author: Mellott:

text:
    George K. Gann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88986.
    Promulgated February 16, 1940.

      M. D. Hanley, Esq., B. W. Burgeson, Esq., and W. W. Patterson, Esq., for the petitioner.

      F. F. Korell, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner determined a deficiency of $4,805.30 in petitioner’s income tax for the year 1935. The amended petition alleges that the respondent erred in disallowing $2,057.14 of $10,376.42 deducted by petitioner in his return as ordinary and necessary expenses of carrying on his business, the expenditures having been made for food, rent, liquors, and boat operation; that he erred in disallowing $265 expended by petitioner as club dues, paid for membership maintained exclusively for the purpose of entertaining business guests; and that he erred in including in gross income $150,000 received by petitioner in connection with the termination and cancellation of a certain contract.

No evidence was introduced upon the first issue, so it must be treated as abandoned. The second issue was inferentially reduced to a claim that a deduction of $162 should be allowed for dues paid to the Chicago Athletic Club, and the third issue was presented in several alternatives which will hereinafter be referred to in more detail.

There is no substantial dispute as to the facts, many of them being admitted in the pleadings or shown in exhibits thereto attached or introduced in evidence before us. We shall therefore simply recite the basic facts, after which the respective contentions of the parties will be discussed.

Petitioner is a resident of Chicago, Illinois, and duly filed his return of income for the calendar year 1935 with the collector of internal revenue for the first district of Illinois. The tax shown to be due upon the said return was paid.

In his income tax return petitioner reported a capital gain of $90,000. In other words, he included in gross income for the purpose of computing his net income but $60,000 of $150,000 received by him from his employer, Theodore Gary & Co., under the circumstances hereinafter set out, on the theory that this was the entire amount necessary to be included under section 117 (a) of the Revenue Act of 1934, his contention being that he had made a sale or exchange of a capital asset, which had been held for more than five years but not for more than ten years. The section relied upon is as follows-:

SEC. 117*. CAPITAL GAINS AND LOSSES.
(a) General Rote. — In the ease of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
* * * * * * #
40 percentum if the capital asset has been held for more than 5 years but not for more than 10 years.

The circumstances surrounding the receipt of the $150,000 referred to in the preceding paragraph are as follows:

Prior to October 29, 1930, petitioner was an employee of Theodore Gary & Co., a Missouri corporation, sometimes hereinafter referred to simply as the company. It was engaged in the purchase, management, and operation of telephone systems and properties throughout the world and in the manufacture, rental, and sale of telephone and electrical equipment. Petitioner had been engaged in the telephone business, either as an employee of the company or in some other capacity, continuously since June 1,1903. On October 29, 1930, petitioner and the company entered into a written contract which provided that petitioner’s duties, between June 22,1930, and July 1,1935, should be of an executive, supervisory, and directory character, to be determined by the company’s board of directors or its executive committee, “and to which he may be fully elected or called by the corporate entity or enterprise to be served”, but which should not be such as to prevent him from establishing and maintaining a residence in Chicago. The company agreed to pay, or cause to be paid to him, as compensation, a salary of $30,000 per year and to reimburse him for all reasonable traveling expenses and out-of-pocket expenses incurred by him. The contract further provided that no personal investments should be made by him, or his immediate family, which would “conflict in any way with the aims or business of” the company or of its subsidiaries or associated companies, and that the company should be paid by him “the sum of Five Thousand Dollars for each month of the unexpired term of this contract as liquidated damages” in case of his willful failure or refusal, while physically fit, to devote his time and efforts to the company’s business. The last clause was premised upon “the intimate knowledge of the business of” the company possessed by Gann and “on account of the particular personal qualifications of the Second Party [Gann] and his adaptation to the natnre of the services to be rendered hereunder, the parties hereto deem and declare it to be impossible to measure, with any degree of justice and certainty, the damage which would arise from a breach of this contract by Second Party.” The contract provided that Gann should “devote all his time and attention to the business” of the company and that he should not, without its written consent “engage in or carry on any profession or other business, or trade, except in personal investments that do not require any substantial amount of managerial time or attention.” It also contained provisions for the selection of arbitrators in the event of disagreement between the parties “with respect to the interpretation of the terms of” the contract “or the performance thereof.”

Clause ninth of the agreement reads as follows:

Ninth : The subsidiaries of party of the First Part and companies controlled by it are under the management of a certain partnership, Theodore Gary & Co., composed of the executives of Party of the First Part and certain of its subsidiary companies. It is contemplated that during the life of this agreement it may be to the mutual advantage of the parties hereto that Second Party become a member of said partnership and to that end it is agreed that during the life of this agreement the parties hereto shall give consideration to Second Party joining said partnership as a member thereof, and if Second Party shall become such a partnership member, then, in that event, this agreement shall be thereby cancelled.

Under date of September 9, 1981, the above agreement was modified and extended to December 31, 1941, by the execution of another contract. Clauses 2, 3, and 4 of this contract are as follows:

2 — It is agreed by the parties that in addition to the intention as expressed in Section 9 of the former agreement that the parties shall also consider from time to time and attempt to mutually agree upon a basis whereby the second party shall not only join the partnership of Theodore Gary & Co., referred to in said Section 9, but the parties shall also attempt to mutually agree on a plan under which second party may become a member of the Missouri partnership known as Gary & Co. (hereinafter referred to as Mopar). It is recognized that Section 9 of the former agreement and this section must of necessity be an evidence of intention and that no execution can be had under Section 9 or this clause except by mutual agreement.
3 — It is agreed that pending any change by mutual agreement of the parties hereto in accordance with the intentions expressed in Section 2 above, that first party shall pay to second party in lieu of the salary of thirty thousand dollars per annum specified in the Third Section of the former agreement a salary of forty thousand dollars per annum from September 1, 1931, until September 1, 1932, and for the next year forty-five thousand dollars per annum, and for the next year fifty thousand dollars per annum, after which the aforesaid sum of fifty thousand dollars per annum shall constitute the annual minimum salary to be paid party of the second part, and it is agreed that on and after September 1, 1934, the parties will consider annually whether, having regard to the size of the company’s business, and the results obtained, and the position and work being done by second party, the same minimum salary of fifty thousand dollars per annum shall be increased. It being the intention that (unless by mutual agreement the second party shall enter into the partnership as evidenced by the intention of Section 2 above) the salary shall be adjusted from time to time so as to be a reasonable, adequate, and commercial salary for the work and responsibility of the second party, taking into consideration' the factors referred to above and any and all other relevant factors existing at the time.
It is expressly agreed that in considering the question of a revision of the aforesaid minimum salary of fifty thousand dollars per annum that the party of the first part retains full discretion to act according to its best judgment, after giving full consideration in good faith to all existing facts.
4 — It is agreed that in the event Mopar sells the control of first party to interests other than Theodore Gary & Co. (New York partnership) that the second party may if he elects, terminate this agreement by giving, not later than three months after second party has knowledge of said sale, notice in writing to first party of bis election to terminate the agreement and unless said notice is so given by second party the agreement shall continue regardless of said sale.

On October 1, 1984, another contract was executed, which, omitting formal parts and signatures, provides as follows:

WITNESSETH :
It is mutually agreed between the parties as follows:
(1) The parties hereby agree that in the event party of the first part pays, or causes to be paid to the party of the second part, at times hereinafter mentioned, the sums referred to, totaling Two Hundred Thousand Six Hundred Eighty-seven Dollars and Ninety-eight Cents ($200,687.98), then, and in that event, the agreement now existing between parties of the first and second part (dated on the twenty-ninth day of October, 1930, as amended the ninth day of September, 1931, covering employment by the first party of the second party for the period of years ending December 31, 1941) is forthwith cancelled, as hereinafter set out. The sums referred to are:
Fifty Thousand Six Hundred Eighty-seven Dollars and ninety-eight Cents ($50,687.98) on or before the 31st of December, 1934, and Seventy-five Thousand Dollars ($75,000) on January 15, 1935, and Seventy-five Thousand Dollars ($75,000) on January 15, 1936. Provided such payments are made on the dates above mentioned (and in the event the dates should be on a Sunday or holiday, then on the first next preceding business day) it is agreed that the above mentioned agreement dated the twenty-ninth day of October, 1930, as amended the ninth day of September, 1931, is forthwith cancelled and the party of the second part acknowledges that for good and valuable consideration he has remised, released and forever discharged and by these presents does, for himself, his heirs, executors, and administrators, remise, release and forever discharge the said Theodore Gary and Company and its subsidiary and affiliated companies, and its or their successors and assigns, of and from all rights, actions, cause and causes of action, suits, debts, dues, sums of money, covenants, controversies, agreements, promises, damages, claims and demands, whatsoever, in law or in equity, which he now has with or against the said Theodore Gary and Company, its said subsidiary or affiliated companies, or ever had, or which his heirs, executors, or administrators hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever, from the beginning of the world to the date of these presents, under or by reason of a certain contract of employment entered into by and between the said Theodore Gary and Company and the said George K. Gann, under date of October 29, 1930, as amended September 9, 1931.
In the event of the death, or permanent disability of the party of the second part occurring prior to January 15, 1936, Theodore Gary and Company obligates itself to make the above payments referred to, totaling the sum of Two Hundred Thousand Six Hundred Eighty-seven Dollars and Ninety-eight Cents ($200,-687.98), to said second party or his estate at the dates above set out.
In the event that the payments do not become obligatory by reason of the death or permanent disability of the second party under the preceding paragraph, and in the event that Theodore Gary and Company does not pay or cause to be paid the total sum of Two Hundred Thousand Six Hundred Eighty-seven Dollars and Ninety-eight Cents ($200,687.98), as above set out, then the contract dated October 29, 1930, as amended September 9, 1931, between first and second parties shall remain in full force and effect, and any payments made or caused to be made by first party hereunder or as compensation for services of second party from October first, 1934, to January 15, 1936, sball be construed to be payments on account of tbe above mentioned original contract, as amended, between first and second parties, dated October 29, 1930, as amended September 9, 1931.

