author: McMahon:

text:
    Pacific National Bank of Seattle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74685.
    Promulgated March 4, 1936.

      Emery F, Hess, Esq., and H. L. Scott, G. P. A., for tbe petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $1,331.65.

The petitioner is a national bank organized under the laws of the United States, with its principal office in Seattle, Washington.

In 1931, the books of the petitioner were examined by a national bank examiner. Thereafter, under date of November 20, 1931, upon the report of such examiner dated September 8, 1931, and pursuant to his instructions, depreciation in the total amount of $11,209.08 on certain bonds was charged off “in accordance with instructions from the Comptroller”, as follows:

Allegheny Corpn. 5’s 1944-$1, 933.12
Am. Rolling Mills 4⅛ 1933- 393.75
Bloedel Donovan Lbr. Mills 6 1933- 60. 33
Phillips Pet. Corpn. 5⅛ 1939- 1,417. 50
Remington Rand Deb. 5½ 1947- 2, 513. 75
U. S. Rubber Co. 6’s 1933- 568.13
Olympic Forest Products Co. 6 1933- 562. 50
Asso. Telephone Utilities 5½ 1944- 1, 062. 50
Postal Tel. & Cable Co. 5⅛ 1953_ 1, 910. 00
Peoria & Eastern Ry. 4 1978- 787. 50

In its return for 1931 the petitioner claimed a loss deduction in the total amount of $11,209.08, representing “Depreciation Charge-off on Bonds in Compliance with the requirements of the Comptroller of the Currency”, including the! items above set forth. This deduction was disallowed by the respondent on the following grounds:

Write down of investment bonds not an allowable deduction. No showing of partial worthlessness has been made as required under the provisions of section 23 (j) of the Revenue Act of 1928.

Upon the foregoing facts, which we find and which are the only facts we can find upon the record, the only issue involved is whether the respondent erred in disallowing a deduction for bad debts in the amount of $11,209.08 written off upon the books of the petitioner during 1931 pursuant to instructions of the national bank examiner.

The petitioner contends that it is entitled to a bad debt deduction under section 23 (j), Revenue Act of 1928, and article 191 of Regulations 74.

While the evidence shows that the amount of $11,209.08 was charged off on the books of petitioner, there is no evidence showing that the bonds in question were, in 1931, worthless to the extent claimed by petitioner or that the petitioner determined that the bonds involved herein were then worthless to that extent. The making of a charge off is not sufficient. The evidence discloses that the amount of $11,209.08 was charged off on the books upon direction of the bank examiner. There is no evidence as to the reasons or facts upon which the bank examiner’s determination was based except that the examiner’s report discloses his “estimated market value” of the bonds involved herein and the rating of the bonds as shown by Moody, Standard Statistics, Fitch, or Bond and Quotation Service. No evidence of default in interest or evidence of probable default in payment of principal at maturity was presented. There is evidence pertaining to quotations from the New York Stock and Curb Exchanges on some of these bonds and on common stock of some of the companies which issued these bonds, a statement of average prices for 1930 and 1931 of 60 unidentified bonds listed on the New York Stock Exchange, a statement showing sales of some of the bonds involved made by petitioner after 1931, and a statement showing the “Net Income after all Charges” for 1929, 1930, and 1931 of some of the companies involved, as shown by Moody’s manuals, which discloses that some of the companies had deficits in earnings in 1931 and some in 1930 and 1931. This, without other evidence of default, receivership, or financial difficulties, is not sufficient to establish the worthlessness of the debts represented by such bonds to the extent claimed. The quotations merely reflect market prices and show the fluctuations thereof. No bad debt deduction is allowable merely upon a showing of market quotations. Fluctuations in market prices represent merely paper losses or gains depending on whether such quotations are below or above the cost basis. While some of the debtor companies may have had deficits in 1931 and also in 1930, this, without other evidence, is not sufficient to show that such debtor companies were in default in 1931, or that they would be unable to pay these obligations in full when due. They may have had ample resources to take care of all obligations in spite of a deficit in annual earnings or income.

In Second National Bank of Philadelphia, 33 B. T. A. 750, contentions similar to those made by the petitioner herein were fully considered and discussed by the Board, and that decision is controlling herein. In that case the Board found that a showing that certain bonds were, in the year there in question, in default as to interest, and the debtor was, as to each, in receivership, that the national bank examiner found also that the bonds were quoted on the market at a small value and directed that they be written down, and that in compliance with such direction a charge-off was made, in the absence of countervailing evidence by the Government, was sufficient to establish that the debts were, to the extent claimed, worthless. We have no such showing in the instant proceeding. However, as to certain other bonds, where there was no evidence of a default or receivership or any reason shown giving rise to a belief that they would not be paid at maturity in their entirety, a bad debt deduction to the extent of a charge-off directed by the national bank examiner was not allowed, although it was shown that some of the bonds became in default in the year following the year in question therein, and the bank examiner determined that the market value was substantially lower than the value at which they were carried on the books. Upon authority of that case we therefore hold that the direction of a national bank to charge off a portion, of the book value of bonds depreciated in value is not sufficient to .entitle the petitioner to a deduction of the amount so charged off under section 23 (j), Revenue Act of 1928, notwithstanding the provisions of article 191 of Regulations 74 to the effect that debts charged off in part by a bank, pursuant to the direction of a bank examiner, shall be presumed to be worthless to the extent charged off in the absence of affirmative evidence to the contrary. Since that case, a very recent case, is controlling, no useful purpose would be served by discussing the numerous authorities cited in petitioner’s brief.

Decision will be entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * * * * *
      (j) Bad Debts. — Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

       Art. 101. * ⅜ * Where banks or other corporations which are subject to supervision by Federal authorities (or by State authorities maintaining substantially equivalent standards) in obedience to the specific orders, or in accordance with the general policy of such supervisory officers, charge off debts in whole or in part, such debts shall, in the absence of affirmative evidence clearly establishing the contrary, be presumed, for income tax purposes, to be worthless or recoverable only in part, as the case may be.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    Margaret Day, Charles Corson Day, William L. Day, and Fidelity-Philadelphia Trust Company, Executors u/w Charles Day, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75103.
    Promulgated March 4, 1936.

      Frederick E. 8. Morrison, Esq., and Henry 8. Drinker, Jr., Esq., for the petitioners.

      Harry F. Morton, Esq., and Frank M. TTionvpson, Jr., Esq., for the respondent.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * ⅜ *

   OPINION.

Matthews :

The principal issue for determination is whether the respondent erred in including in the decedent’s gross estate the value of the property covered by the five trusts created by the decedent during his lifetime. It will be observed that all of these trusts were created subsequent to the enactment of the Revenue Act of 1926, the statute here applicable, so that no question of unconstitutional retro-activity arises. Cf. Nichols v. Coolidge, 274 U. S. 531; Helvering v. Helmholz, 296 U. S. 93. None of the trusts was created in contemplation of death and each contained a provision by which the settlor reserved the power to alter, amend, or revoke, with the concurrence of the beneficiary, the trusts therein contained. This power to revoke was not exercised or relinquished by the decedent during his life in respect of either trust made for his two sons, and it is not questioned that it remained in full force and effect until the decedent’s death. Our first question, therefore, is whether the cessation of this power at death was the cessation of such substantial control over the property of these two trusts as to warrant their inclusion in the decedent’s gross estate.

Any doubts which may have existed upon the inclusion of such an interest have been put at rest by the Supreme Court’s recent decision in Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. In that case the husband was a beneficiary to the extent of a life interest, following the settlor’s, and to the extent of the corpus if he should survive the settlor’s two daughters'. The husband survived the settlor, the trust continuing in force. “The trust was irrevocable”, the Supreme Court said, “save that the settlor reserved the right to modify, alter or revoke it, in whole or in part, or to change any beneficial interest, any such revocation or alteration to be effected with the written consent of the trustee and her husband or, if the husband were dead, of the trustee and her brother.” Although it was argued on behalf of the taxpayer that section 302 (d) of the Revenue Act of 1926 should be construed in the light of section 219 (g), which would amount to adding to the phrase “in conjunction with any person” the words “not a beneficiary of the trust”, it was pointed out by the Supreme Court that the language was plain and its clear intent could not be disregarded. The Court held that there was nothing unreasonable or arbitrary in the provisions of section 302 (d) and that where, subsequent to the passage of the Revenue Act of 1926, the creator 'of a trust estate saw fit to reserve to himself jointly with any other person the power of revocation or alteration, the transaction should be treated for the purposes of the law as intended to take effect in possession or enjoyment at the death of the settlor.

