5 of the same book an entry appears as follows:

Vim Electric Co. Condemnation Award 29- 85, 000
a/e Vim Securities Corp. 25- 85,000
To Vim Securities Corp. for proceeds of Condemnation Award

The facts above found and set forth present such inconsistencies as to be difficult of interpretation. The petitioner contends in effect that it is entitled to the benefit of section 112 (f) of the Revenue Act of 1936 because its stockholders were the same as those of the Gold Street Corporation which acquired and still owns the new property; because there was in effect only one corporation, though three legal entities, in addition to the stockholders, appear; and because the condemnation money received by the petitioner paid, in part, for the new property. The respondent on the contrary takes the position in substance that legal entities must be recognized, that the petitioner did not acquire any new property, that the stockholders in the new corporation which acquired the new property did not include all of those having stock in the petitioner, and that in fact the petitioner’s condemnation money did not go to the new corporation to pay for property, but that the new corporation borrowed from the Vim Electric Co., and that various book records made by the different companies recognize the separate entities and bear out respondent’s view. The petitioner, upon brief and referring to the respondent’s request for a finding that funds advanced by the Vim Electric Co. to the Gold Street Corporation, the holder of the new property, were set up on the books of the latter as owed to the Vim Electric Co. and that interest was paid or accrued on the same to the latter, says: “This is correct insofar as it evidences a physical notation, but is misleading.” Elsewhere upon brief the petitioner says:

Without an examination of the attending facts and the relationship of the Kassover Brothers in the petitioner corporation and the Vim Electric Co., Inc. and in the formation of the new corporation, which acquired the substituted warehouse, it may appear from a cursory observation that the method adopted was circuitous and involved. But in the light of the examination of the true facts, the procedure becomes simple and clear and the only approved manner of obtaining the end result under the exigencies then confronting the parties. * * *

We have examined the facts with care, but the procedure has not to us “become simple and clear.” On the contrary, it appears as “circuitous and involved” as petitioner admits it may appear from a cursory observation. The petitioner is in the plain position of asking us to disregard entries made in the course of business by three corporations, indicating a treatment of this matter inconsistent with the present position of the petitioner. Those entries indicate to us that the ownership of the property newly acquired, by a new corporation, was well recognized by the stockholders and officers at that time. It is true that the petitioner paid the condemnation money to the Vim Electric Co., but this was in partial payments, not beginning until January 29, 1937, and continuing 'until June 19,1937. No reason is shown why, if the petitioner was investing the money in the Gold Street property, it was not paid immediately upon receipt on October 9, 1936. Nor is any reason shown why, if petitioner in fact purchased and owned the new property, it was not conveyed to the petitioner upon completion of the condemnation proceedings and. payment of the award. The reason why this had not been done earlier was, as petitioner admits, in order that the amount of the award might not be affected and cut down by disclosure of the fact that the petitioner was acquiring, for less money than the amount asked for the old property, another more valuable property. But this is an admission that the purchase of the property by a different corporation was definitely intended. In other words, for the purpose of'affecting the award a different corporate entity was intentionally, and in due legal form, employed, but we are asked to disregard the different entity so set up. Further inconsistency appears between the contention above discussed, that the petitioner was not doing business and so was not amenable to excess profits tax, and the fact that the Vim Electric Co., one of the entities sought to be merged in the petitioner, is shown to have been very actively in business and the contention, above considered, that the fixtures were those of Vim Electric Co. and the value thereof was not awarded to the petitioner. Thus we see petitioner relying on separateness of entities. That various book entries show the Gold Street Corporation acting as a separate entity and treating the Vim Electric Co. as lending to it, instead of its merely receiving the condemnation money gratuitously from the petitioner, though sought to be explained, can not be effectively denied.