The $50,687.98 specified in the above agreement was paid during the year 1934 and is not the subject of controversy herein. The remainder of the amount, or $150,000, was paid to petitioner during the year 1935.

It is not clear from the evidence whether petitioner continued in the employ of the company after the execution of the contract of October 1, 1934, or not. In answer to the question whether he was with it at the time of the hearing he stated: “I have done some work for some of their subsidiaries, yes.” He also related that he “went to South America in 1935 and spent some three months there and in the West Indies; and then various of them came up here as I recall it. You were asking me about 1935.” At one place in the record he referred to a visit or a business trip made to Chicago by representatives of a South American republic, apparently in 1935. Substantial amounts were deducted by him from his gross income for entertaining such business guests, some of whom he stated stayed with him for six weeks and were entertained by him on his boat. At another place in the record he spoke of threats of “expropriating our telephone systems * * * confiscating them unless we are willing to make a certain kind of deal. Now the kind of deal they would like to have us make — ,” at which juncture his counsel properly stated: “Now, we are not going into that.” We point this out for the bearing it may have upon petitioner’s contention that he gave up his rights to participate in the pension plan of Theodore Gary & Co., which must of necessity be discussed and which the evidence shows was substantially as follows:

The company had adopted a “Plan for Employees’ Pensions, Disability Benefits and Death Benefits”, effective as of December 2, 1932. In so far as important herein, it provided for the deposit of certain amounts by the company, based upon its pay roll, in a fund to be administered by a committee of employees. Section 5, paragraph (1) (b), of the document specifying the terms and conditions under which the employees participate provides:

Any employee whose term of employment has been thirty years or more, or any male employee who has reached the age of fifty-five and whose term of employment has been twenty-five or more years, * * * may, at the discretion of the committee and with the approval of the President or of a vice-president designated by the President, be retired from active service and granted a pension.

Paragraph 2 of the same section provides that the “annual' pension allowance for each employee retired with a pension on account of age, length of service or disability” shall be a certain percentage of his average annual pay with a proviso to the effect that $30 per month shall be the minimum and $200 per month the maximum.

The petitioner alleges that the company had established and invariably followed the practice of not limiting retiring employees to the $200 per month maximum, paying, or causing them to be paid, from the fund, the percentage based upon years of service and salary. He therefore alleges that in terminating his contract of employment with the company he gave up not only his right to receive a pension of $200 per month, but really the right to receive $1,535.08 per month during the remainder of his life. His exact age was not shown; but the evidence does establish the fact that he would have been more than 55 years of age on December 31,1941.

Upon brief counsel relies only on the showing which was made to the effect that a man 50 years, of age in December 1935 could have purchased a life annuity paying him a monthly life income of $200 per month, without refund, at a cost of $26,007.80. This figure is important only in connection with petitioner’s last alternative contention.

While petitioner, as stated above, included $60,000 of the $150,000 in his gross income he now alleges that he erred in doing so and asks that we find he has made an overpayment in his tax for the year in question. He divides his argument into five parts as follows: (1) That the $150,000 was not income from services and was not a gain or a profit but was paid'by the company to be relieved of its obligation under the contract and was received by him as an amount that placed him in no better or worse position; (2) that the amount not being derived from capital, from labor, or from both combined, it is not income within the meaning of that term as construed by the Supreme Court in Eisner v. Macomber, 252 U. S. 189, and Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; (3) that it does not come within the provisions of section 22 (a) of the applicable revenue act unless the last portion thereof be given a broader construction than the words used should be given; (4) in the alternative, that he correctly reported only 40 percent of the amount because he made a “sale or exchange” of a capital asset when he terminated the contract of employment; and (5) as a final alternative that he is entitled to deduct as a loss at least $26,007.80 if it should be held that the' $150,000 represented a gain or profit to him. These contentions will be considered briefly in the order stated.

Petitioner argues that the payment was essentially “damages” for a wrongful breach of the contract of employment by the company, though made by agreement of the parties; that if the cancellation agreement had not been entered into and the contract had been breached he would have been entitled to receive only such amount as he could show was the damage sustained in consequence of such breach; that the amount of recovery would have been only sufficient to equalize the loss he would have sustained by reason of the breach and he would have been “neither ahead nor behind upon receiving the amount recovered”; that since no further services were required of him, it can not be said that he received income from services; and that by a parity of the reasoning contained in such cases as C. A. Hawkins, 6 B. T. A. 1023, and Mrs. Lyde McDonald, 9 B. T. A. 1340, which hold that no taxable income results from the receipt of “general damages for the personal injury suffered by reason of defamatory statements made”, alienation of affections, breach of promise to marry and the like, the amount in question can not be considered as income.

We can not agree with this contention. The amount received by petitioner comes squarely within section 22 (a) of the Revenue Act of 1934, which provides:

SEC. 22. GROSS INCOME.
(a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

Some of the language used by us in Walter M. Hort, 39 B. T. A. 922, 926 (on appeal, C. C. A., 2d Cir.), is apposite. In that case petitioner had received $140,000 for the cancellation of a lease on his property. We said:

This lease cost the petitioner nothing and we must assume, in accordance with the Commissioner’s determination, that it had no basis in his hands for gain or loss. The payment of $140,000 which he received was income. H. I. Josey, supra. Cf. Langwell Real Estate Corporation 47 Fed. (2d) 841, reversing 17 B. T. A. 196.
The final argument of the petitioner is that if the $140,000 was income, it was capital gain rather than ordinary income. Capital gain is defined in section 101 (c) (1) of the Revenue Act of 1932 as a gain from the sale or exchange of capital assets. A sale or exchange involves a transfer of property in goods. Williston on Sales (2d Ed.), vol. 1, ch. 1. Here the lease was extinguished, not sold or exchanged. The lessee did not acquire any valuable asset but merely obtained a release from his liabilities under the lease. The Supreme Court has held recently in Fairbanks v. United States, — U. S. — (3/27/39), that “payment and discharge of a bond is neither sale nor exchange within the normally accepted meaning of the words” and the gain derived from the redemption of bonds is not a capital gain. Likewise, it has been held that the settlement of a note for less than its face value is not a sale or exchange and does not give rise to a capital loss. Hale v. Helvering, 85 Fed. (2d) 819. Similar holdings have been made in regard to the voluntary surrender of a life insurance and annuity contract and in regard to liquidated damages for failure to perform a contract for the purchase of stock. Frank J. Cobbs, 39 B. T. A. 642; George A. Hellman, 33 B. T. A. 901; A. M. Johnson, 32 B. T. A. 156. Cf. James R. Stewart, 39 B. T. A. 87. Neither business men nor lawyers refer to the cancellation or forfeiture of a lease for a consideration as a sale or exchange. The $140,000 received by the petitioner is not capital gain hut is taxable to the petitioner as ordinary income. H. I. Josey, supra.

The translation by this petitioner of his contract right to receive compensation over a period of time into a single sum payable at once in cancellation of the contract, we think, resulted in the receipt by him of income. Walter M. Hort, supra; H. I. Josey, 38 B. T. A. 497; affd., 104 Fed. (2d) 453; Thurlow E. McFall, 34 B. T. A. 108. Cf. Edward H. Clark, 40 B. T. A. 333; Lyeth v. Hoey, 305 U. S. 188.

Eisner v. Macomber, supra, is cited by petitioner as supporting not only the contention presently being considered but also his second and third contentions. The three may therefore be considered together. Petitioner contends that under the rationale of the cited case the $150,000 “was not derived from capital or from labor and is not derived from both combined. Therefore, it is not income.” He argues that the last few words of the portion of section 22 (a) set out, supra, must be construed not as taxing “income derived from any source whatever”, as the statute states, but only as taxing “gains or profits” which are “income” from dealing in property. Therefore, he says, since he did not deal in property, he realized no income in the sense that the word is used in the statute.

Ho attempt will be made in this already too long opinion to discuss at length Eisner v. Macomber, supra. The language used by the Court in that case must be considered in the light of the facts then before it. The question was whether or not the recipient of a stock dividend had received income. In holding that she had not, the Court pointed out that nothing had been derived — received or drawn by the recipient for his (her) separate use, benefit and disposal. It was therefore held that no “income, from whatever source derived” (in the language of the Sixteenth Amendment) had been realized. But we do not construe the Court’s opinion, as petitioner apparently urges that it should be construed, as limiting the words “income derived from any source whatever” to gains and profits derived from dealing in property. We think that they should be construed merely as a statutory enactment of the essence of the Sixteenth Amendment, i. e., as an attempt by Congress to include in taxable income, “income from whatever source derived.” We hold, therefore, that the respondent properly included the amount in petitioner’s income for the taxable year.