We are of the opinion, therefore, that the value of the trusts created by the decedent for his two sons was properly includable in his gross estate.

In the trust for his daughter, created the same day as those for her brothers, the income was to be paid to her for life from the date of her majority (March 1, 1937), with remainder as she should appoint, or to her heirs. During her minority the trustee was to apply the trust income towards her “maintenance, education and support”, the receipt therefor of her father, the settlor, or of her mother being a proper acquittance to the trustee. The power to alter or revoke was reserved in the same terms as were used in the trusts for the decedent’s sons except that in the provision relative to the concurrence of the beneficiary the words were added, “after she shall have attained majority.” This power remained unexer-cised at the time of decedent’s death.

The petitioners contend that the decedent had no power to revoke at the time of his death in 1931, since at that time his daughter had not reached her majority and the power to revoke would not spring into being until she could concur in its exercise. This is a matter of construction and we can not agree that this is a normal construction of the actual words used or, even if the words should be thought ambiguous, that it would be a reasonable construction to put on decedent’s intention in all the circumstances. The clause, “with the concurrence and assent of the said Margaret Dunning Day after she shall have attained majority”, would seem to be a limitation on the decedent’s power only when and after his daughter should have reached her majority, leaving the decedent’s power to revoke during her minority free and untrammeled. It would have been idle to-put in the concurrence of his daughter while she was still a minor, and it is not likely that the decedent would have put beyond himself a full control of her interests while he was still her natural guardian. Everything points to an absolute power of revocation in the decedent during his daughter’s infancy, which was to be limited by her concurrence only after she had reached years of discretion.

We are of the opinion, therefore, that the decedent’s power to revoke was unconditioned in respect of the trust for his daughter at the time of his death, and hold that its value was properly in-cludable in his gross estate.

We shall next consider the two trusts the uses of which were-changed by the decedent in accordance with the power to alter or revoke reserved by him as settlor. In the case of the trust for his wife, the original trust indenture provided that the trustee should pay the net income to the decedent for life, then to his wife for life, then to his three children equally for their lives with a gift over of the remainder to their appointees. On February 5, 1931, the decedent exercised, by a written instrument executed by himself and his wife jointly, his power to alter the original trust with his wife’s concurrence and revoked the provision with respect to paying the income to himself for life, “to the end that the income from the said fund shall be payable to Margaret Day, wife of the said Set-tlor, from this date forward, during her life with remainders over as in the said Indenture recited.” No other alteration or amendment was made by the decedent, it having been expressly recited in the instrument dated February 5, 1931, that it was the intention of the settlor “to modify in part the uses and trusts in said indenture contained as hereinafter recited, the terms and conditions of said indenture to otherwise remain unchanged.”

We are of the opinion that the value of the property so transferred in trust by the decedent is includable in the decedent’s gross estate. The modification in part of the uses and trusts contained in the original trust deed, by revoking that portion which provided that the settlor should receive the net income for his life, did not amount to an exhaustion of the powers reserved to the settlor in the original deed. Indeed, the provisions of the original deed were expressly reaffirmed in that the terms and conditions thereof were not to be changed, except for the modification in the one particular which was accomplished under the instrument dated February 5, 1931, by revoking the life interest of the settlor. The settlor still retained the power, with the consent of his wife, to make any desired alterations or amendments with respect to the remaining uses and trusts contained in the original deed and there was no change in the provisions governing the ultimate disposition of the property. Under these circumstances we do not agree with the petitioners’ contention that the decedent had no further control over the property of this trust after the' execution of the instrument dated February 5, 1931.

In the case of the trust for the decedent’s mother, the original trust indenture provided that the trustee should pay the net income therefrom to his mother for life and at her death should pay the corpus to the decedent. On May 4, 1931, the decedent and his mother signed a written instrument which revoked the uses and trusts contained in the original trust indenture and directed that the fund so assigned should be held by the trustee in trust, to pay the net income therefrom to his mother for life and at her death to divide the corpus into three separate shares and to add one of such shares to each of the trusts created by the decedent for the benefit of his three children under the three trust deeds dated August 21, 1930. No other alteration or change was made by the decedent, it having been expressly recited in the instrument dated May 4,1931, that it was the intention of the settlor “to revoke the uses and trusts in said indenture set forth and to make new uses as hereinafter recited, the terms and conditions of said indenture to otherwise remain unchanged.”

We are of the opinion, that the value of the property covered by this trust is likewise includable in the decedent’s gross estate. What we have said above with respect to the trust created by the decedent for his wife is applicable also to the trust created for his mother. In each instance the decedent reserved to himself an interest in the trust created by the original deed and by amendment he gave up the interest which he had so reserved. In the case of the trust created for the benefit of his wife the decedent ivas to receive the income for life, and he modified the trust by revoking his life interest; under .the terms of the trust created for the benefit of his mother the corpus of the trust was to revert to the decedent or to his estate after his mother’s death, and he substituted for this provision a paragraph providing that the corpus should be divided and the shares added equally to the trusts which he had established for the benefit of his three children. Inasmuch as all other terms and conditions of the original trusts were to remain unchanged, and the right to alter, amend, or revoke, with the concurrence of the beneficiary, was one of the other terms and conditions, we hold that the decedent did not relinquish his right to exercise control over the property thereby transferred and effectually to direct its devolution. The decedent having retained the power to revoke or change the trusts, in conjunction with the beneficiaries, which power was not exhausted when the trusts were altered under the circumstances hereinabove set out, the enjoyment of the property was, at the date of the decedent’s death, subject to a change through the exercise of such power, within the meaning of section 302(d).

In the view which we have taken it is unnecessary for us to consider the respondent’s alternative argument that the decedent’s modification of the trusts in favor of his wife and his mother, by the instruments dated February 5, 1931, and May 4, 1931, amounted to a relinquishment in contemplation of death of the powers reserved to him under the original deeds of trust; for this reason we have not incorporated in our findings of fact, and we shall not discuss herein, any of the evidence introduced by the parties with respect to the decedent’s physical and mezital condition on the significant dates, or the circumstances connected with his last illness, which evidence is claimed to throw light on the motives actuating the decedent in making disposition of the property covered by the trusts.

The petitioners claim as an allowable deduction, under section 303 (a) (1), the sum of $15,000 as additional counsel fees incurred in administration of the decedent’s estate; $5,000 has already been claimed and allowed. The parties stipulated that the petitioners have agreed to pay and will pay their counsel as additional fees at least the $15,000 claimed, and that the total amount of $20,000 is comparable to tbe fees ordinarily paid in estates of this size and will therefore be allowed by the Orphans’ Court. In these circumstances'we hold that the $15,000 claimed as a deduction in respect of additional attorneys’ fees should be allowed. Irving Bank-Columbia Trust Co. et al., Executors, 16 B. T. A. 897; Arthur M. Lamport et al., Executors, 28 B. T. A. 862; William Rhinelander Stewart, Jr., et al., Executors, 31 B. T. A. 201.

This brings us to the three deductions, in the total amount of $23,500, claimed in respect of pledges made by decedent during his life to certain educational and charitable institutions. The several donees are public educational or charitable institutions, not run for private gain, within the meaning of the statute. The petitioners claim them under section 303 (a) (1) or (a) (3), Revenue Act of 1926, set out in the margin. Although they were originally allowed by the respondent, he avers in his amended answer that they should be disallowed on the ground that none of the pledges was made for a full and adequate consideration in money or money’s worth.

With respect to the gifts to the Benjamin Franldin Memorial, Inc., and the Welfare Federation of Philadelphia, the decedent expressly promised to pay the specified amounts in consideration of the subscription of others. The facts bring these pledges squarely within the ruling of this Board in Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339, and Robert A. Taft, Executor, 33 B. T. A. 671, in each of which decisions certain claims of charitable and educational institutions against the decedent’s estate based upon monetary pledges of others were held to be for an adequate and full consideration in money or money’s worth, within the meaning of section 303 (a) (1). We therefore hold that the deductions -claimed by the petitioners on account of these two items are proper and should be allowed by the respondent in computing the net estate subject to tax.

We are of the opinion that the same rule is applicable to the underwriting agreement executed by the decedent, whereby he agreed with the other underwriters and with the Pennsylvania Museum of Art to insure the sum of $25,000 toward a fund to be used by the museum for the purchase of certain works of art, in accordance with the terms and conditions therein set out. This underwriting agreement is quoted in full in our findings of fact and the parties have stipulated the facts relating to the collection of the fund. The decedent’s subscription was in consideration of like subscriptions by others; it amounted in effect to a gift to the museum which, although indefinite in amount when subscribed, will have to-be paid in full by the petitioners. Under these circumstances we hold that the claim for the balance of $17,500, which had not been paid prior to the decedent’s death, is based on the money promises of others, within the rule of Jeptha E. Wade, Jr., et al., Executors, supra, and constitutes an allowable deduction.