The petitioner urges that it perforce must acquire a new building. This of course is not consistent with the contention of no business done by petitioner. The most active business entity was the Vim Electric Co. It was that company which needed a building. That company advanced money to the Gold Street Corporation, which acquired the property; and upon the books of the Gold Street Corporation, by items of interest accrued and other items, the Vim Electric Co. appears as the lender. Some items of those amounts paid by petitioner to the Vim Electric Co. appear charged to it, and not to be a mere transfer of funds. The Gold Street Corporation had a bank account and .made separate tax returns, though it appears to have made no record of any corporate meetings. Though attempt is made to explain away the effect of corporate and book records, we think we are more safely guided by the records. Thus it is contended that four stockholders in the new corporation were the same as those in petitioner. Yet three “dummy” stockholders in the new corporation are shown as assigning their rights to only three of the persons who were stockholders in petitioner, and though recitation is made as to four stockholders in the new corporation, no stock in fact was ever issued. Again, though there is recitation that the subscriber to the stock in the new corporation was the Vim Securities Corporation, immediately thereafter it is also recited that the stock subscription was transferred to the stockholders of petitioner. No certificates were ever issued. All this confusion is plainly insufficient to show that the new corporation, or its property, was owned by the old, or even by the same stockholders. Though there is evidence that the petitioner was advised not to issue the stock to the individuals, such fact is insufficient to explain what was actually done in setting up the new corporation, and the transactions had and recorded. The petitioner has the burden of proof.

. -We think the petitioner can not with reason be held to have acquired the new property. Appeal is made to look through form to substance, and we are cited among others such cases as North Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898, and Southern Pacific Co. v. Lowe, 247 U. S. 330. We think that such cases should not be applied here, where the new corporation was set up for a definite purpose and that purpose was effected, and where the effect of ordinary corporate records and accounts, set up to serve the purpose of the individuals involved, must be disregarded. Higgins v. Smith, 308 U. S. 473; Valuation Service Co., 41 B. T. A. 811. In Regals Realty Co., 43 B. T. A. 194, we considered section 112 (b) (1) of the Revenue Act of 1936, as to nonrecognition of gain or loss where property held for investment is exchanged for other property. We refused, following Riggins v. Smith, supra, to disregard the separate corporate entities of the petitioner and its successor “at the behest of their creators.” Petitioner cites Excelsior-Leader Laundry Co., 8 B. T. A. 183, involving proceeds of insurance upon destroyed property invested in new property, where section 234 (a) (14) of the Revenue A ct of 1921 was relied upon. We distinguish that case from the instant proceeding for the reason that, though the first corporation seems to have loaned the insurance proceeds to another, the first corporation, claiming the credit, was consolidated with the other prior to the end of the year. The fact was there stressed by us in upholding the petitioner’s contention. To allow such a consolidated corporation the benefit of a statute bv no means indicates that the same conclusion should be reached under the circumstances here involved. Considering all of the facts found, and reconciling them as nearly as possible, we conclude and hold that the respondent did not err in adding to petitioner’s net income the $36,-350 gain from condemnation of real estate.

Moreover, we think it apparent that the expenditure of moneys for new property long prior to the payment of the condemnation award, as here, does not satisfy the statutes. Bandes v. Commissioner, 69 Fed. (2d) 812. Munson Steamship Line v. Commissioner, 77 Fed. (2d) 849, we consider clearly distinguishable on its facts.

Lastly, petitioner suggests that it is entitled to credit under section 26 (c) (1) of the Revenue Act of 1936. The question is raised on brief, with no pleading thereof. It is not even covered by the motion to amend to conform to proof hereinabove considered. No evidence indicates facts to which the statute could be applied. The point appears to be an afterthought. No error in this respect is shown.

Reviewed by the Board.

Decision will he entered for the respondent.

VaN FossaN and Leech concur only in the result.


author: Leech :

text:
    Piermont Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100371.
    Promulgated February 28, 1941.

      Francis L. Casey, Esq., for the petitioner.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Leech :

Respondent has disallowed the deduction from petitioner’s adjusted net income of $50,000 set aside during 1935 for the retirement of its debentures.

The issue, as submitted at the hearing and to a discussion of which the original briefs were limited, was merely whether the bond indebtedness for the retirement of which the contested $50,000 in securities was set aside, was “indebtedness incurred prior to January 1, 1934,” within the meaning of section 351 (b) (2) (B) of the Revenue Act of 1934. That issue, as thus submitted, was decided adversely to respondent in Sun Pife Line Co., 42 B. T. A. 1413. In there discussing the identically parallel section of the Revenue Act of 1936, we said:

* * * We think no distinction was intended between a corporation which after the date set, changes the form of its obligation, even changes the obligee, but remains equally obligated, and one which merely remains bound by the original obligation. * * * [Emphasis supplied.]

However, respondent in his reply brief for the first time argues that the “setting aside” here was not sufficient to entitle petitioner to the disputed deduction because the “setting aside” under the act must be such as to effect, if so facto, a retirement of the indebtedness pro tanto.