Petitioner’s argument upon the fourth point is not persuasive. He neither “sold nor exchanged” a capital asset. Like the petitioner in Thurlow E. McFall, supra, he did not sell his contract, “for inherently this [he] * * * could not do.” His qualifications and skill formed the material ingredient in the contract and such a contract can not be sold. Arkansas Valley Smelting Co. v. Belden Mining Co., 127 U. S. 379; Estate of John D. Beals. 31 B. T. A. 966; affd., 82 Fed. (2d) 268; Sloan v. Williams, 138 Ill. 43; 27 N. E. 531; Salmon Lake Seed Co. v. Frontier Trust Co., 153 Atl. 671; Walter M. Hort, supra; Richard S. Doyle, 37 B. T. A. 323; affd., 102 Fed. (2d) 86. The respondent therefore did not err in determining that the amount received constituted ordinary income rather than a capital gain.

Petitioner’s fifth contention, that he is entitled to deduct the amount which'it would have cost him to purchase an annuity paying him $200 a month commencing at age 55, must be denied for lack of evidence. The evidence does not justify a finding that he gave up his right to receive a pension. It will be noted that the quoted section of the pension plan provides that “Any employee whose term of employment has been thirty years or more” may be retired from active service and be granted a pension. Petitioner, according to the certificate of the secretary of the fund, had formally been determined to be entitled to use the “date of June 1, 1903, from which to compute benefits to which * * * [he] would be entitled under the Plan”, after being given “credit for his services prior to December 2, 1932 with said Theodore Gary and Company and other companies allied and associated with said Theodore Gary and Company, as is permitted under said Plan.” He probably, therefore, had a vested right to receive a pension prior to October 1, 1934. The contract of that date is silent as to, and makes no mention whatever of, a pension. In addition, as we have mentioned above, even though the particular contract of employment was terminated, the record does not indicate whether he remained in the employ of the company in some other capacity or not. Inferentially he did; for he related in some detail the activities in which he engaged for and in behalf of the company during the year 1935. He also claimed and was allowed deductions from gross income in substantial amounts for entertaining business guests. We express no conclusion upon the issue of law which might have arisen if the necessary facts had been established by the evidence. We merely hold that the claimed off-set or deduction may not be allowed under the evidence before us.

The remaining question is: May dues paid to the Chicago Athletic Club in the amount of $162 be allowed as a deduction from gross income? Petitioner’s contention is that the amount, under the facts, should be allowed as an ordinary and necessary business expense under section 23 (a) of the Revenue Act of 1934.

The evidence upon this issue, though somewhat extensive, merely shows that petitioner belonged to the club before, during, and after the taxable year and paid his dues at the rate of $13.50 per month. He testified that he never made any use of the swimming pool or athletic features of the club, but used it for the purpose of entertaining business guests; also “for some business contact, we would meet in there.” “I use it [at the time of the hearing] about as I described it here before. I use it as a business contact.” Petitioner testified that during the taxable year his work with the company was that of a “negotiator”, negotiating telephone franchises, concessions, modifications in existing franchises and concessions, etc., with various countries, particularly South American countries. (This, it will be noted, was apparently after the termination of his employment contract.) That sometimes representatives of such countries came to Chicago and it was necessary for him to entertain them. The only specific instance given for the taxable year is as shown in the following excerpt from his testimony. “Well, I entertained them in my residence, I entertained them in a club such as this Chicago Athletic Club that was mentioned; I chiefly entertained them on a small motor boat I had, which was a rather unusual thing for every visitor here, and they all liked that sort of stuff. Seldom, if ever, would any of those people come to an office.”

The evidence that the dues were both ordinary and necessary expenses of carrying on a trade or business is not convincing, especially when examined in conjunction with the evidence upon the other issues from which it appears that petitioner may even have ceased his activities as a negotiator prior to the taxable year. Cf. Deputy v. duPont, 308 U. S. 488. Entertainment expenses have frequently been allowed as deductions; Cohan v. Commissioner, 39 Fed. (2d) 540; Joseph Kahn, 38 B. T. A. 1417 (appeal pending, C. C. A., 2d Cir.), and cases cited; and the Commissioner has allowed this petitioner to deduct several thousand dollars obviously expended by him for such purposes. But substantial evidence has always been made a prerequisite for the allowance of club dues. Cf. Louis Boehm, 35 B. T. A. 1106; N. H. Van Sicklen, Jr., 33 B. T. A. 544; Reginald Denny, 33 B. T. A. 738; Hal E. Roach, 20 B. T. A. 919; Blackmer v. Commissioner, 70 Fed. (2d) 255. Finding none such in the instant proceeding, we decline to disturb the respondent’s disallowance of the claimed deduction.

The respondent committed no error in determining the deficiency in tax.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    The Montreal Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93428.
    Promulgated February 16, 1940.

      R. H. Weir, for the petitioner.

      Thomas F. OalTaghan, Esq., and R. W. Patterson, Esq., for the respondent.
   Van Fossan :

In the single issue before us the petitioner contends that the respondent erred in deducting from its -gross income from the property amounts expended in the payment of silicosis claims, in order to arrive at net income therefor in computing percentage depletion under the provisions of section 114 (b) (4) of the Revenue Act of 1934, maintaining that such expenditures were in no way connected with the product of the property on which depletion was computed. It argues that operating expenses and any other deductions which must be deducted in arriving at net income, as contemplated by section 114 (b) (4) and article 23 (m)-l (A) of Regulations 86, must be attributable to the mineral property on which the depletion is claimed (as required by the regulations) and must be related to the taxable year at issue.

The petitioner’s position here is similar to that of the respondent in Helvering v. Wilshire Oil Co., 308 U. S. 90. In that case the taxpayer, consistent with a previously made election, took as deductions in the taxable year development expenses which were incurred in prior years. Such expenses had no direct relation to the production of oil from the taxpayer’s property during the taxable years. So here, the settlement of silicosis claims was, under the requirements of the Wisconsin Workmen’s Compensation Act, a normal incident in the operation of petitioner’s iron mines. While the contraction of the disease had no direct relation to the current year’s output, the disease itself directly grew from and had an immediate relation to the petitioner’s mining operations. The payment of silicosis claims must be placed in the same category as the development expenses which the Supreme Court held in the Wilshire Oil Co. case are required to be deducted from gross income in computing net income for depletion purposes. In line with and upon the authority of the decision in the Wilshire Oil Co. case, we sustain the respondent’s action.

The respondent points out that in its income tax returns for the year in question the petitioner claimed the benefit of the deduction of the amounts it paid in settlement of the silicosis claims and that such deduction was allowed in computing taxable net income. The petitioner argues, however, that although the deduction was proper for the year in which the claims were finally adjusted and paid, such payment was not an “operating expense” of that year, and that only operating expenses are deductible in computing net income as a depletion basis under the statute. This argument is answered by the decision in the Wilshire Oil Co. case. There development cost was certainly not an “operating expense” of the current year, yet it was recognized as deductible in computing net income for depletion purposes.

Decision will be entered, v/nder Bule 50.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      * * * * * 1? *
      (b) Basis tor Depletion.—
      * * * * * * *
      (4) Percentage depletion por'coal and metal mines and sdlphdr. — The allowance for depletion under section 23 (m) shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property. * * *

       Art. 23 (m) — 1.—Depletion of mines, oil and gas wells, other natural deposits, and timber; depreciation of improvements—
      * 4 * 4 4 4 4
      When used in these articles (23 (m)-l to 23 (m)-28) covering depletion and depreciation—
      4 4 4 4 4 4 4
      (h) “Net income of the taxpayer (computed without allowance for depletion) from the property,” as used in section 114 (b) (2), (3), and (4) and articles 23 (m)-l to 23 (m)-28, inclusive, means the “gross income from the property” as defined in paragraph (g) less the allowable deductions attributable to the mineral property upon which the depletion is claimed and the allowable deductions attributable to the processes listed in paragraph (g) in so far as they relate to the product of such property, including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc., but excluding any allowance for depletion. Deductions not directly attributable to particular properties or processes shall be fairly allocated. * » *


text:
    Mirabel Quicksilver Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97600.
    Promulgated February 16, 1940.

      Louis Jaznin, Esq., for the petitioner.

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

Van Fossan :

The question presented is whether or not interest and capital stock taxes should be deducted from gross income in computing net income for depletion purposes, pursuant to the provisions of section 114 (b) (4) of the Revenue Act of 1936.

The petitioner contends that the decisions of the Supreme Court in Helvering v. Wilshire Oil Co., 308 U. S. 90, and other cases, favorable to the respondent, do not dispose of the case at bar and argues that interest and capital stock taxes are not of such a nature as to bring them within the regulations. It also complains that the inclusion of interest paid on .borrowed money in the deductions under article 23 (m)-l (A) of Regulations 94 will discriminate against a company which has been compelled to borrow its capital in favor of one whose stock has all been sold for cash.

In the Wilshire Oil Co. case the Supreme Court approved a regulation (article 221 (i), Regulations 74) requiring the deduction of development expenses in computing net income' for depletion purposes. Article 221 (i) also requires the deduction of overhead expenses. Here the computation of such net income is governed by article 23 (m)-l (h) of Regulations 94,, which specifically likewise requires the deduction of overhead expenses in determining the maximum depletion allowance under the statute.