As to petitioners’ claim in respect of a credit against the Federal estate tax for state inheritance and estate taxes paid, nothing appears of record beyond petitioners’ claim for such a credit in their petition and their counsel’s enumeration of the same claim in stating the issues in their brief. No argument or facts were adduced in support of the claim. Respondent recognized the sum of $101,906.03 as an allowable credit in respect of this claim in his deficiency notice. While the facts stipulated show that petitioners claimed the sum of $112,124.96, we have no evidence that this sum was actually paid. We must conclude, therefore, that petitioners have abandoned this claim in excess of the amount of $101,903.06 already allowed.

Reviewed by the Board.

Judgment will he entered under Rule 50.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide, and for an adequate and full consideration in money or money’s worth, * * *

      (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; * * *.


author: Seawedl :

text:
    Edward E. Trost, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73848.
    Promulgated March 4, 1936.

      William B. Mahoney, Esq., for the petitioner.

      James E. Yeatman, Esq., for the respondent.
   OPINION.

Seawedl :

Whether petitioner is taxable on the net gain received by him in the sale of the Vacuum Oil Co. stock and/or the Liberty Bank stock, at the “ordinary rate” or at the “capital net gain rate” under the existing facts and admissions, depends upon the proper definition of “capital assets” as contained in section 101 of the Revenue Act of 1928. Subsection (c) (8) of that section defines “capital assets” to mean “property held by the taxpayer for more than two years (whether or not connected with his trade or business).” As respondent admits the stocks mentioned were held by petitioner for more than two years, and the parties are in agreement as to the amount of gain realized by petitioner upon its sale in the taxable year, there would be nothing further to decide if the subsection (c) (8) ended with the above quotation. But, by way of exception, the statute proceeds as follows: “but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of hig trade or business.” If, therefore, the stocks in question fall within the enumerated exceptions contained in the further quoted part o.f the statute, they would not be “capital assets”, and the gain would not be “capital net gain” but “ordinary gain”, and the taxpayer would lose.

Under the adjudicated cases in the Board and the courts we are of opinion, and hold, that the transactions in controversy do not fall within said exceptions. The securities purchased by petitioner and sold for his account by the firm in 1930, were not held by petitioner as “stock in trade” or “primarily for sale in the course of his trade or business”, Taylor v. Commissioner, 76 Fed. (2d) 904; certiorari denied, 296 U. S. 594. The securities under the circumstances were not such as “would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.” Clinton Gilbert, Jr., Executor, 20 B. T. A. 765, 771.

In a recent case where the petitioner was a member of a brokerage firm and did a large volume of trading in his personal account, and there were other facts comparable to those here present, we said :

Although it is undoubtedly true that the petitioner was ready to sell any of his investments when the market quotations would show him a satisfactory profit, the evidence does not show that these securities were held “primarily for sale in the course of” petitioner’s trade or business, or in fact that the petitioner individually had a trade or business of buying and selling securities. His purchases and sales were such as might be made by any investor or retired business man. Such a person would not ordinarily be regarded as engaged in a business of buying and selling securities. To regard the petitioner’s purchases and sales of securities as a trade or business within the contemplation of the statute does violence to the very language of the statute and to the purpose which Congress had in mind in providing for the taxing of gains from the sale of property held more than two years at the capital gain rate. That object was to facilitate sales of property which had been held for a long period and which had greatly appreciated in value. See Ways and Means Committee Report (p. 10) and Finance Committee Report (p. 12) on Revenue Act of 1921. * * *
* * * # * * *
We are of opinion that a professional man, such as a lawyer or a doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business. We think that the same observation applies to the petitioner at bar. He was not engaged as an individual in a trade or business of buying and selling securities ; consequently, he could not be regarded as holding them primarily for sale in the course of his trade or business.
The petitioner is entitled to report his gain from the sale of the 4,000 warrants in the amount of $239,864.50 as a capital net gain. [Francis M. Weld, 31 B. T. A. 600.]

See also Albert Raiss, 21 B. T. A. 593; Ignaz Schwinn, 9 B. T. A. 1304.

We sustain petitioner and hold that respondent was in error.

Judgment of no deficiency will be entered.


author: Van Fossan:

text:
    Continental Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28427.
    Promulgated March 5, 1936.

      Arthur B. Hyman, Esq., for the petitioner.

      J. L. Baekstrom, Esq., and P. A. Sebastian, Esq., for the respondent.
   OPINION.

Van Fossan:

From the Board’s decision in this proceeding, following the opinion of May 19, 1931, 23 B. T. A. 311, the respondent filed a petition for review in the Court of Appeals for the District of Columbia. The Board’s decision was reversed, November 27, 1933, Commissioner v. Continental Oil Co., 68 Fed. (2d) 750, and the proceeding remanded with instructions “to proceed in accordance with the views expressed in the opinion of this Court.”

In its opinion, the Board held that the deficiency notice covered only the petitioner’s liability for the tax, if any, owing by the Mutual Oil Co. of Maine, for the period January 1 to March 15, 1920, and, since that company owed no tax, it having sustained a net loss in that period, there ivas no transferee liability, and it accordingly determined no deficiency. Under that decision, the Board found it unnecessary to dispose of three assignments of error pertaining to the merits of the deficiency and, consequently, no decision was made as to them. The court held that the notice asserted “a liability for taxation for the period in question against Continental as transferee of all the oil companies involved”, namely, Mutual Oil Co. of Maine, Mutual Oil Co. of Arizona, Mutual Refining & Producing Co., and Northwestern Oil Refining Co. This decision of the court not only requires us to examine further the matter of petitioner’s liability, under section 280 of the Revenue Act of 1926, for the deficiencies in taxes, if any, of Maine, Arizona, Mutual Refining, and Northwestern, for the period January 1 to March 15, 1920, but renders it necessary now to disj)ose of the three assignments of error left undecided by our earlier opinion. These assignments are:

(a) That respondent determined the taxpayers’ invested capital for the period in question to be a proportional part of the full invested capital;
(b) That respondent determined the taxpayers’ net income for the period in question to be $198,489.18, whereas the correct net income is $79,657.27; and
(c) That respondent failed to give credit for income and profits taxes paid in behalf of the taxpayers for the period in question, in the amount of $200,707.45.

Briefly reviewing the facts set forth in our earlier opinion, pertaining to the matter of petitioner’s liability as transferee, it appears that throughout the period in question Maine owned all of the capital stock of Arizona, Mutual Refining, and Northwestern; that on March 15,1920, petitioner acquired all of the capital stock of Maine; that on March 15, 1920, Maine transferred all of its assets to petitioner, in exchange for 600,000 shares of petitioner’s capital stock, which shares had a fair market value of not less than $9 each; that the value of the net assets so transferred by Maine to petitioner was sufficient to meet Maine’s liability, if any, as of the date of transfer, for income and profits taxes; that Maine, Arizona, Mutual Refining, and Northwestern were in existence, carrying on and conducting their respective businesses, throughout the whole of 1920; that petitioner filed a consolidated return for 1920, which return included the net income and invested capital for the whole of 1920, of Maine, Arizona, Mutual Refining, Northwestern, and itself, and showed a total tax of $200,707.45 which petitioner paid; that for the period in question, Maine sustained a net loss of $8,255.02; that on April 30, 1921, Mutual Refining and Northwestern, without any consideration therefor, transferred all of their assets to Arizona; that the value of the net assets so transferred by Mutual Refining and Northwestern to Arizona was, in each instance, sufficient to meet the transferor’s liability, if any, as of the date of transfer, for income and profits taxes; that on December 31,1921, Arizona, without any consideration therefor, transferred all of its assets to petitioner; that the value of the net assets so transferred by Arizona to petitioner was sufficient to meet Arizona’s liability, if any, as well as the liabilities of Mutual Refining and Northwestern, if any, as of the date of transfer, for income and profits taxes; that petitioner was a Maine corporation, and Mutual Refining and Northwestern were Wyoming corporations; and that Maine and Mutual Refining were dissolved in 1921 and Arizona and Northwestern were dissolved in 1922.

Since Maine sustained a net loss in the period January 1 to March 15, 1920, it is obvious that there can be no deficiency, and, hence, no transferee liability on the part of the petitioner, in respect of the taxes of that company for the period in question.