Although this question is thus not before us, we do not agree with respondent. Moreover, assuming any regulation could so construe the pertinent statutory provision, we do not think that either Regulations 86, article 351-4, which originally construed the controlling provision, or T. D. 4777, XVT48-9060, approved November 19, 1937, the latter being cited by respondent, does so construe it.

The pertinent subsection reads: “Amounts used or set aside to retire indebtedness * * *.” (Emphasis supplied.) The construction for which respondent now contends would eliminate the significant alternative provision of the statute and is therefore improper. In our opinion the statute permits the deduction if the amount is set aside, even though the indebtedness be not to that extent thus extinguished. The evidence here amply proves that the amount claimed as a deduction was set aside within the meaning of the statute.

Whether the amount in dispute was “irrevocably” set aside, in the tax year, is not pertinent. That definitive word was added in the Kevenue Act of 1937, section 355, not as “clarifying and giving effect to the regulations” as respondent argues, but “to protect the revenue, so that amounts may not be set aside for retirement of debt, and deductions secured, although finally such amounts are never used to retire the indebtedness.” Report of the Senate Finance Committee, 75th Cong., 1st sess., S. Eept. 1242.

Decision will be entered wnder Bule 50.


author: Turner :

text:
    F. W. Fitch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93340, 98131.
    Promulgated February 28, 1941

      Arnold F. Schaetsle, Esq., for the petitioner.

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

Turner :

The respondent determined deficiencies in income tax for the years 1934 and 1935 in the respective amounts of $998.62 and $1,078.54. The question presented is whether or not the petitioner is taxable, under the rule laid down in Douglas v. Willcuts, 296 U. S. 1, on income distributed to his divorced wife from a trust created by them under an agreement which was subsequently confirmed as a property settlement in a divorce decree of an Iowa court. We must first determine, however, whether the decision of the Supreme Court of the United States relating to petitioner’s income tax for 1933 makes the question here res judicata as to the income for subsequent years.

The case was submitted upon a written stipulation of facts and the facts as stipulated are adopted as our findings herein. Only those facts which are necessary for an understanding of the issue involved will be recited.

Petitioner, a resident of Des Moines, Iowa, is the divorced husband of Lettie S. Fitch, to whom he was married in 1892. They lived together as husband and wife until 1917, at which time they separated. In December 1922 Lettie S. Fitch filed a suit for separate maintenance against petitioner. The suit was dismissed in April 1923, after the parties had agreed on a settlement. In accordance with the settlement, petitioner leased certain premises owned by him to the F. W. Fitch Co. for 99 years, at an annual rental of $12,000, and on April 23, 1923, joined his wife and the Bankers Trust Co. as trustee, in the execution of a trust agreement, under which the trustee took title to the premises and an assignment of the lease to collect the rents and, after deduction of expenses, to pay to Lettie S. Fitch $600 a month during her life, and the balance of the annual income to the petitioner during his life. Provision was made for the duration of the trust during the lifetime of both petitioner and Lettie S. Fitch and in any case for at least 15 years, and for distribution of the income to the children of petitioner and his wife in case either should die prior to the termination of the minimum period. Petitioner irrevocably alienated the corpus, as well as any right to receive $600 per month provided for Lettie S. Fitch in favor of her and the children. Provision was made that upon the termination of the trust period, the corpus should be paid over to the children or their lineal descendants.

On April 14, 1925, Lettie S. Fitch filed a suit for divorce against petitioner in the District Court of Polk County, Iowa, alleging cruelty, desertion, and failure to provide for her and a minor child in a proper manner. In his answer petitioner alleged, among other things, that he had created the above described trust for her benefit in settlement of the prior suit for maintenance and that “She is now and was receiving this $600.00 per month at the time she filed her petition herein, claiming that the defendant had failed to provide for her and for the minor child in a proper manner”, and that “This constituted and now constitutes a full and complete settlement in excess of what she is in equity entitled to, and the plaintiff, at the time orally agreed with the defendant that the amount given her was sufficient for all time, and that plaintiff and defendant should go their respective ways without interference with each other.” On December 17, 1925, the court entered a decree, granting the wife an absolute divorce and the custody of the minor son, and further adjudging, “That the trust agreement which is referred to in the defendant’s answer * * * be, and the same is hereby ratified and confirmed by the court; and that the property and alimony settlement made by the parties be, and it is hereby confirmed by the court.”