The items in question are clearly overhead expenditures. The petitioner is engaged solely in the mining of cinnabar, the chief ore producing mercury or quicksilver. The money borrowed was used to develop its mines and to provide plant and equipment for the production therefrom. The taxes were paid as a necessary condition to the petitioner’s continuance in business. Both expenditures bear a direct relation to the petitioner’s operations and the production from its property for the taxable year and must he deducted in computing its net income for depletion purposes under the statute.

Decision will be entered, under Bule SO.

       SEC. 114. BASIS EOB DEPRECIATION AND DEPLETION.
      *******
      (b) Basis for Depletion.—
      *******
      (4) Percentage depletion for coal and metal mines and sulphur. — The allowance for depletion under section 23 (m) shall be, in the case of coal mines, 5 per centum,’ in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, óf the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property.

       Art. 23 (in) — 1. Depletion of mines, oil and gas wells, other natural deposits, and timber; depreciation of improvements—
      * * * * * * *

        (h) “Net income of the taxpayer (computed without allowance for depletion) from the property,” as used in section 114 (b) (2), (3), and (4) and articles 23 (m)-l to 23 (m) — 28, inclusive, means the “gross income from the property” as defined in paragraph (g) less the allowable deductions attributable to the mineral property upon which the depletion is claimed and the allowable deductions attributable to the processes listed in paragraph (g) in so far as they relate to the product of such property, including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc., but excluding any allowance for depletion.


author: Disney :

text:
    A. Giurlani & Bro., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91797.
    Promulgated February 16, 1940.

      Martin J. Dinkelspiel, Esq., and Frank T. Andrews, G. P. A., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Disney :

The only question presented is whether $32,962.50 paid in 1935 by petitioner to creditors of the Italian corporation to save it from bankruptcy was deductible as an ordinary and necessary business expense or, in the alternative, as a loss sustained in trade or business.

Petitioners contend that the money was paid to protect the source of its supply of a distinctive and uniform olive oil, and that the payment averted the pending bankruptcy of the Italian corporation, the source of supply. In fact the evidence is sparse in regard to the object of the payment, or the effect. The petitioner alleges that petitioner’s representative was dispatched to Italy to investigate and obviate the impending loss of its vital olive oil business. This is by the answer denied. The only evidence adduced as to purpose of the payment was that the company in San Francisco received notice of the impending auction sale of the source of olive oil and was told “You have to take care of your future interest”, that the secretary of petitioner told the Giurlani brothers, the president and vice president of the corporation, that “our business was going to finish soon if we were unable to serve the brand of our oil and — The oil, the quality of the oil that we had”; that the “president and vice president knew, and admitted, that closing the source of the supply of Star Brand olive oil, we would at once be reduced to an inconsequential corporation”, and that as a result of this discussion or meeting he was sent to Italy with “full power to do everything on account to save our company.” Nothing further appears, and we are not informed as to the effect of the payment, except that at a later date petitioner bought Star Brand olive oil from Gaetano Giurlani, S. A. Since no issue is made in this regard and no evidence adduced to contradict the little produced by petitioner, we shall assume that the purpose was to protect the source of supply of olive oil. Was the expenditure either ordinary and necessary expense, or loss, of business? As stated very recently in Deputy v. du Pont, 308 U. S. 488, upon the same question here presented, “Review of the many decided cases is of little aid since each turns on its special facts.” Petitioner stresses as controlling First National Bank of Skowhegan, Maine, 35 B. T. A. 876, and several other cases from the Board; also Seufert Bros. Co. v. Lucas, 44 Fed. (2d) 528; and cites Welch v. Helvering, 290 U. S. 111; and respondent puts equal, but contrary, emphasis upon Welch v. Helvering, supra, as controlling, pointing also to Amtorg Trading Corporation v. Commissioner, 65 Fed. (2d) 583; Commissioner v. Field, 42 Fed. (2d) 820; and Foye Lumber & Tie Co., 33 B. T. A. 271.

The fact of an implication of the ordinary, in assistance rendered by banks to others, particularly in connection with the strain of the depression, is a major ground of decision in the First National Bank of Skowhegan, Maine, supra, case. Such implication can not be found here. We think that case can not prevail under the facts herein involved against what is said in Welch v. Helvering, supra, and in particular the latest expression in Deputy v. du Pont, supra, covering this subject, and more parallel and applicable to the situation here.

'Certainly we must say, of the expense here involved, as was said in the du Pont case, supra, “We can not assume that they are embraced within the normal overhead or operating costs of such activities.” Though sale of Star Brand olive oil was a very important element of petitioner’s business, we think that the protection of a source of supply by discharge of the liabilities in bankruptcy of the foreign corporation which sold to petitioner is distinctly out of the ordinary. A customer does not by normal standards pay the debts of a bankrupt manufacturer merely because of such relation as customer. It is patent that petitioner, in fact, relies upon no ordinary fact — the fact that only a certain distinctive unusual blend of olive oil would satisfy its trade— not even a brand like it made in the same city in Italy, but not exactly like it. Ordinarily, certainly, such a slight difference in a manufacturer’s product does not impel a distributee to pay the debts of the manufacturer when it becomes bankrupt. We conclude and hold that the expenditure of $32,962.50 by petitioner was not an ordinary expense of business under section 23 (a) of the Revenue Act of 1934. We also hold that it was not a loss under section 23 (f) of the same act. We think the expenditure has not the attributes of loss.

Decision will be entered for the respondent.


text:
    Harry E. MacConaughey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joel W. Kaufmann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mildred B. Kaufmann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92052, 95082, 95083.
    Promulgated February 16, 1940.

      Walter G. Fox, Jr., Esq., and Robert B. Gaylord, Esq., for tlie petitioner in Docket No. 92052.

      Walter G. Fox, Jr., Esq., Monte A. Dernham, Esq., and Donald M. Scott, Esq., for the petitioners, in Docket Nos. 95082 and 95088.

      Arthur L. Murray, Esq., and Harry R. Horrow, Esq., for the respondent.
   OPINION.

Disney : These proceedings, duly consolidated, involve deficiencies in income tax as follows:

All facts have been stipulated, by a general stipulation covering facts common to all cases and a supplemental stipulation in each proceeding as to facts not common to all. The facts so stipulated are found as facts by us, and will be set forth herein only so far as is necessary for disposition of the issue presented. The only issue left for our consideration is whether the “Coos Bay Lumber Company Syndicate” was an association taxable as a corporation.

The facts involved may be epitomized as follows: The Coos Bay Lumber Co. (hereinafter called the company) was for many years prior to 1928, and has ever since been, a corporation engaged in the lumber business. In addition to operating properties, such as lumber mills, it owned nonoperating timber lands. Through a reorganization which had taken place in 1927, the holders of the company’s bonds exchanged them for 63,757 shares of first preferred stock and 63,757 shares of no par value common stock, this being all of the common stock and all of the first preferred stock, and all was placed in a voting trust with power in the trustees to sell the same for the benefit of the beneficiaries, the former bondholders. The general creditors as a part of the reorganization received 10,000 shares of second preferred stock. On July 10, 1928, the company made a contract to sell for $2,000,000 a part of its nonoperating timber lands. The proceeds of that sale were received prior to April 12,1929. In 1928 an investment banking house, after investigating the financial standing, business, and operations of the company, decided that with the proceeds of sale of all or a substantial part of the remaining nonoperating timber lands the second preferred stock and a substantial portion of the first preferred stock could be retired, that the company’s earnings would pay 1 percent on the remaining first preferred stock, and that any preferred remaining, and the common, could be sold to sawmill operators in the southern states or otherwise disposed of. The investment bankers believed that, because of depletion of timber in the southern states, such sawmill operators desired to commence operations in the West.

On October 5,1928, the investment banking house, on its own behalf, made a contract to buy, and on November 1, 1928, did buy, from the voting trustees all of the first preferred and all of the common stock of the company, for $6,315,100 cash. On October 22, 1928, the invest^! ment banking house formed a syndicate to purchase from itself all of the first preferred and three-fourths of the common stock for an aggregate price of $6,315,100, retaining one-fourth of the common j stock as compensation for services as syndicate manager. All of they stock was to be deposited with the Bank of California, National Association, as depositary. The syndicate was to be divided into 63,151 units, each unit to be sold for $100, plus interest of 1 percent per annum from October 1,1928, until payment. All units were disposed of and each member signed and delivered to the syndicate manager a counterpart of the agreement forming the syndicate. The manager also signed a copy thereof. The purchase price of the units, $6,315,100, plus interest was paid to the investment banking house by itself as syndicate manager. There were 894 original members of the syndicate. Settlement for all units was made in cash by payment to the depositary, the Bank of California, National Association, for the account of the investment banking house as syndicate manager. The bank issued deposit certificates to each member acknowledging receipt of such payment.

The syndicate agreement provides, so far as material, that the syndicate manager, Peirce, Fair & Co., is forming a syndicate of which it will be manager and in which it will participate to purchase the first preferred and common stock of the company; that interests in the syndicate will be in $100 units; that “The purpose of this Syndicate is to acquire the stock above mentioned and to market or otherwise dispose of all or a part thereof”; that in material part the terms of the syndicate are: That no interest shall be transferable at any i.im e except with the express written consent of the manager, which may be given or withheld at the manager’s option in each case, provided that the manager hereby consents to pledge by any member of his interest for the purpose of borrowing money on the security thereof for his own use; that the manager reserves the right in its absolute discretion to determine who shall become members and the number of units to which anyone shall be permitted to subscribe; upon making payment, each member shall be entitled to a receipt; but nothing in the agreement or otherwise shall constitute the members partners with, or agents for, the manager; that except as otherwise expressly provided, the agreement shall bind and inure to the benefit of the several members, their heirs, executors, administrators and assigns; that the syndicate shall expire November 1, 1932, provided that the manager may, in its discretion, extend the term not to exceed four years, and may terminate the same at any time upon ten days’ written notice to tire members; that within thirty days after the termination of the syndicate, the manager shall make final distribution of the net assets and profits of the syndicate to the members pro rata; and that the manager’s apportionment and determination of profits, losses and expenses of the syndicate and its written statement of the results of the syndicate shall be conclusive upon the members.