The petitioner is liable in equity as transferee of the assets of Arizona, Mutual Refining, and Northwestern, in respect of the deficiencies in taxes of those companies for the period in question. It concedes that it is the transferee of Arizona; but, contrary to its contention, it, and not Arizona, is likewise the direct transferee of Mutual Refining and Northwestern. The petitioner, as the sole shareholder of Mutual Refining and Northwestern, was the motivating force behind the transactions in which those two companies transferred, without any consideration therefore, all of their assets to Arizona, in which it was also the sole shareholder. Corporations do not and can not dispose of their assets in such a manner as to create a condition of virtual insolvency, without the consent of their shareholders. Certainly, Arizona was in no position to compel the other two companies to transfer their assets, without consideration, to it. The substance of the transactions, by which Mutual Refining and Northwestern divested themselves o.f all of their assets, was that those two companies distributed their assets in liquidation and Arizona received them as the nominee of the petitioner. The petitioner is chargeable with the constructive receipt of those assets in the first instance, and their transfer to Arizona was but an added investment in that company by petitioner. Cf. Homer S. Warren et al., Administrators, 31 B. T. A. 1041, 1048.

The petitioner argues that it is the taxpayer in respect of the taxes due on the income of Mutual Refining and Northwestern for the period in question; that it can not have the dual capacity of both taxpayer and transferee; and that since its liability in respect of those taxes is that of a taxpayer, “it follows that the statute of limitations bars the assessment and collection of any alleged deficiency, for the Board has held that original liability became extinguished on March 15, 1926, one year before the deficiency letter was issued by the respondent.” The entirely erroneous argument that petitioner is the taxpayer is predicated upon the facts that it filed a consolidated return for 1920, which included the income of Mutual Refining and Northwestern for the whole of that year, and that it paid the tax shown to be due upon that return. But petitioner had no affiliated relationship with Mutual Refining and Northwestern, or with their common parent, Maine, prior to March 15, 1920, and the inclusion of their income of the antecedent 1920 period in the consolidated return for calendar 1920 has no statutory justification and was error. Mutual Refining and Northwestern, together with Maine and Arizona, existed as an entirely separate affiliation during the period in question, for which period, a separate consolidated return, including the income of those four companies, was required. The fact that petitioner filed an incorrect return for 1920 and paid the tax shown to be due thereon can not serve to put the petitioner in the place and stead of Mutual Refining and Northwestern, as the taxpayer, in respect of the taxes due upon the income of those companies for a period during which there was no affiliated relationship of the three. The cases cited by petitioner are not in point, for in all of them an affiliated status actually existed in the period under consideration.

Since the value of the net assets received by petitioner from Arizona, Mutual Refining, and Northwestern exceeded, in each instance, the transferor’s liability for income and profits taxes, as of the date of the transfer, the petitioner is liable in respect of the entire deficiencies, if any, in the taxes of those companies.

In its earlier opinion, the Board made the following findings:

⅜ ⅜ ⅛ tlie respondent * * * determined that a consolidation existed with the Mutual Oil Company of Maine as parent, Mutual Refining and Producing Company, Northwestern Oil Refining Company and Mutual Oil Company of Arizona as subsidiaries for the period January 1 to March 15, 1920, and a new consolidation with the Elk Basin Consolidated Petroleum Company (the petitioner) as parent, the Mutual Oil Company of Maine and its said subsidiaries as subsidiaries for the period March 15 to December SI, 1920.
For the period January 1 to March 15, 1920, respondent fixed invested capital at January 1, 1920, at the sum of $3,192,636.27 and apportioned to the period January 1 to March 15, 1920, two and a half twelfths thereof, to-wit, $065,-132.55. The accuracy of the figures is conceded, the propriety of the apportionment of invested capital being in controversy.

Tile petitioner contends that “there is no authority in law for the apportionment of invested capital for the purpose of arriving at, excess profits taxes”, and that Maine, Arizona, Mutual Refining, and Northwestern are entitled to have their profits taxes for the period January 1 to March 15, 1920, determined upon the basis of their full invested capital and not a fractional part thereof. Since the affiliation which existed in the period January 1 to March 15, 1920, of Maine, Arizona, Mutual Refining, and Northwestern, was an entirely different and separate affiliation from that which existed during the remainder of calendar 1920, a separate consolidated return was required for the said period; and it has long been settled that when changes in affiliation require the making of a return for a fractional part of a year, section 326 (d) of the Revenue Act of 1918 applies and invested capital is the same fractional part of the average invested capital for the year. Green River Distilling Co., 16 B. T. A. 395. Pittsburgh West Virginia Railway Co., 32 B. T. A. 66, 75. None of the cases relied upon by petitioner are in point, since all of them deal with either the first or the last accounting period of the taxpayer concerned, which is entirely different from a fractional period created by change in affiliated status. The respondent’s determination of invested capital for the period in question conforms with the view above expressed, and, accordingly, it is approved.

In respect of the matter of the net income of Maine, Arizona, Mutual Refining, and Northwestern, the Board’s earlier opinion contains these findings:

For the year 1920 the income of the Mutual Company of Arizona was the sum of $187,905.41, the income of the Northwestern Oil Refining Company was the sum of $420,977, and the income of the Mutual Refining and Producing Company was the sum of $403,672.45, as determined by the respondent, of which net incomes respondent apportioned to the period January 1 to March 15, 1920, two and one-half twelfths thereof in the following amounts:
Mutual Oil Company of Arizona-._ $37, 991. 80
Mutual Oil Company of Maine, loss (actual)- 8,255.02
Northwestern Oil Refining Company- 85,115. 57
Mutual Refining & Producing Company- 81, 616. 83
Total net income. $196, 469.18
Exhibit O filed with the stipulation is a statement purporting to show the net income of the Mutual Refining and Producing Company for the period January 1 to March 15, 1920, which statement truly and accurately reflects such income so far as same may be determined without an actual closing of the books, it being stipulated that such closing was not made. The respondent does not concede that his method of determining the net income for the period is incorrect.
Exhibit D attached to the stipulation is a statement purporting to show the net income of the Northwestern Oil Refining Company for the period January 1 to March 15, 1920, which statement truly and accurately reflects such income so far as same may be determined without an actual closing of the books, it being stipulated that such closing was not made. The respondent does not concede that his method of determining the net income for the period is incorrect.
Attached to the stipulation (marked exhibit E) is a statement purporting to show the net income of the Mutual Oil Company of Arizona from January 1 to March 15, 1920, arrived at by determining the ratio of gross profits to sales for the entire year and applying such ratio to the period January 1 to March 15, 1920, as to all departments except the Chanute Refinery. Such statement, except page one headed Statement of Income for Eirst Two and One-half months of 1920, correctly shows the entries in the books of said company, the propriety of such method of computing net income, however, not being admitted by the respondent. No monthly inventories were taken for the period involved except that the net income of the Chanute Refinery was determined by using monthly inventories of stocks, it being also stipulated that the books of the Chanute Refinery were not closed monthly. The respondent does not concede that his method of determining the net income of the Mutual Oil Company of Arizona for the period January 1 to March 15, 1920, is incorrect.
The net loss of the Mutual Oil Company of Maine, which owned only the stocks of the Mutual Oil Company of Arizona, Northwestern Oil Refining Company and the Mutual Refining and Producing Company, for the period from January 1 to March 15, 1920, was the sum of $8,255.02.
⅝ ⅜ ⅜ ⅜ ⅜ ⅜ ⅜
The income as shown by the books did not differ from a situation in which the books had been actually closed at the end of each month with the exception that the depreciation was not computed monthly. Depreciation was the only item which distinguished between the closing and nonelosing of the books. In order to arrive at the income of the Mutual Oil Company of Arizona for the period from January 1, 1920, to March 15, 1920, the ratio of percentages of the gross profit to gross sales was applied to actual sales. Comparison with the two succeeding years in which physical inventories were actually kept from month to month showed the same percentages.

Exhibit C shows net income of $80,604.23 for Mutual Refining; Exhibit D shows net income of $45,326.97 for Northwestern; and Exhibit E shows a net loss of $39,010.31 for Arizona. Petitioner contends that these are the proper figures for determining the tax liabilities of the companies concerned, for the period in question, rather than those determined by respondent by an arbitrary formula.