Pursuant to this decree, petitioner transferred to Lettie S. Fitch 600 common shares of the F. W. Fitch Co., which, on December 31, 1925, had a book value of $77,959.80, and paid to her attorney the amount of $23,500, of which she received $8,500, the balance representing counsel fees and expenses.

During the years 1933, 1934, and 1935 the trustee under the trust agreement above described distributed to Lettie S. Fitch, $7,128, $5,760, and $5,760, respectively. For the year 1933 the respondent determined that the income thus received by petitioner’s divorced wife constituted taxable income to him. A petition was filed with this Board and in a memorandum findings of fact and opinion entered on January 12, 1938, we sustained the Commissioner’s determination, citing Douglas v. Willcuts, supra, and several other cases.

A petition for review of the Board’s decision was filed with the Circuit Court of Appeals for the Eighth Circuit and on April 25, 1939, the court entered its decision, 103 Fed. (2d) 702, reversing the Board and holding that the doctrine of Douglas v. Willcuts, supra, did not apply. In its opinion the court quoted sections 10480 and 10481 of the Iowa Code, 1935, and, after citing and discussing a number of Iowa cases, among which were Kraft v. Kraft, 193 Iowa, 602; 187 N. W. 449; Spain v. Spain, 177 Iowa, 249; Barish v. Barish, 190 Iowa, 493; 180 N. W. 724; Carr v. Carr, 185 Iowa, 1205; 171 N. W. 785; and McCoy v. McCoy, 191 Iowa, 973; 183 N. W. 377, concluded that under the law of that state a decree of absolute divorce confirming a property settlement discharged the husband’s obligation for further suppdrt and precluded the wife’s right to any further alimony, and held that the income from the trust in question was not used to satisfy a continuing obligation of the husband and was not taxable to him.

The Supreme Court of the United States granted certiorari and on January 29, 1940, handed down its decision, Helvering v. Fitch, 309 U. S. 149, reversing the Eighth Circuit and holding that the income from the trust received by the wife was taxable to the husband. After discussing the Iowa cases relied upon by the Eighth Circuit in reaching its decision, and one additional case, McNary v. McNary, 206 Iowa, 942; 221 N. W. 580, the Supreme Court said:

On this state of the Iowa authorities we can only speculate as to the power of the Iowa court to modify alimony awarded in a lump sum or a property settlement ratified by a divorce decree. * * *
Enough has been said to show that respondent has not sustained the burden of establishing that his ease falls outside the general rule expressed in Douglas v. Willcuts, supra. If we were to conclude that this case is an exception to that rule we would be acting largely on conjecture as to Iowa law. That we cannot do. For if such a result is to obtain, it must be bottomed on clear and convincing proof, and not on mere inferences and vague conjectures, that local law and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent. Only in that event can income to the wife from an alimony trust be treated under the revenue acts the same as income accruing from property after a debtor has transferred that property to his creditor in full satisfaction of his obligation — unless of course Congress decides otherwise.

Subsequently and on May 7, 1940, petitioner F. W. Fitch filed a petition in the District Court of the State of Iowa in and for Polk County, asking the court to modify the divorce decree entered on December 17, 1925. The petition alleged in part as follows:

That since the above referred to decree was entered the defendant’s property and assets have greatly diminished and his financial net worth at this time is less than one-half of what it was at the time the decree was entered. Further, since the entry of said divorce decree, the property, assets and income of the defendant have become impressed with a far greater burden than originally existed. For the year 1933, and years subsequent thereto, the United States Commissioner of Internal Revenue has determined that income of the aforesaid trust payable to the plaintiff, pursuant to the terms thereof, is con-stnictively the income of the defendant in that said income is discharging the defendant’s continuing obligation to support the plaintiff and that he is subject to the Federal income tax thereon. For the year 1933 the plaintiff received the sum of $7,128.00 as her share of the trust income for that year. Said Commissioner has added this income to the other income of defendant and has assessed and collected thereon the sum of $1,951.12, by way of additional income taxes and interest for said year. Additional income taxes determined to be due from the defendant by reason of the inclusion as taxable income to him of all trust income payable to the plaintiff are as follows:
1934_ $998. 62
1935_,_ 1, 095. 64
1930_ 2, 521. 49
In addition'to these amounts interest thereon is accruing at the rate of 6% per annum and there will be an additional estimated deficiency in income taxes, annually, of about $1,500.00.
On the other hand, the financial condition of the plaintiff has materially improved. In the decree of divorce she was awarded the custody of her minor son, Lucius W. Fitch, and the settlement and award of support and alimony contemplated that plaintiff would care and provide for him out of the funds and income awarded her, and in fact, it was agreed and understood that she would provide him with a college education. Said minor son attained his majority on March 27, 1927, two years after the divorce decree was entered and he has since become self supporting. Hence, plaintiff’s income has been relieved of this burden. Furthermore, the Commissioner of Internal Revenue has awarded refunds of all income taxes paid by the plaintiff upon her share of the trust income which is now being taxed to the defendant. The common capital stock of The F. W. Fitch Company which was awarded to the plaintiff in the property settlement confirmed in the aforesaid divorce decree has materially increased in value in the hands of the plaintiff and accordingly her financial position and property values have substantially improved and increased.
Whebefobe, the defendant prays that the decree of divorce awarded the plaintiff herein, be modified so as to reallocate the annual income confirmed in said decree, awarding to the defendant a larger share thereof and decreasing the plaintiff’s share, taking into consideration additional income taxes and interest in the sum of $1,951.12 paid by the defendant for 1933 and all additional income taxes which he may be required to pay upon trust income being paid to the plaintiff and so as to establish by an order nunc pro tunc, the status of defendant subsequent to divorce, either as a debtor with a continuing obligation to support plaintiff or as a stranger whose marital obligations were discharged upon divorce and to make such further modification of the divorce decree as may be just and for such further and different equitable relief as to the Court may seem proper in the premises. Defendant further prays that an order be entered herein directing the plaintiff to show cause why the decree of divorce should not be modified as herein prayed and fixing the time and place for hearing thereon.

The court entered an order directing the petitioner’s former wife to show cause why the decree of divorce should not be modified as prayed. She responded by filing a motion to dismiss the petition on the following grounds:

Defendant’s petition shows on its face that the decree of divorce entered herein was a final adjudication of all marital and property rights betweén these parties. The Court retained no jurisdiction in the decree either for the purpose of reallocating the income of the trust referred to or to redistribute any of the property involved in the settlement which was approved by the Court and hence it is without power to entertain the petition of defendant.
The decree of divorce herein terminated all marital obligations of these parties and hence a nunc pro tunc order as prayed for in defendant’s petition is unwarranted and unnecessary.

After having heard the argument of counsel, the court (May term, 1940) sustained the motion to dismiss the petition and entered its findings as follows:

That on the 17th day of December 1925 the plaintiff was granted an absolute divorce from the defendant by this Court. That said decree of divorce approved a property settlement made by the parties out of court and confirmed and ratified a certain trust agreement entered into between these parties on or about the 23rd day of April 1923, the same being recorded in Book 870, on Page 502 of the records of the Recorder of Deeds of Polk County, Iowa.
That the decree of divorce entered herein was a final adjudication of all marital and property rights between these parties and that thereafter no obligation rested upon either of the parties to make contributions to the support or income of the other.
That the Court retained no jurisdiction either under the decree entered herein or under the law of this State to in any manner modify, amend or change the decree of divorce entered herein or to reallocate the income of the trust referred to in the decree or to in any manner redistribute the property which was the subject of the settlement made out of Court and approved by the Court in its decree.
That a nunc pro tunc order as prayed for in the defendant’s petition could serve no purpose since his status under the decree of divorce heretofore entered was established by the law of this State and thereafter he had no further continuing obligation to support the plaintiff.

The action of the District. Court in sustaining the motion to dismiss was appealed to the Supreme Court of Iowa and was pending in that court at the time the present proceedings were presented to this Board. On November 12, 1940, that court handed down its decision, 294 N. W. 577, affirming the decision of the District Court (Fitch v. Fitch, No. 45360). After reciting the findings of the District Court the court said:

We are of the opinion that this question has been considered, by the bench and bar of this state, fairly well settled. However, in a recent case handed down by the United States Supreme Court, Helvering v. Fitch, 60 S. Ct. 427, 84 L. ed. 399, Justice Douglas, after reviewing our decisions, makes this statement:
“On this state of the Iowa authorities we can only speculate as to the power of the Iowa court to modify alimony awarded in a lump sum or a property settlement ratified by a divorce decree.”
The doubt seems to have been engendered because of what we might call a negative application of section 10481, 1939 Code of Iowa, in three or four cases, the one particularly noticed in the high court’s decision being McNary v. McNary, 206 Iowa 942, 221 N. W. 580. As we read our decisions, we can find little room for doubt as to the attitude we have heretofore taken in reference to this question. * * *

After discussing a number of tbe Iowa cases hereinabove cited, the court concluded as follows:

go, in the instant cage, the decree of divorce fixed and determined the property rights as between these parties by a lump sum allowance. The title to the property allotted to the wife vested in her and the income fixed by the trust agreement, which was payable to her, is contained in an irrevocable trust and the decree of divorce confirming the settlement made between the parties as to the property rights amounts to a lump sum award or allocation of a definite, certain portion of the property of the husband to the wife, and, thereafter, no obligation rested upon either of the parties to make contribution to the support or income of the other and the provisions contained in section 10481 of our code confers [sic] no power or authority upon the court to modify or change said decree.
What we said in Kraft v. Kraft and Carr v. Carr, supra, to the effect that, where alimony is allowed in a lump sum as permanent alimony or where there is a division of the property as permanent alimony, the statute does not authorize a change therein except for such reasons as would justify the setting aside or changing of a decree in any other case, is the settled ■ law of this state.

The respondent has determined that the income from the trust for the years 1934 and 1935 received by petitioner’s divorced wife constituted taxable income to the petitioner and contends that the decision of the Supreme Court of the United States in Helvering v. Fitch, supra, relating to similar income for the year 1933, makes the question as to the income for 1934 and 1935 res judicata, citing Tait v. Western Maryland Railway Co., 289 U. S. 620, in support thereof. That contention must be denied. The supervening decision of the Iowa Supreme Court interpreting the state law in direct relation to this divorce decree can not be ignored since the local law is determinative of the point in controversy. Blair v. Commissioner, 300 U. S. 5. On brief the respondent contends that the Blair case is distinguishable from the present case for the reason that “the petition filed by petitioner herein on May 7, 1940, in the Polk County, Iowa, District Court was a nullity db initio in view of petitioner’s apparent and inexcusable failure to file a proper application alleging section 10481 [Iowa Code] as the statutory grounds to invoke jurisdiction in the local equity court to modify the original divorce decree.” Since the Iowa Supreme Court in its opinion cited that section of the code and stated that it did not confer power or authority upon the court to modify or change the decree, we find no merit in the respondent’s contention.

With respect to the years 1934 and 1935, the years here under consideration, the petitioner contends that the recent decision of the Iowa Supreme Court is determinative, and on brief the respondent concedes that: “If it is clear that under the local law of Iowa, the divorce court does not retain jurisdiction and petitioner has been given a full discharge and there is no continuing obligation to support his divorced wife, however contingent, then that part of the trust income distributed to the divorced wife would apparently not constitute taxable income to petitioner.”

Whatever doubt existed as to the Iowa law on this point at the time the Supreme Court of the United States decided Helvering v. Fitch, supra, has now been removed by the decision of the Iowa Supreme Court above referred to. It is now settled that the divorce decree confirming the property settlement between petitioner and his wife can not be changed or modified, that petitioner was given a full discharge, and that the income from the trust was not used to satisfy a continuing obligation to support his divorced wife. The income from the trust received by his divorced wife during 1934 and 1935 is not taxable to petitioner. Helvering v. Fuller, 310 U. S. 69. Cf. Helvering v. Leonard, 310 U. S. 80. A number of the Iowa cases discussed by the respondent in his brief are distinguishable from the present case in that they involve monthly alimony rather than a final property settlement between husband and wife.

The parties have stipulated as follows:

Petitioner is entitled to a bad debt deduction in tbe sum of $1,850.00 for tbe year 1935. The original petition failed to allege error with respect to this item and the same has not heretofore been allowed as a deduction in computing taxable net income. The issue comes before the Board for the first time by amended petition and answer filed upon submission. Since it is conceded petitioner is entitled to a bad debt deduction in the sum of $1,850.00 the deficiency asserted for 1935 is $695.53 in lieu of $1,078.54 asserted in the deficiency notice.

Reviewed by the Board.

Decisions will be entered under Rule 50.