The syndicate agreement further provides:

The Manager shall have the sole direction and management in all respects of transactions and business of the Syndicate. The members irrevocably grant to the Manager full power and authority, for account of the Syndicate, to do any and all acts and enter into and execute any and all agreements or other instruments necessary, proper or expedient, in the judgment of the Manager, to carry out and perform this agreement, including the right to sell at public or private sale from time to time, in the discretion of the Manager, any and all of the securities owned by the Syndicate, or to exchange any of such securities for other securities, and generally, as such Manager, to transact the business of the Syndicate in such manner as in its discretion it may deem for the best interests of the Syndicate. * * * The Manager shall have the right, in its own name or otherwise, but for the account of the Syndicate, to do all such things and take all such action as may be necessary in its discretion to sell, merge or consolidate the properties of the Coos Bay Lumber Company with those of any other person, firm or corporation or to reorganize, recapitalize or refinance said corporation, and for such purpose the Manager shall have the right to exchange any or all securities owned by the Syndicate for securities of any other corporation into which it may be merged or consolidated or to which its properties or any thereof may be sold, or for the securities of a reorganized or recapitalized corporation.
* * * If it shall become impossible to meet such expenses out of the income or profits of the Syndicate, the members agree to pay the same pro rata upon call of the Manager, provided that the total amount of all such calls by the Manager upon any one member shall not exceed 10% of the amount of his subscription hereunder.
J(c S¡C * # & * *
* * * It is also understood that in case the Manager participates in any underwriting or selling syndicate in connection with the marketing of the securities to be acquired by the Syndicate, or any thereof, it shall be entitled to receive a brokerage or commission on all securities marketed or sold by it, not exceeding 5% of the price at which such securities may be sold.

The instrument further provided that it should be accepted by executing one counterpart and delivering such executed counterpart to the manager, and that the other counterpart might be retained by the person thereby becoming a member; further that all of the counterparts executed by members and taken together should constitute the syndicate agreement as fully as though all parties had executed one agreement.

The deposit certificate received by a member from the Bank of California, National Association, in return for the money subscribed to the syndicate recited that it was nonnegotiable, but on the back thereof there is a printed form for assignment or transfer, together with a printed form for consent by the manager to the transfer.

The Coos Bay Lumber Co. paid from surplus a dividend for the quarter ended December 31, 1928, of $1.75 per share on all first preferred stock. Payment was made to the syndicate and on February 23, 1929, the manager enclosed to the members checks for their proportion thereof together with a balance sheet of the company under date of December 31, 1928.

The Coos Bay Lumber Co. paid from surplus a dividend for the quarter ended March 31, 1929, of $1.75 per share on first preferred stock. This was received by the syndicate and distributed by the manager.

The Coos Bay Lumber Co. purchased from the syndicate 15,939% shares of the first preferred stock, paying $100 and accrued dividend per share. The accrued dividend was applied by the manager against syndicate expenses and the principal sum received, amounting to 25 percent of the principal investment of the syndicate, was distributed by the manager on April 12, 1929, together with a financial statement of the company as of March 31,1929.

On July 15, 1929, the manager distributed a dividend of $1.75 per share paid by the company for the quarter ended June 30, 1929, on the outstanding preferred stock. Accompanying this distribution was a letter from the president of the company giving results of the company for the first six months of 1929, its estimate of probable earnings for the year, and a balance sheet as of June 30, 1929.

On October 25, 1929, the manager distributed a dividend of $1.75 per share received from the company on the outstanding preferred stock, together with a balance sheet as of September 30, 1929. On February 14, 1930, a dividend from the company of $1.75 per share on the preferred stock was distributed by the manager of the syndicate, together with a letter from the president of the company, similar to the one distributed on July 15,1929. Again on April 15, 1930, a dividend received from the company of $1.75 per share on preferred stock was distributed by the manager. On July 19, 1930, the manager distributed a letter with a copy of a letter from the president of the company, explaining why no dividend was being paid at that time. The balance sheet of the company as of June 30, 1930, was enclosed.

On February 11, 1931, the manager distributed a letter from the president of the company, together with a balance sheet and a comment upon the situation of the company, showing a net loss from the operations of the year 1930, and suggesting that some method must be found to provide the company with additional working capital. On August 6, 1931, a report was made by the manager, stating that the total amount of subscriptions and underwritings received for the proposed issue of notes and common stock of Coos Bay Lumber Co. was $728,690 on August 1, that $1,000,000 was the minimum amount the management would have felt justified in accepting, and, therefore, all subscriptions and underwritings received under the proposed financing were released.

On August 6, 1932, the manager distributed a notice that under the terms of the syndicate agreement the syndicate was to be terminated as of August 20, 1932. There was enclosed a complete statement of the company’s affairs, together with a copy of the balance sheet of the company as of June 30, 1932. Attention was called to the depression and its effect in decreasing the company’s working capital and prospective further diminution thereof. It was stated that the purposes of the syndicate had been defeated by the depression ; that it was felt that members should be placed in the possession of their stock, in immediate relationship to the board of directors; that the management would, before dissolving the syndicate, donate to the syndicate the 15,9391/4 shares of common stock of the company owned by it and retained by it at the time the syndicate was formed; that the manager would surrender to the company for cancellation the remaining outstanding shares of preferred stock, in simplification of the capital structure of the company; that this surrender would not decrease the proportionate participation of each member in the company, and that on or before August 20, 1932, there would be deposited with the Bank of California, National Association, as depositary for the syndicate, a certificate issued in the name of each member for his number of shares of common stock in the company, delivery of which certificate would be made upon delivery by the member of the deposit certificate held by him, together with his copy of the syndicate agreement dated October 22, 1928, and upon payment by him of 20 cents per unit, representing syndicate expenses incurred.

The petitioners herein received their proportionate share of the distributions made by the syndicate manager both in cash and in stock. Upon the termination of the syndicate they received one share of common stock of the Coos Bay Lumber Co. for each share held by them.

Petitioner Harry E. MacConaughey received upon termination of the syndicate 90 shares of the common stock of the company, and on December 28, 1934, sold same for $217.40. Petitioners Joel W. Kauf-mann and Mildred B. Kaufmann received 100 shares of said common stock and sold the same in 1936 for $1,096. The petitioners in filing their income tax returns deducted as a capital loss the difference between the sale price received and the adjusted cost basis of the units. In arriving at each deficiency, the respondent determined that the syndicate was an association taxable as a corporation, that the shares of the Coos Bay Lumber Co. stock sold were received in exchange for the units, upon which exchange gain or loss was realized, and that the cost basis of the stock sold was its fair market value on August 20, 1982, the date of distribution by the syndicate, which value respondent determined to be $3 per share. The respondent therefore as to petitioner Harry E. MacConaughey determined a loss of $52.60, with 60 percent thereof, or $31.56, recognizable. Petitioner MacConaughey had in his income tax return claimed a realized loss of $6,532.60, the difference between the sale price of $217.40 and an adjusted cost basis of $6,750. He therefore claimed a recognizable loss of 40 percent, or $2,613.04, and therefore claimed a capital loss of $2,000. As to the other petitioners, Joel W. and Mildred B. Kaufmann, his wife, respondent disallowed deduction of loss claimed and determined a realized gain of $796, of which 60 percent was determined to be taxable, one-half to each of the two petitioners. Petitioners Kaufmann and wife had claimed a realized loss of $6,424, the difference between the sale price of $1,096 and adjusted cost basis of $7,520, and claimed a deductible loss of 40 percent thereof, or $2,569.60, or $1,284.80 as to each.

The fair market value of common stock of the Coos Bay Lumber Co. on August 20, 1932, was $3 per share.