The practice of determining net income for a fractional part of a year by apportionment of the year’s entire net income on a time basis has received the sanction of this Board and the courts, when circumstances indicated tRe unavailability of other methods more capable of clearly reflecting net income. L. S. Ayers & Co., 1 B. T. A. 1135; Carl Lang, 3 B. T. A. 417; Peter W. Rouss, 4 B. T. A. 516; Watab Paper Co., 27 B. T. A. 488; and Rouss v. Bowers, 30 Fed. (2d) 628; certiorari denied, 279 U. S. 853. But where net income for the fractional part of the year is clearly reflected by the books, or circumstances indicate that it may be more clearly reflected by other methods, the time formula of apportionment must give way. Grego A. Anticich, 18 B. T. A. 513; and Reynolds v. Cooper, 60 Fed. (2d) 650.

Here, in the case of Mutual Refining and Northwestern, there was a complete monthly accounting, on the books, of all income and expenses, except depreciation which apparently was entered only annually, even to the taking of physical inventories. True, the books were not closed, which required only the closing of the nominal accounts into profit and loss account, but if they had been, the accounting results would not have been different. A simple mathematical calculation was all that was necessary to determine the proportional part of the annual depreciation charge applicable to the period in question, and that has been correctly made on exhibits C and D. Surely, in the case of these two companies, net income is more clearly reflected by taking the actual net income of January and February and one half of the actual net income of March, than by a fractional part of the entire year’s net income. Accordingly, we find that the net income of Mutual Refining and Northwestern, for the period in question, is $80,604.23 and $45,326.97, respectively.

In the case of Arizona, the situation is somewhat different. At the very outset we are confronted with petitioner’s computation in Exhibit E showing a net loss of $39,010.31 for the 2%-month period in question, although the company had a net income of $187,905.41 for the entire year 1920. By the same sort of computation as was used in Exhibit E, the petitioner would necessarily arriA^e at a net income of $226,915.72 for the last 9½ months of 1920. It would seem that this distinctly unfavorable situation in the 2i/^-month period, as compared with the 9%-month period, requires some explanation before the result shown in Exhibit E could be accepted, but there is none in the record. Such a situation could result from any one, or a combination,,of a number of factors, not the least of which would be any differential in gross profit ratio as between the two periods. Arizona is without the benefit of a 1920 inventory earlier than December 31 that would have enabled it to compute its net income for the 2^month period as accurately as Mutual Refining and Northwestern; hence, for the purpose of the computation in Exhibit E, petitioner assumed constancy in Arizona’s gross profit ratio throughout the entire year and applied the year’s average of 17.06 percent to the gross sales o,f the 2%-month period, to arrive at Arizona’s gross profit for that period. It would be a startling coincidence, if in such a business as the marketing and jobbing o-f oil and accessories, the gross profit ratio did not vary as much as a decimal point throughout the entire year or, as one witness testified, throughout the two succeeding years; and the improbability of the fact is demonstrated by petitioner’s own computation of the net income of Arizona’s Chanute Refinery. branch, which shows a grogs profit ratio of 32.426 percent for the 2i/2-month period. Moreover, when an important factor necessary to the determination of net income, like inventory, is missing, so that resort must be had to some method of apportionment to determine the net income for a fractional part of a year, we believe it to be eminently more fair and conducive to a clear reflection of income to apply the apportionment to all factors that make up net income, to expenses as well as gross profit. By petitioner’s computation in Exhibit E, about 13 percent of Arizona’s gross profit for 1920 is allocated to the 2½-month period, though 20 percent of its expenses for the year are allocated to that period; and there is no justification in the record for the conclusion that that allocation approximates the realities of the situation. The Board has previously withheld its approval of the method used in Exhibit E for computing net income of a fractional part of a year, J. Landis Shoe Co., 11 B. T. A. 42; aff'd., 34 Fed. (2d) 1020, and we see no good reason for adopting it here. As the record stands, we can not say that the respondent’s apportionment is arbitrary or contrary to fact. Accordingly, we approve his determination of Arizona’s net income .for the period January 1 to March 15, 1920.

In respect of the matter of credit for taxes previously paid, the Board’s earlier opinion contains these findings:

The * * * [petitioner], as aforesaid, filed its return for the calendar year 1920 including therein the income of the Mutual Oil Company of Maine, the Mutual Refining and Producing Company, the Northwestern Oil Refining Company and the Mutual Oil Company of Arizona and paid a tax thereon in the sum of $200,707.45. That no credit for such payment has been made by the respondent in arriving at the alleged deficiency in taxes for the period January 1, to March 15, 19-'0: that a certificate of overassessment in the sum of $12,779.97 has been issued to the ⅜ * * [petitioner] for the year 1920 which gave credit for said sum of $200,707.45, which certificate was protested by the » * * [petitioner] and its claim for refund has not been finally determined.

The petitioner contends that some portion of the $200,707.45 tax paid on the basis of the consolidated return is applicable to, and should be credited against, the tax liabilities of Arizona, Mutual Refining, and Northwestern for the period January 1 to March 15, 1920, thereby reducing the deficiencies in taxes of the three latter companies and the amount of petitioner’s transferee liability in respect of those deficiencies. The question must be resolved adversely to petitioner, upon authority of C. A. O’Meara et al., 11 B. T. A. 101; Oilbelt Motor Co., 16 B. T. A. 831; Robert Treat Hotel Co., 20 B. T. A. 968; J. A. Folger & Co., 27 B. T. A. 1; West Virginia Rail Co. v. Jewett Bigelow & Brooks Coal Co., 26 Fed. (2d) 503; and Meyersdale Fuel Co. v. United States, 44 Fed. (2d) 437; certiorari denied, 283 U. S. 860.

In the Meyersdale Fuel Co. case, supra, the taxpayer filed a consolidated return for 1920, which included the net income of three alleged subsidiary corporations, showing a total tax of $109,639. The taxpayer paid the tax shown to be due on the return, in part out of funds contributed by its alleged subsidiaries, and to the extent of $14,439 out of its own funds. The Commissioner held that the four companies were not affiliated and, having determined the tax liability of each on a separate basis — $13,600 in the case of the taxpayer, notified the latter of an overassessment. Later determinations by the Commissioner, the facts of which are not material here, resulted in credits and refunds being granted to the taxpayer in the total sum of $9,764. The taxpayer brought suit in the Court of Claims to recover the difference between the amount of the tax paid on the consolidated return and the total of the amount ($23,364) of such tax assignable to it upon the basis of its net income plus amounts previously credited and refunded to it. The court held that the taxpayer could not recover, stating “the plaintiff, under the facts, was not entitled to a refund of more than $838.65, being the difference between the tax of $14,439.47 paid by it on the consolidated return out of its own funds without reimbursement from the other corporations and the correct tax liability of $13,600.80.” This decision of the Court of Claims with the other decisions cited above, lays down the rule that a corporate taxpayer which mistakenly joins with others in filing a consolidated return is entitled to credit for only such portion of the tax shown on the return as was actually paid by it either directly to the Government or through the medium of its parent company. The record does not show that Arizona, Mutual Refining, and Northwestern contributed anything to the payment of the tax paid on the consolidated return, and the fair inference to be drawn from the stipulated facts is that the petitioner paid the entire tax out of its own funds. No part of the tax paid on the consolidated return, therefore, may be credited to Arizona, Mutual Refining, and Northwestern in arriving at the deficiencies due from those companies.

Decision will be entered under Rule 50.


author: Van Fossan: TtirneR,

text:
    Roosevelt & Son Investment Fund, George E. Roosevelt, Philip J. Roosevelt, Fairman R. Dick, Ermand J. Rifflard and Van S. Merle Smith, as Managers, and Chemical Bank & Trust Company (formerly The Chemical National Bank of New York), as Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76196.
    Promulgated March 6, 1936.

      Leslie D. Dawson, Esq., for the petitioner.

      Bruce A. Low, Esq., and L. S. RusKbrook, Esq., for the respondent.

         SEC. 275. PERIOD OP LIMITATION UPON ASSESSMENT AND COLLECTION.
      Except as provided in section 276—
      (a) General rule. — The amount of income taxes imposed by this title shall be assessed within two years after the return was filed and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. ,
      (b) Request for prompt assessment. — In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within one year after written request therefor * * *.
      (c) Corporation and shareholder. — If a corporation makes no return of the tax imposed by this title, but each of the shareholders includes in his return his distributive share of the net income of the corporation, then the tax of the corporation shall be assessed within four years after the last date on which any such shareholder’s return was filed.
      SBC. 276. SAME — EXCEPTIONS.
      (a) False return or no return. — In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

   OPINION.

Van Fossan:

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1929 in the sum of $104,000.86. The case was presented on a stipulation signed by the parties, supplemented by oral testimony.

The issues are:

(1) Whether or not the assessment and collection of the proposed deficiency are barred by the statute of limitations.
(2) Whether or not the petitioner is an association or a revocable trust.
(3) Whether or not the respondent is estopped from assessing a tax against the petitioner for the year 1929.
(4) Whether the proper amount of dividends deductible under section 23 (p) of the Revenue Act of 1928 was $200,878.83, the sum received, or $100,736.03, the sum allowed by the respondent.
(5) Whether or not the petitioner is entitled to deduct $109,010.90 paid as ordinary and necessary expenses for compensation to the managers of the investment fund.

Roosevelt & Son was a partnership, originally formed in 1797. For over 130 years it has engaged in business as a partnership, dealing for many years in investment securities. For two generations prior to 1927 its principal business was caring for other people’s money, acting as trustee under wills and deeds of trust and serving as custodian of property. In 1927 the firm' was caring for 1,600 or more different issues of common stocks on behalf of several hundred beneficiaries. In order to render them more efficient service the petitioner trust was established. The question of income tax liability of the individual beneficiaries was discussed at length and the form of the trust was chosen to make the tax of each participant as nearly as possible identical with what he would have paid as an individual owner of a proportionate share of the securities held by the petitioner.

The petitioner, Roosevelt & Son Investment Fund, hereinafter sometimes called the fund, was formed pursuant to an agreement designated “Investment Trust Indenture” dated April 29, 1927, by W. Emlen Roosevelt, George E. Roosevelt, Fairman R. Dick, Philip J. Roosevelt, and Archibald B. Roosevelt, general partners of the firm of Roosevelt & Son and called “managers” in the indenture, with the Chemical National Bank of New York (now the Chemical Bank & Trust Co.) as trustee and the registered holders of participation certificates as beneficiaries. By death and resignations the personnel of the managers was changed so that George E. Roosevelt, Philip J. Roosevelt, Fairman R. Dick, Ermand J. Rifflard, and Van S. Merle Smith are now the managers of the trust.

The rights and obligations of the parties to the indenture were fixed and determined by its provisions and the fund has been administered and operated since its formation strictly in accordance with its terms. Under the indenture, certificates were issued in the following form:

[Fobm or Ceettitcate]
No_ $_ ⅜ — ,- (Cost Value) (Face Value)
Roosevelt & Son Investment Fund
Participation Certificate
Series A
This Is To Cekcity that__ the registered holder hereof, has paid_,_Dollars ($_), the cost value hereof, into the Investment Fund created under a certain indenture, hereinafter described, and is therefore entitled to - ( — .-) units in said Investment Fund.
This Certificate is one of the series of Certificates, designated as Series A. issued under an Indenture (hereinafter called the Indenture), dated as of April 29, 1927, to which W. Emlen Roosevelt, George E. Roosevelt, Fairman R. Dick, Philip J. Roosevelt and Archibald B. Roosevelt (hereinafter called the Managers) and The Chemical National Bank of New York, as Trustee, and the registered holders of said Certificates are parties.
The registered holder hereof has by acceptance hereof become a party to the Indenture and is bound by all the terms and provisions thereof. A copy of the Indenture is on file at the principal office of said Trustee in the Borough of Manhattan, City of New York and there open to inspection during business hours by the registered holder hereof.
The registered holder hereof is entitled to (1) cumulative distributions upon the Face Value hereof, accruing from the date hereof, at the rate of 5⅝ per annum, payable quarterly, and (2) such extraordinary distributions as the Managers may from time to time determine; all as provided in the Indenture.
The registered holder hereof may, subject to the terms and provisions of the Indenture, upon written demand delivered to the Trustee at least (5) days before the first business day of any month and accompanied by surrender hereof, cause the Managers to redeem this Certificate and thereby become entitled to receive from the Managers the distributive share (as defined in the Indenture) in said Investment Fund represented hereby on the first business day of the month next succeeding the month in which such demand shall be delivered to said Trustee.
The Managers, subject to the terms and provisions of the Indenture, may cause this certificate and all other Certificates outstanding under the Indenture to be redeemed on the first business day of any month, upon 30 days’ notice as provided in the Indenture, by payment to the registered holders of said Certificates of the respective distributive shares represented thereby, and may cause, in particular instances, this Certificate and/or any of said Certificates to be redeemed by like payment without redeeming all of said Certificates then outstanding under the Indenture.
This Certificate is not transferable, and the registered holder hereof shall for all purposes be deemed the absolute owner hereof, and neither the Managers nor said Trustee shall be affected by any notice to the contrary, except that the registered holder hereof may, as provided in the Indenture, by the due execution and delivery of an instrument of assignment, substantially in the form endorsed on the back hereof, accompanied by delivery of this Certificate, assign the right to cause this Certificate to be redeemed and to receive from the Managers said distributive share, but notwithstanding such assignment any and all distributions payable in respect hereof shall continue to be payable to the registered holder hereof until this Certificate shall be redeemed. The assignee named in any such assignment may cause this Certificate to be redeemed upon like terms and conditions as the registered holder hereof could have caused such redemption had such assignment not been made, and in the event that the Managers after written notice of any such assignment, shall cause the redemption hereof, as provided in the Indenture, such assignee shall be entitled, upon the surrender of this Certificate accompanied by said assignment, to receive said distributive share.
* * ⅜ ⅜ ⅜ * *
This Certificate is not valid unless authenticated by said The Chemical National Bank of New York, as Trustee.

Provision was made for the redemption of the certificates either at the managers’ or the holders’ option. In either case redemption might be made in kind or in cash at the managers’ election. The establishment of the investment fund was provided for in article 111, section 1 of the indenture, as follows:

Section 1. Investment of the Investment Fund. — The Managers shall have absolute control and management of the Investment Fund, except as herein otherwise specifically provided, and the Managers shall cause the Investment Fund to be invested and reinvested from time to time in such common and/or preferred stocks and/or in such other Securities and/or in such call and/or time loans upon collateral security consisting of Securities listed upon the New York Stock Exchange having a value at the time of the making of any such loan of not less than 20% in excess of the amount of such loan, as the Managers may in their absolute discretion deem best.

Deliveries to and from the fund were covered by the following-provision :

Section 2. As to Deliveries to and from the Investment Fund. — Except as herein otherwise provided, the Managers covenant that they will not make any Order for the payment of cash and/or delivery of Securities out of the Investment Fund as the case may be except (a) upon the redemption of Certificates hereinafter provided for in Article V hereof, (b) upon substantially contemporaneous delivery to the Trustee for account of the Investment Fund of Securities, in negotiable form or to the order of the Trustee, for the purchase of which such cash shall be withdrawn, or (c) upon substantially contemporaneous deposit for the account of the Investment Fund of the net proceeds of the sale of Securities so withdrawn, ⅜ * *.

The managers agreed not to mortgage, pledge, or encumber the fund or any part thereof or to permit encumbrances to be placed against it. Separate accounts were kept for the individual participants and statements thereof rendered to them.

jSTo meeting of the participants was ever held nor was any organization of them ever effected. There were no bylaws promulgated to control their concerted action. The managers’ powers and duties were definitely set forth in the indenture and no enlargement or curtailment thereof was permitted except by a proposed amendment from which any participant might dissent and, in that event, such dissent was equivalent to a request for the redemption of his certificate. Upon the resignation or death of a manager provision was made for the selection of his successor by the surviving managers. The managers never held regular meetings and no provision was made for such procedure. No minutes were kept of the actions taken by the managers.

On or about March 15, 1928, the managers of the fund filed on its behalf a “fiduciary return of income” on form 1041 for the year 1927, with the collector of internal revenue of the second district of New York. On December 24, 1928, the managers wrote to the respondent requesting a ruling as to whether they should file a return for the year 1928 upon the form of a return provided for use by a trustee or that provided for corporations.

On March 15, 1929, the managers filed a return for the year 1928 on form 1041, as they had done for the preceding year. On March 30, 1929, the respondent wrote to the managers a letter later known as G. C. M. 6114, which held the fund to be an association. Prior to March 15,1930, the managers delivered or mailed to each participant a notice that he should report as “dividends” in item 9, form 1040, the amount shown as the total income derived from his ownership of the fund certificates in accordance with the statement inclosed with the said notice.