The only question requiring our determination is whether an organization was an association taxable as a corporation, as respondent contends, or a mere joint venture, pool or syndicate, as petitioners argue. The question is not an easy one, for the organization possessed characteristics tending both to prove, and to deny, the existence of an association of the nature taxable as a corporation. No single test can be applied, as appears from the stress laid sometimes upon one feature, sometimes upon another, in the various cases. We should certainly give weight to the purpose for which the organization was formed, as set forth in the agreement under which it is set up, and to purpose and actual operation rather than form. Commissioner v. Vandegrift Realty & Investment Co., 82 Fed. (2d) 387. The purpose here is plain. The corporate stock involved had previously been placed in a voting trust, with power in the voting trustees to sell the stock for the benefit of the beneficiaries (formerly holders of bonds of the company). The company already, at the time of formation of the “syndicate”, had a contract to sell some of its nonoperating timber lands for $2,000,000, and received the purchase price thereof several months after the “syndicate” was organized. In this situation an investment banking house, after investigating the financial standing, business, and operations of the lumber company, conceived the idea that the remaining nonoperating timber lands could be sold, all second preferred stock and a substantial part of the first preferred stock could be retired, and 7 percent dividends paid on the remaining preferred, and that any unredeemed preferred stock, and the common stock, could be sold to sawmill operators in the southern states or otherwise disposed of. The investment bankers had a theory that such sawmill operators desired to commence operations in the West, because of depletion of timber in the South. Thus it appears that an initial idea, first of the voting trust and then of the investment bankers, was the sale to others of the stock of the lumber company. The investment bankers then contracted with the voting trust to purchase, and did purchase, for cash, all first preferred and common stock and immediately organized on October 22, 1928, what they called a “syndicate.” Looking to the agreement entered into between the investment bankers and those who participated with them, we find again the idea of sale of stock predominating, for the agreement states its purpose:

* * * The purpose of this Syndicate is to acquire the stock ab.ove mentioned and to market or otherwise dispose of all or a part thereof. * * *

Eespondent suggests that the words “or a part” allowed retention of all or a part by the “syndicate” manager. Viewing the expression in the light of the earlier history of the matter and intent of the investment bankers, we think that such expression does not militate against the prevailing idea of sale of stock. Obviously it might be necessary to sell only a part, at any one time, as it might not be possible to sell all the stock. There is no suggestion of power to purchase stock, though cases have held organizations both to buy and sell stock not to be associations taxable as corporations. Later in the agreement exchange of securities is permitted, but this seems limited to exchange for securities of any other corporation with which there may be merger. We conclude that the object of the organization was not to do business generally, not trade generally even in the stock of the lumber company, but to dispose of such stock. Turning from purpose to activities, we see that in fact the activities of the organization consisted merely of receiving and distributing dividends upon the stock, selling to the lumber company a part of its first preferred stock, transmitting to the participants reports made by the company as to its operation and condition, and finally, when financial conditions changed, terminating the “syndicate” and distributing the stock. The respondent urges that the business of the lumber company was the business of the “syndicate.” We can not so disregard the corporate entities. The organization took no integral part in the operation or conduct of the lumber company. Of course the “syndicate” was organized for profit, but we think it was not engaged in business within the intent of the cases suggesting conduct of business as a test.

Considering now the form of the organization, we of course note that there is centralized management in a broad sense, for there was a manager. Morrissey v. Commissioner, 296 U. S. 344. Yet there was no board of directors, no power of control by participants, no officers, no meetings of participants. There were no certificates of participation, a counterpart of the agreement and a deposit certificate, stating that it is nonnegotiable, being the only evidence of a participant’s rights. There was no free assignability of rights. Though subject to hypothecation by a participant in borrowing money for his own use, any other transfer of a participant’s interest was subject to the express written consent of the manager. It is true that the agreement bound and inured, except as otherwise provided, to the benefit of the members, “their heirs, executors and assigns”, but as above seen, pow?er to assign was specifically limited. The same expression in effect appeared in the syndicate agreement in E. L. Cord, 38 B. T. A. 1372, wherein we held a syndicate not to be taxable as a corporation. Liability of the participants was not limited as in a corporation. Liability for expenses was limited to 10 percent, but general liability was not so limited. Continuity of enterprise was limited by the power of the manager to terminate at any time, upon 10 days’ notice, and by the fact that no provision was made for selection of a successor to the manager. Dissolution of Peirce, Fair & Co., the manager, would have terminated the syndicate so far as the terms of the agreement are concerned. The term of the agreement is of course much longer than those considered by us in Pierre S. du Pont, 37 B. T. A. 1198, and John J. Raskob, 37 B. T. A. 1283, where we held there was no association taxable as a corporation, but otherwise there is considerable similarity. Title to the stock did not rest in the “syndicate” as such, though the manager could by express provision of the agreement hold it in its own name or in the name of others. The organization agreement provided no name for the group. It had no office, no books, no stationery, and no bylaws. The manager, Peirce, Fair & Co., kept records upon its own books as to the affairs of the syndicate, but designated no part of its office for syndicate transactions.

Reviewing all of the attributes of the organization here presented, it seems to us to partake of agency rather than of an association taxable as a corporation. The powers of the manager are expressly and irrevocably granted by the agreement: “The members irrevocably grant to the Manager full power and authority, for the account of the Syndicate, to do any and all acts”, etc. The manager was given power to decide in its absolute discretion who should become members of the “syndicate.” Its determination and apportionment of losses, profits, and expenses were conclusive. Such an agreement seems to us not to present the similarity to a corporate set-up which the cases require. To review and distinguish decisions would render little aid, for they, of course, vary in the facts presented. Deputy v. du Pont, 308 U. S. 488. We think that we have before us here an organization merely to dispose of certain stock, not even to buy or deal in it; or if not to dispose of all, mer,ely to hold the remainder for the members, and distribute dividends or other distribution by the corporation, in a manner more similar to such cases as E. L. Cord, supra; N. B. Whitcomb Coca-Cola Syndicate, 35 B. T. A. 1031; affd., 95 Fed. (2d) 596; W. S. Farish, 36 B. T. A. 1114; and Darol Trading Account, 34 B. T. A. 837, involving holding of stock, rather than cases such as Swanson v. Commissioner, 296 U. S. 362, and Helvering v. Coleman-Gilbert Associates, 296 U. S. 369, where real property was owned and operated for long periods of time, or Helvering v. Combs, 296 U. S. 365, involving drilling of an oil well.

After analysis of the original intent of the organizers, the powers conferred by the agreement, and the activities conducted herein, we conclude and hold that petitioners did not own interests in an association taxable as a corporation, and therefore the distribution to petitioners upon termination thereof was not liquidation of such an association, and the basis for determination of gain or loss to them was the net investment made in the organization.

Decision will be entered under Rule 50.


author: Turner:

text:
    Shoemaker-Nash, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96338.
    Promulgated February 16, 1940.

      M. A. Matlock, Esq., for tbe petitioner.

      Stanley B. Anderson, Esq., for the respondent.’
   OPINION.

Turner:

According to the facts, the petitioner is a dealer in new and used automobiles, and was so engaged during the taxable year. In payment for automobiles sold it received notes of the purchasers, which notes it subsequently sold to either one of two finance companies. It is stipulated that petitioner kept its books of account and reported its income on the accrual method. With respect to proper treatment for income tax purposes of proceeds from sales made by a concern which keeps its accounts and makes its returns on the accrual basis, the Supreme Court, in Spring City Foundry Co. v. Commissioner, 292 U. S. 182, had the following to say:

* * * Keeping accounts and making returns on tile accrual basis, as distinguished from tbe cash basis, import that it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income. When the right to receive an amount becomes fixed, the right accrues. When a merchandising concern makes sales, its inventory is reduced and a claim for the purchase price arises. Article 35 of Regulations 45 under the Revenue Act of 1918 provided: “In the case of a manufacturing, merchandising, or mining business ‘gross income’ means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.”
On an accrual basis, the “total sales”, to which the regulation refers, are manifestly the accounts receivable arising from the sales, and these accounts receivable, less the cost of the goods sold, figure in the statement of gross income. If such accounts receivable become uncollectible, in whole or part, the question is one of the deduction which may bo taken according to the applicable statute. * * *

.The petitioner being on the accrual basis, we assume., that such profit as may have been realized on the sale of the automobile itself was accrued on petitioner’s books when the sale was made and the subsequent sale of the notes to the finance company was a new and separate transaction. The selling price of the automobile having been so accrued, however, it may seem difficult on first impression to understand just how the notes received in payment of the selling price of the automobile can result in further gain to the dealer unless the finance company purchasing the notes pays a premium therefor or the notes include some charge or fee in excess of the selling price of the car. The parties have failed to submit a full stipulation of facts in that connection and no proof was offered at the hearing. From the respondent’s notice of deficiency, however, it is to be inferred that the notes included a charge or fee over and above the selling price of the automobile. From the notice of deficiency we quote the following :

The reserve for repossessions, $2,252.25,- is offset on tbe balance sheet by an equal amount shown as Retained by Finance Companies. Since your corporation reports income on the accrual basis, the amount due from finance companies should be included in taxable income.
Attention is called to General Counsel Memorandum 9571 (Cumulative Bulletin X-2, 1931, page 153) which is summarized as follows:
Under the plan outlined in the instant case, where a sale of an automobile is made on a credit basis, the purchaser executes a note or notes for the deferred payments, including a service charge. The notes are endorsed by the dealer and turned over to the finance company, which then remits to the dealer the unpaid portion of the selling price, not including the service charge. The finance company maintains a reserve account and, upon taking over such notes, credits the dealer therein with a portion of the service charge.
The credit thus given by the finance company to the dealer is properly to be included and taken up as income on an accrual basis of accounting, when the credit is made in favor of the dealer by the finance company.

In any event, there is no suggestion or claim that the amounts withheld by the two finance companies upon the purchase of the notes from the petitioner, the amounts so withheld being the amounts here in controversy, do not represent profit on the disposition of the said notes and do not, in fact, constitute income to the petitioner if, as, and when the said amounts become properly accruable, the claim of the petitioner rather being that General Counsel’s Memorandum 9571, C. B. X-2, p. 153, is not to be accepted as laying down a general rule of law, and further that the instant case is distinguishable from the case dealt with in G. C. M. 9571 in that the payment of the reserves withheld by the finance companies in the instant case were so contingent that they might never be paid and should not, therefore, be accrued as income until their actual release and payment.

There is nothing to indicate and, in fact, there is no contention that the price at which any given notes were sold was not agreed upon and did not become fixed at the time of the sale. The withholding of the reserve credit had to do with the time of payment and in no way affected or changed the selling price of the notes. It is true that the release or payment of the reserve credit did not automatically follow the payment or reduction of the notes of any particular automobile purchaser, but contrary to the inference to be drawn from the petitioner’s brief, we are unable to conclude that the reserve credits were any the less absolute credits by the finance companies to the petitioner, payable without limitation, than in the case dealt with in G. C. M. 9571, supra. In that case it was pointed out that the dealer received the full benefit of the reserve credit either by actual payment ox-through credit on his liability as endorser in the event the purchaser of the automobile failed to meet his obligation on the notes. In the case here the petitioner was not even liable as endorser with respect to certain of the notes sold by it to the C. I. T. Corporation, the said notes having been sold and endorsed to that corporation without recoux-se, and in the event of default on those notes by the purchaser of the automobile, the only apparent recourse that the C. I. T. Corporation had against the petitioner was to repossess the automobile covei-ed by such notes and to require the petitioner to purchase the automobile at a price and subject to the conditions specified in the coixtract between it and petitioner. Furthermore it appears that the C. I. T. Corporation not only purchased deferred payment notes from the petitioner, but extended credit to petitioner in connection with the acquisition of new cars from the manufacturer and with respect to another activity designated as the “C. I. T. Quick Turn Over Plan — Used Car Wholesale”, and the reserve retained by the C. I. T. Corporation out of the purchase price of the deferred payment notes was held in part at least as security for the credit or advances so made. Obviously where the reserve credit retained out of the purchase price of deferred payment notes becomes a reserve securing credits or advaxxces otherwise granted or made to the petitioner by the C. I. T. Corporation, there is no basis whatever for the claim that the said reserve credit retained from the purchase pi-ice of the notes is contingent and may never be paid. Cf. Luther Bonham, 33 B. T. A. 1100; affd., 89 Fed. (2d) 725.

From the above it is, in our opinion, apparent that the sale of notes of automobile purchasers to the finance companies was as much a part of the business carried on by the petitioner as the sale of the automobiles themselves, cf. Hercules Motors Corporation, 40 B. T. A. 999, and, the petitioner being on the accrual basis, we find nothing in this case to justify the conclusion that the profit from the sale of such notes is not aecruable when the notes are sold. Spring City Foundry Co. v. Commissioner, supra; Rouss v. Bowers, 30 Fed. (2d) 628. For, although the amount of the reserve credit is not immediately paid and does not become immediately payable, there is no showing that it will not be collectible when due or that its collection in the future is improbable. The decisions in Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85, and other cases of similar import discussed by the petitioner in its brief are not applicable here.

Decision will loe entered for the respondent.


author: Keen : Murdock, OppeR,

text:
    Estate of Giles W. Mead, Deceased, Arthur L. Erb and Elise G. Mead, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97566.
    Promulgated February 20, 1940.

      Dana Latham, Esq., for the petitioners.

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

Keen :

The first issue presented for our decision involves, substantially, the same question that was decided by the Supreme Court in Estate of Sanford v. Commissioner, 308 U. S. 39, whether in the case of an inter vivos transfer of property in trust, the donor reserving to himself the power to designate new beneficiaries other than himself, the gift becomes complete and subject to the Federal gift tax at the time of the relinquishment of the power.

In the Sanford, case the donor in 1913 created a trust of personal property for the benefit of named beneficiaries, reserving to himself the power to terminate the trust in whole or in part or to modify it. In 1919 he surrendered his power of revocation, reserving the right to modify the trust, but provided that such reservation should not be construed to include any right in the donor to withdraw principal or income from the trust. In 1924, after the effective date of the gift tax statute, the donor renounced his remaining power to modify the trust. The court held that the gift became completed and taxable only upon the donor’s final renunciation of his power to modify the trust.

The facts in the case before us bring it squarely within the decision of the Sanford case, supra, and upon the authority of that decision we hold that the renunciation by the decedent, in 1937, of his power to alter or amend the trust instrument resulted in the completion of a taxable gift with respect to the corpus of the trust to the extent of its fair market value at the date of the renunication of the power. Since the petitioner has offered no evidence of the value of the assets of the trust as of that date, the determination of the respondent is approved.

The second issue presents the question of whether the distribution by the trustee to Elise G. Mead, the beneficiary under the trust instrument of both the A and B trusts, resulted in taxable gifts by decedent in the amounts so distributed during the respective years before us. This issue arises from the determination by the respondent that each distribution of trust income made to the beneficiary, prior to the renunciation by the grantor of his reserved power to change beneficiaries, constituted a completed gift to her by the grantor in the amount distributed.

The respondent cites Hesslein v. Hoey, 91 Fed. (2d) 954; Porter v. Commissioner, 288 U. S. 436; and Estate of Sanford v. Commissioner, supra, as authority for his determination. In these and related cases cited by the respondent, the question before the court was whether the transfer of the corpus became completed and subject to tax on the termination of the reserved power to modify the trust either by renunciation of the power or by death of the donor.

The issue here involves only the income from the trust property and as we view the case the rationale of the decisions applicable to gifts of corpus is not controlling. Our attention has not been called to any decided case precisely in point. The argument of the respondent that the gift of income was completed when distribution was made by the trustee, “even though the first step of the gift may have been taken when the trust was established” is ingenious, but, in our opinion, is untenable under the facts before us.

The instrument creating the trust entitled the beneficiary to the net income of the property held in trust during her lifetime or until the donor exercised his power to change beneficiaries. She thus became the owner of an equitable interest in the corpus of the trust property, subject to being divested by the happening of a subsequent event. Cf. Blair v. Commissioner, 300 U. S. 5; Brown v. Fletcher, 235 U. S. 589; Irwin v. Gavit, 268 U. S. 161. By virtue of this interest in the corpus of the trust she was entitled to enforce the trust, to have a breach of trust enjoined, and to require the net income to be paid over to her by the trustee. The interest was present property, alienable like any other in the absence of a valid restraint upon alienation. Blair v. Commissioner, supra. Since the net income was currently distributable to her, it became her property within the meaning of the taxing statutes at the time of its receipt by the trustee. United States v. Arnold, 89 Fed. (2d) 246. The reserved power of the donor did not affect the quantum of her interest. It only made its duration contingent upon the exercise of the power by the decedent to change beneficiaries. The termination of the power in 1937 merely removed the contingency. In this situation it is obvious that when net income from trust property accrued there arose an obligation of the trustee to distribute such income to the beneficiary of the trust. The distribution was in satisfaction of that obligation and not a gift of income to the beneficiary by the donor of the trust at the time of distribution. We hold that the amounts distributed are not taxable as gifts of the donor in the respective years before us.

It should be borne in mind that the trust involved herein is not a revocable trust of such a nature that the income therefrom would be taxable to the donor. Knapp v. Hoey, 104 Fed. (2d) 99; Ellsworth B. Buck, 41 B. T. A. 99. Since the income will not be considered for purposes of taxation as having been received by the donor of the trust, it would appear illogical to consider it as being the subject of a gift from the donor of the trust to the beneficiary.

Reviewed by the Board.

Decision will he entered under Rule 50.

Murdock,

dissenting: I dissent from that part of the opinion which holds that the periodic payments of income were not gifts.

OppeR,

dissenting: I feel obliged to question the soundness of the majority opinion in its second phase — that which deals with the taxation as gifts of the periodic payments of income.

Section SOI (c) of the Revenue Act of 1932 describes certain circumstances under which a transfer of principal is excluded from the category of taxable gifts; prescribes the change in that situation which will render the transfer taxable; and concludes:

* * * and any payment of the income therefrom to a beneficiary other than the donor shall be considered to he a transfer by the donor of such income by gift.

We know that a reservation of the right to change beneficiaries prevents a gift of principal from being sufficiently complete to invoke the tax, Hesslein v. Hoey, 91 Fed. (2d) 954, (C. C. A. 2d Cir.), certiorari denied, 302 U. S. 156; and that only the renunciation of that right by inter vivos action or at death is considered definitive, Estate of Sanford v. Commissioner, 308 U. S. 39; see Burnet v. Guggenheim, 288 U. S. 280; Reinecke v. Northern Trust Co., 278 U. S. 339. In fact, that is the majority view in this case. Why then is no correlative principle applicable to the intervening payments of income so that these become complete and taxable as gifts only when they actually inure to the benefit of a specific grantee ?

It matters little whether the principle of the cases cited is that complete control over the designation of beneficiaries is equivalent to that power to “revest in the donor” as to which the statute is articulate; or whether such control is so fundamentally opposed to the concept of a gift that as a matter of general law the tax would be inapplicable to such arrangements even in the absence of any express exception in the statute. Cf. Burnet v. Guggenheim, supra. Under either hypothesis, it is clear that the rule of expressio v/nius is not to apply strictly to the exemptions specified in 501 (c). The donor need not be a potential beneficiary of the principal in order to defer the tax until a definite grantee is ascertainable. Why need he be of the income?

I can not read the applicable authorities except as establishing that the gift tax provisions are suspended until it can be determined whether the grantor is an “Injun giver.” He might have been such here as to the payments of income, no less than with respect to the corpus, until each completed transfer put it beyond his power of recall. Are we to say that, before this, the beneficiary’s ownership of future income was more secure than her equitable interest in the principal?

The majority’s conclusion is stated to derive in some degree from the assumed proposition that the grantor was not taxable on the trust income. It is thought this renders it anomalous to treat as a gift from him that which he never received. But it seems to me by no means clear that the grantor must be regarded as immune from taxation on income of this nature, for the reasons stated in the dissenting opinion in Ellsworth B. Buck, 41 B. T. A. 99, particularly the last paragraph thereof. And certainly if one’s dominion over these fruits be sufficiently real it is of little moment whether they pass physically through his hands. Lucas v. Earl, 281 U. S. 111; Douglas v. Willcuts, 296 U. S. 1; Saenger, Inc. v. Commissioner, 84 Fed. (2d) 23 (C. C. A., 5th Cir.); certiorari denied, 299 U. S. 577.

Smith and HaeroN agree with this dissent.

       (c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor’s death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift.


author: Steenhagen :

text:
    The Chase National Bank of the City of New York, as Trustee under Trust Agreement Dated July 1, 1931, Between American Depositor Corporation, Depositor, and The Chase National Bank of the City of New York, as Trustee, Creating “Corporate Trust Shares, Accumulative Series,” Petitioner, v. Commissioner of Internal Revenue, Respondent. The Chase National Bank of the City of New York, as Trustee under Trust Agreement Dated July 1, 1931, Between American Depositor Corporation, Depositor, and The Chase National Bank of the City of New York, as Trustee, as Modified by Supplemental Agreement Dated September 23, 1932, Creating “Corporate Trust Shares, Accumulative Series (Modified),” Petitioner, v. Commissioner of Internal Revenue, Respondent. The Chase National Bank of the City of New York, as Trustee under Trust Agreement Dated July 1, 1931, Between American Depositor Corporation, Depositor, and The Chase National Bank of the City of New York, as Trustee, Creating “Corporate Trust Shares, Series AA,” Petitioner, v. Commissioner of Internal Revenue, Respondent. The Chase National Bank of the City of New York, as Trustee under Trust Agreement Dated July 1, 1931, Between American Depositor Corporation, Depositor, and The Chase National Bank of the City of New York, as Trustee, as Modified by Supplemental Agreement Dated September 23, 1932, Creating “Corporate Trust Shares, Series AA (Modified),” Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93857, 93855, 93856, 93854.
    Promulgated February 20, 1940.

      Weston Vernon, Jr., Ésq., for the petitioners.

      Walt Mandry, Esq., for the respondent.
   OPINION.

Steenhagen :

The Commissioner determined as to each of the four petitioners deficiencies in income and excess profits taxes for 1934. He now concedes the excess profits tax deficiencies to have been determined in error, and they are therefore no longer in issue. The income tax deficiencies result from the determination that petitioners are associations and therefore taxable as corporations, and the petitioners assail this determination. There is no other issue.

The petitioners are investment trusts within the general class commonly known as fixed trusts. They are administered under similar plans of operation, which the findings set forth in resume, and the evidence shows no departure in their conduct from the provisions of the respective instruments. Securities constituting the investments of each are restricted to a prescribed portfolio, which neither the trustee nor the depositor may enlarge and which may be reduced only upon contingencies so minutely specified that only negligible discretion may be exercised by either in respect of the invested funds. Eeinvestments are entirely forbidden. Under the agreement of 1931, “Corporate Trust Shares, Accumulative Series” (identical with the other three except in details hereafter mentioned), the trustee, holder of the legal title and certificates of the deposited shares and funds, is directed to collect all cash and other distributions, to convert, the other distributions into cash, except those paid in common stock, and to distribute all such moneys proportionately to the trust share holders at semiannual intervals. The trustee may sell none of the shares constituting corpus except at the discretionary direction of the depositor, which may exercise this discretion only upon the occurrence of specified events tending to indicate that the shares are not a sound investment, or in case of the failure of any distribution by a constituent corporation for a year and 30 days, in which case a sale of its shares is mandatory. The proceeds of all such sales and also of liquidating distributions are distributable semiannually, as is income. Since no replacement shares may be purchased under any condition, the trust’s stock portfolio might be permanently decreased, and if by such decreases the number of constituent corporations should fall below 16, the trust would terminate. The agreement of 1931 relating to series AA differs principally in that the trustee is also to sell common stock received as dividends and distribute the proceeds. Under the modified agreements, the depositor may direct the sale of any constituent shares which it regards as an unsound investment, and the exercise of its power to make such a direction is not conditioned upon the occurrence of specified events. Continuance of the trusts is not dependent on any minimum number of constituent corporations.

In general, under all of the agreements the trustee is to hold corpus and collect and distribute income and proceeds of trust property sold, and the depositor is to watch over and preserve the safety of investments by directing advisable sales. But it may not direct reinvestment. The trustee’s functions, prescribed in detail, are purely ministerial, except in some cases of minor importance, such, for example, as a discretionary election in the course of a constituent corporation’s reorganization. The depositor may direct sales to eliminate unsafe investments, and perform other acts, such as voting constituent shares, which are among the usual powers of the ordi7 nary trustee.

The plan clearly provides no “medium for the conduct of a business and sharing its gains”, and the trustee’s operations under them can not properly be called “an enterprise for the transaction of business”, which the Supreme Court in Morrissey v. Commissioner, 296 U. S. 344, regarded as implicit in the statutory term “association.” The collection and distribution of income, the sales of securities and other acts of the trustee, and the acts of the depositor are but incidental to the holding and conservation of the corpus. These acts are different from such activities as the improvement, subdivision, and sale of real estate, the operation of apartment houses and other buildings, the development of oil lands, and the conduct of a medical clinic, which have been held to stamp the trusts performing them as associations. On the contrary, a trust which merely holds property and collects income is not to be classed as an association, Myers v. Commissioner, 89 Fed. (2d) 86 (C. C. A., 7th Cir.), even though, as here, the trustee acts in accordance with the directions of an agent or manager whose powers were:

definitely fixed in advance of their exercise. He possessed no authority beyond that expressly delegated by his principal. * * * The duties of the trustee were purely ministerial, with no power to control, direct, or participate in, the conduct of the selling enterprise contemplated by the contract. [Lewis & Co. v. Commissioner, 301 U. S. 385.]

In several cases investment trusts operating under plans similar to that of petitioners have been held associations, but in each instance profits were sought from the sale and reinvestment of trust funds. The combined powers of the trustee and the depositor under petitioners’ agreements fall short of any authority “to take advantage of wide swings in the market”, as in Investment Trust of Mutual Investment Co., 27 B. T. A. 1322; affd., 71 Fed. (2d) 1009 (C. C. A., 2d Cir.); to “invest and reinvest all sums of money deposited * * * making investments in its sole discretion”, as in Brooklyn Trust Co. v. Commissioner, 80 Fed. (2d) 865 (C. C. A., 2d Cir.); certiorari denied, 298 U. S. 659; to conduct “an investment business for profit”, as in Ittleson v. Anderson, 67 Fed. (2d) 323 (C. C. A., 2d Cir.), or to trade “on the market”, as in Fred T. Murphy et al., Trustees, 25 B. T. A. 724.

We find upon the present record that the trustee and depositor or both combined were not given and did not in 1935 exercise any powers beyond those which are necessary incidents to the preservation of trust property, the collection of income therefrom, and its dis-^ tribution to the holders of trust shares. Unlike the organization in Morrissey v. Commissioner, supra, petitioners’ object was only “to hold and conserve particular property, with incidental powers, as in the traditional type of trusts.” They were not “created and maintained as a medium for the carrying on of a business enterprise.” It is unnecessary to decide whether they had other “salient features” resembling those of corporations which would otherwise invite the tax. The Commissioner erred in classifying the petitioners as associations, and his determination is reversed.

Reviewed by the Board.

Decision will he entered under Bule 50.

         Kilgallon v. Commissioner, 96 Fed. (2d) 337 (C. C. A., 7th Cir.) ; certiorari denied, 305 U. S. 622.

        Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Swanson v. Commissioner, 296 U. S. 362; Title Insurance & Trust Co. v. Commissioner, 100 Fed. (2d) 482 (C. C. A., 9th Cir.) ; Solomon v. Commissioner, 89 Fed. (2d) 569 (C. C. A., 5th Cir.) ; certiorari denied, 302 U. S. 692; Williams Trust, 39 B. T. A. 612 (on review C. C. A., 6th Cir.) ; Cleveland Trust Co., Trustee, 39 B. T. A. 429 (on review C. C. A., 6th Cir.) ; Lee H. Marshall Heirs, 39 B. T. A. 101 (on review C. C. A., 3d Cir., and C. A. D. C.).

        Helvering v. Combs, 296 U. S. 365 ; United States v. Trust No. B. I. 35, 107 Fed. (2d) 22 (C. C. A., 9th Cir., Oct. 25, 1939) ; Thrash Lease Trust v. Commissioner, 99 Fed. (2d) 925 (C. C. A., 9th Cir.) ; certiorari denied, 306 U. S. 654; C. A. Everts et al., Jamison Lease Syndicate, 38 B. T. A. 1039.

         Pelton v. Commissioner, 82 Fed. (2d) 473 (C. C. A., 7th Cir.). See also Gibbs-Preyer Trust No. 1, 39 B. T. A. 492 (on review C. C. A., 6th Cir.).