On March 15, 1930, the managers filed a fiduciary return on form 1041 for the year 1929 similar to that filed for the preceding years. On or about July 23, 1930, the respondent received from his general counsel a ruling, later known as G. C. M. 8386, in which a change of interpretation by the general counsel was indicated and recommendation was made that petitioner be notified that it was held to be a strict trust. On August 11,1930, the managers wrote to the respondent reciting the history of the trust, describing its operation and agreeing to indemnify the Government for any loss of tax if the fund should be held to be a trust and not an association. On October 17, 1930, the respondent notified the petitioner that, upon reconsideration, he held it to be a strict trust for the years 1927 and 1928, and on October 25, 1930, the respondent directed the petitioner to disregard certain proposed additional taxes for those years. On October 28, 1930, the petitioner requested the respondent to issue a ruling to cover the years 1929 and 1930. On November 11, 1930, the respondent, by letter later known as G. C. M. 8804, replied that if the same conditions obtained as during the years 1927 and 1928 the fund had the taxable status of a revocable trust.

On or about December 12, 1930, the managers delivered or mailed to each certificate holder a letter stating that the United States Treasury Department had held the fund to be a strict trust and advising him to include in his amended returns for the years 1928 and 1929 his proportionate part of a reserve retained by the managers to cover additional taxes claimed by the Government and thus released by the said ruling. The amount received from the fund by the certificate holders was designated “dividends.” Certain of the participants filed their amended returns in accordance with such instructions and paid their income taxes thus increased. There were about 680 participants in 1929.

Before December 31, 1929, the managers of the fund set aside a reserve out of income of the fund in the amount of $107,142.80 to cover the payment of any income taxes which might be held to be clue by the fund for the year 1929. In preparing the “Fiduciary Return of Income” on form 1041 for the year 1929 which was filed on March 15, 1930, the total amount of dividends shown on line seven of said return was $100,136.03 instead of $201,818.83, the difference representing the above mentioned reserve. After receipt from the Commissioner of the letter dated November 11, 1930, the managers of the fund credited back this reserve to the income of the fund.

On December 17, 1930, the managers filed on behalf of the fund an amended return on form 1041 for the year 1929. In that return they increased the amount of “dividends” from $100,736.03 to $207,-878.83 by adding the amount of the reserve withheld. The amended return disclosed the names of the participating certificate holders for 1929 and their respective proportions of the total income of the petitioner for that year. The return set forth the amount of interest received from bank deposits, notes, and corporation bonds, the amounts received as profit from the sale of real estate, stock, bonds, etc., and the total dividends received on stock of domestic corporations. The entire income of the petitioner was comprehended under those three headings. Certain deductions were claimed and itemized under schedule E.

There was introduced in evidence as respondent’s exhibit a document prepared on form 1120 (Corporation Income Tax Return), on the face of which is stamped “Substitute Return.” The stamp indicated that it was prepared by A. O. Brown and approved by A. B. Niess, neither of whom was identified in the record. The document bears the notation: “Return filed as Fiduciary now considered an association taxable as a corporation.” No date of filing appears on the return but a stamp thereon headed “Audit Law Division” bears the words and symbols “Basis O. A. or R. A. R. 4r-27 1931.” No explanation of these symbols was made. The return contains no figures relating to gross income deductions and computation of tax but written across its face appears the notation “Original 1041 Return attached.”

On March 8, 1934, the respondent informed the petitioner’s counsel that the ruling of November 11, 1930, (G. C. M. 8804) had been revoked. On March 9, 1934, the respondent mailed the notice of deficiency to the petitioner stating, among other things, that the petitioner was held to be an association and that such notice of deficiency was issued under authority of the provisions of section 275 (c) of the Revenue Act of 1928.

The fundamental question at issue is the character of the petitioner, whether it is a trust or an association, but since the statute of limitations may bar the assessment and collection of the proposed deficiency we will first consider the latter situation.

The provisions of the Revenue Act of 1928 pertinent to the issue are set forth below.

The petitioner filed its return for the year 1929 on March 15,1930, using form 1041 for the purpose. It is obvious if the return so filed, or the amended return filed December 17, 1930, was a return under the law, that under section 275 (a), providing for assessment within two years, the notice of deficiency was too late. However, the respondent asserts that the return filed March 15, 1930, was made as a trust and not as a corporation; that the petitioner was, in fact, a corporation; that the return prepared by him for the petitioner on a corporate return, form 1120, was the correct return; that conditions imposed by section 275 (c) were fulfilled; and that, therefore, the notice was timely sent within the four-year period thereof.

In Abraham Werbelovsky, Executor, 8 B. T. A. 442, we faced a comparable question. We there observed: “Does the fact that the executor * * * in filing ‘a return of the income’ used Form 1041 instead of either Form 1040 or 1040A place the estate in the position of having failed to file a return within the meaning of the words ‘or of a failure to file a return’ as used in section 278 (a,) of the Revenue Act of 1924? We think not. The estate did file a return.” To the same effect are Estate of F. M. Stearns, 16 B. T. A. 889; and J. R. Brewer, Administrator, 17 B. T. A. 704. The principles underlying these cases were enunciated by the Board as early as Mabel Elevator Co., 2 B. T. A. 517, where we stated:

It is urged that since the return filed by the taxpayer was made upon a fiscal year basis, while the law required a return upon a calendar year basis, the return filed was not the return required by the law and could not operate to start running the statutory period of limitations. With this we can not agree. The return filed purported to be made in accordance with the law; it purported to and did include the income of the taxpayer for the period in questiou. In the absence of any evidence or claim that such return was false or fraudulent with intent to evade tax, it became the duty of the Commissioner to determine, within the time provided by law, whether or not such return was erroneous in any respect.
There can be no doubt that such limitations are placed on assessments for the purpose of assuring the taxpayer, who has made an honest return, that after such period his tax liability will not be reopened; otherwise the business of the country would always have before it the threat of additional taxes against the income of years long past whenever a new theory for interpreting the tax law or for the application of accounting principles occurred to the taxing authorities. If the limitation can be avoided on the plea that the return filed was not such a return as is required by law, although filed in good faith, there is no such assurance for the taxpayer and the limitation becomes of doubtful value at least. If the statute requires any interpretation great weight must be given to the purpose which it was obviously intended to accomplish.

The conclusive word on the matter is found in Zellerbach Paper Co. v. Helvering, 293 U. S. 172, where Mr. Justice Cardozo observed:

* * * Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such (Lucas v. Pilloid Lumber Co., 281 U. S. 245, 50 S. Ct. 297, 74 L. Ed. 829, 67 A. L. R. 1350), and evinces an honest and genuine endeavor to satisfy the law. This is so though at the time of filing the omissions or inaccuracies are such as to make amendment necessary.

The return on form 1041 which was filed by petitioner contained all of the information which would have been contained on a return filed as a corporate return, except for the, computation of the tax. That it contained all the information which the Commissioner deemed necessary in order to assess income taxes against the petitioner as a corporation appears from the fact that when the Commissioner prepared his “substitute return” on form 1120 he inserted no figures whatsoever but merely annexed to such form petitioner’s return on form 1041.

Nor can we concur in the statement of respondent found in his brief that the action of the petitioner “does not appear to come within the intent of the courts of ‘an honest attempt to comply with the law’.” At the expense of repetition, the facts may be recapitulated. The petitioner had filed, on March 15, 1928, a fiduciary return for 1927. On December 24, 1928, it wrote respondent asking what type of return it should file for 1928. Receiving no reply, it filed, on March 15, 1929, a fiduciary return, as it had done for 1927. On March 30, 1929, respondent notified petitioner it was held to be an association taxable as a corporation. On March 15, 1930, petitioner filed a fiduciary return for the preceding calendar year. After some correspondence the respondent on October 17, 1930, notified petitioner that it was held, upon reconsideration, to be a strict trust for 1927 and 1928, and on November 11, 1930, conforming to a request for further ruling, respondent stated that if the conditions were the same as in the two preceding years, petitioner should have the same status for 1929 and 1930 as for the years 1927 and 1928. Its judgment in having filed, on March 15, 1930, a fiduciary return rather than a corporate return being thus vindicated by the Commissioner’s revised ruling, it filed, on December 17, 1930, an amended fiduciary return for the year 1929 in which return petitioner revised the income returned and disclosed the names of all participating certificate holders. It also gave all other pertinent information essential to the assessment of tax.

Thus, not only did petitioner attempt to comply with the law as it understood it, but it actively sought the assistance of the respondent in the interpretation of the law, the better to comply therewith. If there be any doubt, and we entertain none, as to whether or not the return on form 1041 filed on March 15, 1930, for the taxable year 1929 was sufficient to start the running of the statute, certain it is there can be no doubt that the statute was invoked by the filing on December 17, 1930, in precise accord with the Commissioner’s then recent ruling, of the amended return. Since the date of this amended return was more than two years prior to the issuance of the notice of deficiency, it is obvious that as to such amended return the statute has run.

Although the above is sufficient to dispose of the instant proceeding, it may be further observed that it was held in Heffernan v. Alexander, 48 Fed. (2d) 855, that the filing by the Commissioner of a return on behalf of the taxpayer as effectively starts the running of the statute of limitations as though the return were made by the taxpayer himself. See also Douglas L. Edmonds, Administrator, 31 B. T. A. 962. Such a conclusion would seem to flow logically from the concluding provision of paragraph one of section 3176, Revised Statutes. Thus, albeit the evidence is insufficient to establish that the document referred to above as a “substitute return” constituted a sufficient compliance with the requirements of section 3176, Revised Statutes, under which we assume respondent’s agents purported to act, under the cited cases, this very “substitute return” were it sufficient, would start the period of limitation. The document bears no date of official filing. There appears on its face, however, the date of April 27, 1931, in a stamp of the “Audit Law Division”. The normal inference from the dated stamp is that the “substitute return” must have been prepared and on file (if it ever was filed) in the office of the Commissioner prior to the quoted date which, in turn, is more than two years prior to the issuance of the notice of deficiency. Accordingly, if any standing be given to the same it is fairly inferable from such evidence as we have that the “substitute return” on which the respondent relies operated to invoke the statute which bars assessment and collection of the proposed deficiency.

There is no suggestion in the record in this case that the managers of petitioner were guilty of fraud, misrepresentation, or bad faith. Quite the contrary, the record discloses that they made every effort to secure an authoritative ruling by the respondent as to the status of the fund and that they explained in elaborate detail its purpose, character and method of operation. They further agreed to reimburse the Government for any taxes which it might lose by reason of closing agreements or otherwise if the petitioner should be held to be a trust. Thus, the petitioner’s conduct neither evidences nor imputes bad faith.

From the facts before us, we conclude that the return filed by petitioner on March 15, 1930, was sufficient to start the running of the statute of limitations and that the assessment and collection of the taxes contemplated by the notice of deficiency mailed March 9, 1934, were barred by such statute. This holding makes it unnecessary to discuss the history, purposes and scope of section 275 (c) relied on by respondent. Sufficient to say, the section is not applicable under the facts here present. A return was filed by taxpayer which we. have held was sufficient to start the running of the statute.

Our conclusion above obviates the necessity of considering other issues raised by the taxpayer.

Reviewed by the Board.

Decision will be entered for the petitioner.

TtirneR,

dissenting: I am unable to agree with the majority opinion in its holding that the filing of a fiduciary return of income on form 1041 for the year 1929 by- the petitioner, started the running of the statute of limitations. Such a return is an information return and is not a “return of the tax imposed by this title” within the meaning of section 275 (c) of the Revenue Act of 1928, which provides that “if a corporation makes no return of the tax imposed by this title, but each of the shareholders includes in his return his distributive share of the net income of the corporation, then the tax of the corporation shall be assessed within four years after the last date on which any such shareholder’s return was filed.” (Italics supplied.) The evidence in this case shows that only a portion of the petitioner’s shareholders filed amended returns, including therein their distributive shares of petitioner’s net income, even though instructed by petitioner on or about December 12, 1930, to do so. Thus there is no proof that the period of limitations provided in section 275 (c) had run prior to the mailing of the notice of deficiency herein. On the other hand, if the return or returns upon which the period of limitation prescribed by section 275 (c) is based have not been filed, this is a no-return case and under section 276 (a) the tax may be assessed at any time.

It is to be noted that section 275 (a), designated as the general rule, prescribes the period of limitation on the assessment and collection of tax in the ordinary case, while section 275 (b) and (c) covers the cases wherein Congress has recognized the presence of special conditions and circumstances which justify the fixing of different periods of limitation. The exceptions to the periods of limitation so prescribed are set forth in section 276. We have held that the filing of a fiduciary or information return, as distinguished from a tax return, and not predicated upon a liability to tax, but which furnishes information as to income, is the filing of “a return” within the meaning of section 275 (a) and starts the running of the period of limitations in cases where that section is applicable. Abraham Werbelovsky, Executor, 8 B. T. A. 442; Estate of F. M. Stearns, 16 B. T. A. 889; J. R. Brewer, Administrator, 17 B. T. A. 704. See also Hartford-Connecticut Trust Co. v. Eaton, 34 Fed. (2d) 128. None of these decisions was made, however, in a case where the provisions of section 275 (c) were under consideration and none undertakes to define the term “return of the tax imposed by this title”, used in that provision of the statute.

Section 275 (o) first appeared in the Revenue Act of 1926 ánd the reason for its enactment is stated on page 11 of House Report No. 1 of the Committee on Ways and Means, 69th Congress, 1st Session, as follows:

Tliis section provides that if a corporation makes no return of the tax imposed by this bill, but each of the shareholders includes in his return his distributive share of the net income of the corporation, then the tax of the corporation shall be assessed within four years after the last date on which any such shareholder’s return was filed. This provision is limited to taxes imposed under this bill, and it is incorporated in the bill to make certain that if in the future the beneficiaries of a trust or the members of an association include their distributive share in their income-tax return, and if at a later date it should be held that the trust or association is subject to the corporation tax and should have made the return, the statute of limitations as applied to the trust or association shall run from the dates above specified.

In considering the applicability of section 275 (c), we can, of course, eliminate a case where a “return of tax” as distinguished from an information return has been filed, since in such a case section 275 (c) by its own terms would not be applicable and the limitation in section 275 (a) would clearly apply. The Board holds here that the filing of an information return brings this case within the provisions of section 275 (a) and also renders section 275 (c) inapplicable. If this interpretation is correct we must read out of section 275 (c) the words “of the tax imposed by this title” used by Congress in describing the return there dealt with and say that if no return of any kind was filed by the association, section 275 (c) would be applicable. Accordingly, Congress could have saved itself the trouble of describing or limiting the term “return” as it is used in section 275 (c) and would have accomplished exactly the same purpose, under the reasoning of the majority opinion, if it had merely said, “If a corporation makes no return but each of the shareholders includes in his return the distributive share of the net income of the corporation, etc.” In Gilbert v. Commissioner, 56 Fed. (2d) 361, the court said: “It is a well-settled rule ,of construction that a statute should, if possible, be so construed as to give meaning to all parts of it”, and in Crooks v. Harrelson, 35 Fed. (2d) 416, the court said:

To hold thus would be to wipe out a plain distinction made by the statute itself, and which has existed in many jurisdictions; to hold thus would, also violate one of the primary canons of statutory constructions — that each clause and each word of a statute should, if reasonably possible, be given meaning and effect.

And later the Supreme Court in the same case, 282 U. S. 49, said:

» * * courts have sometimes exercised a high degree of ingenuity in the effort to And justification for wrenching from the words of a statute a meaning which literally they did not bear in order to escape consequences thought to be absurd or to entail great hardship. But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter, Monson v. Chester, 22 Pick. (Mass.) 385, 387.

We can not ignore the plain language of the statute and say that Congress meant nothing by adding to the term “return” the limiting words “of the tax imposed by this title”, and this we must do in order to reach the conclusion contained in the majority opinion. We are not justified in ignoring the plain and unambiguous language used by Congress in the provision of the statute which specifically governs and fixes the period within which the tax of an association or trust, taxable under the revenue acts as a corporation, may be assessed. In my opinion, Congress recognized the difficulties often confronting the Bureau of Internal Revenue in determining whether a particular trust or association was such that under the terms of the revenue acts it was to be taxed as a corporation and by this provision of the statute prescribed a longer period of time for the determination of the tax in cases where such associations filed information returns than was allowed where a “return of the tax” was filed. On the other hand, the members of a trust or association were provided with a method whereby they could, by reporting their distributive shares of income in their individual returns, relieve themselves of any burden which might be occasioned by undue delay in the determination of the taxable status of the trust or association. If this was done, Congress said that the Government should be limited to four years in making a determination and assessment of the tax. Furthermore, this placed no additional burden on the members of such a trust or association, since in taking the position that the trust or association was not such as to be taxable as a corporation, they admitted the duty on their part of reporting their distributive shares of income of the trust or association in their individual returns. Under the plain terms of the statute, we are not at liberty to hold that the filing of an information return, in a case such as we have here, caused the running of the period of limitation prescribed by section 275 (a) for by such construction we read out of section 275 (c) clear and unambiguous language which Congress saw fit to place there. This we may not do. Crooks v. Harrelson, supra; Gilbert v. Commissioner, supra; In re Matthews, 109 Fed. 603.

Murdock agrees with this dissent.

         Sec. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, wilfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes.