author: GoodRich :

text:
    Henry B. Babson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gustavus Babson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fred K. Babson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52222-52224.
    Promulgated March 7, 1933.

      George K. Bowden, Esg., and V. J. Hoffer nan, Esg., for the petitioners.

      F. B. Shearer, Esg., and Newton Montgomery, Esg., for the respondent.
   OPINION.

GoodRich :

As disclosed by his notices of the deficiency, respondent determined that the amounts received by each of petitioners in 1925 and 1926 from the corporation should be treated, under the provisions of section 201 (g), Bevenue Act of 1926, as taxable dividends. By amended answer he avers that, regardless of the applicability of section 201 (g) his. determinations were without error for the reason that the amounts so received by petitioners were, in fact and in law, ordinary dividends within the meaning of section 201 (a) of the 1926 Act and taxable as such.

Petitioners contend that the amounts they received were not ordinary dividends, and that the distributions made by the corporation in 1925 and 1926 do not fall within the terms of section 201 (g). They contend that the distributions were made in partial liquidation of the corporation under section 201 (h) and that the amounts received were liquidating dividends under section 201 (c), or, in the alternative, that the transactions were in fact a purchase by the corporation from petitioners of its own stock and the amounts received were in payment of the purchase price thereof. They contend further that, no matter what the character of the distributions, section 201 (g) can not be applied to the amounts received in 1925 because the shares then redeemed had been issued, not as a stock dividend, but as the result of purchases thereof for cash and at par by petitioners.

Although in making his determinations of deficiencies respondent assumed that the payments were made in redemption of a part of the stock of the corporation, this he now denies. To found his new view, he divides the transactions into two parts, first, the distribution, and then a surrender of the stock. We find in this record no reason adequate to impel such a division; on the contrary, the weight of the evidence is that the distribution and the stock surrender were planned to be and were effected as connected and dependent, one upon the other, and, in our opinion, they accomplished a redemption of stock for a cash consideration.

But respondent goes further. Even conceding a redemption of a part of the stock of Babson Bros, so that, as defined in this section the amounts here in issue apparently are amounts distributed in partial liquidation ” and are to be treated as in payment in exchange for the stock as provided in paragraph (c), he still contends these amounts are dividends as defined in paragraph (a). He urges that it was not intended that payments such as those in the case at bar be regarded as distributions in liquidation and that, therefore, they fall outside paragraph (h), despite the clear language of that provision. To bottom his claim that these distributions are not truly in liquidation, he argues, first, that there was in fact no liquidation of this corporation; it continued as a going concern. Next, he says the redemption here was not a true stock redemption, but merely a pro rata cancellation of certificates evidencing stock ownership which effected no change in the relation of the stockholders in respect to the capital of the company. Finally, he argues, the issuance of the dividend stock left unchanged the accumulated earnings of the company, and the subsequent stock redemption was merely a distribution of those earnings. Respondent’s case may be summed up as advancing the proposition that where corporate accumulated earnings have been offset by stock dividends, a distribution in connection with a cancellation or redemption of stock (the company continuing as a going concern) is not a distribution in liquidation within the meaning of the statute, but is a distribution of earnings and a dividend. With that we disagree.

It is difficult to conceive of any corporate distribution which would not be a dividend within the definition of section 201 (a), reading that paragraph alone. However, it is well settled that this provision does not stand alone, but must be taken along with the other provisions having a bearing upon it and the section read as a whole. Hellmich v. Hellman, 276 U. S. 233. When that is done it seems clear that the intention of Congress was to include, under the general definition, ordinary dividends, as that term is judicially defined and generally understood, and distributions of capital unaccompanied by a reduction in stock, recognizing and preserving the distinction between them, on the one hand, and, on the other, liquidating dividends, and distributions accompanied by a reduction in stock. Hellmich v. Hellman, supra; Edwards v. Douglas, 287 Fed. 919; 269 U. S. 204; Langstaff v. Lucas, 9 Fed. (2d) 691; affd., 13 Fed. (2d) 1022. It seems clear also that, as finally expressed in the revenue acts applicable to the instant case, it was intended that a distribution accompanied by a reduction in stock, accomplished by one of the means specifically prescribed in the statute, is to be regarded as a distribution in liquidation and tax imposed upon it as upon a liquidating dividend, unless the circumstances surrounding the stock reduction indicate that the distribution is “ essentially equivalent ” to an ordinary dividend and should be taxed as such. ■

A review of the legislative history of section 201, or its counterpart, reveals various changes made by the Congress in its efforts to impose a tax upon corporate distributions. Under the earlier acts stock dividends and amounts distributed in liquidation were treated as taxable dividends, although, clearly, they are not ordinary dividends as the term is judicially defined in Lynch v. Hornby, 247 U. S. 339, and Lynch v. Turrish, 247 U. S. 221. The Revenue Act of 1918, section 201, imposed a tax upon stock dividends to the extent of earnings accumulated subsequent to February 28, 1913, at surtax rates, but subjected to tax, as other gains, any profit upon liquidation of corporate stock and treated the amounts so distributed as payments in exchange for the stock. But the decision in Towne v. Eisner, 245 U. S. 418, held that stock dividends did not represent income to the stockholder and the decision in Eisner v. Macomber, 252 U. S. 189, held that the Congress was without power to impose a tax without apportionment, upon stock dividends for the reason that such a dividend distributes no income to the stockholder, but, on the contrary, serves to capitalize the earnings accumulated and to make them unavailable for distribution. (See also Hugh R. Wilson, 3 B. T. A. 957) However, such a capitalization of earnings does not serve to “ earmark ” them. Edwards v. Douglas, supra; Walker v. Hopkins, 12 Fed. (2d) 262; J. T. Hedrick, 24 B. T. A. 444. Thereafter, the provisions subjecting distributions in liquidation to tax at both normal and surtax rates were upheld by the decision in Hellmich v. Heilman, supra, the court pointing out the distinction between ordinary and liquidating dividends, and the intention of Congress to preserve it. (See also Langstaff v. Lucas, supra; John K. Greenwood, 1 B. T. A. 291; J. E. Chandler, 8 B. T. A. 146)

So, when Congress came to consider the Kevenue Bill of 1921 it had been denied the power to tax stock dividends, but not the power to tax distributions in liquidation. As adopted, the 1921 Act omitted stock dividends from the definition of dividends (section 201 (a)) and provided (c) that distributions made otherwise than out of earnings, whenever accumulated, should be applied against the cost basis of stock “ for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.” Thus, being aware of the decision in Eisner v. Maeomber, supra, and knowing that stock dividends served to capitalize accumulated earnings and make them unavailable for distribution, the Congress enlarged the provisions relating to distributions in liquidation, apparently for the purpose of imposing a tax, at both normal and surtax rates, upon tire profit derived from distribution by means of stock reduction, of earnings capitalized through stock dividends. And it went further, to the end that, if the circumstances justified, it might impose a tax upon the whole of the amount distributed — not merely upon the gain — for this act contained the forerunner of the statutory provisions under which the instant case arises, reading as. follows:

Sec. 201. (d) A stock dividend shall not be subject to tax, but if after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to- make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation after February 28, 1913.

In the 1924 Act, section 201 (d) above quoted was extended and became section 201 (f). Also, the provisions relating to distributions in complete liquidation were extended to include those made in partial liquidation, because the Treasury had construed the existing law as taxing them, not as capital gains, but as dividends. Part of the explanation of the report follows:

The theory of liquidating dividends is extended to distributions in partial liquidation. If a corporation retires a portion of its capital stock, the transaction is treated, from the point of view of the stockholder, as a sale of his stock. If the corporation distributes an amount in partial retirement of its capital stock, the amount thereof is to be considered as a return of capital, and taxable only if, as, and to the extent that it exceeds the basis of the stock.

So paragraph (c) came into the act, and with it paragraph (g), defining the term amounts distributed in partial liquidation,” and both these provisions were carried over into the Act of 1926.

The chief change made to section 201 by the 1926 Act was to divide paragraph (f) into two subdivisions and to extend the provisions to cases not involving stock dividends, deemed necessary because:

Under existing law the corporation could buy from the stockholders, for eash, one-half of the stock held by them and cancel it without making the stockholders subject to any tax. Yet this action, in all essentials, would be the equivalent of a distribution through cash dividends of the earned surplus. The amendment proposed to this subdivision is intended to make clear that such a transaction is taxable.

Thus opportunity was afforded, if the circumstances justified it, to tax the whole of amounts distributed in a reduction of stock, whether the stock had been bought and paid for, or was received as a dividend.

It is quite apparent that the Congress was aware of the effect of the decision in Eisner v. Macomben, supra, and also that, by enlarging the provisions relating to treatment of distributions in liquidation and in laying the definitions thereof, it was making possible, by means of cancellation or redemption of a part of the stock of a corporation, a distribution of earnings previously accumulated and capitalized by stock dividends. That fact is reflected by the progressive changes in the revenue acts and the discussions of problems which they were designed to meet. It lay within the power of the Congress to deal with this matter of distribution as it saw fit. It might have provided that all distributions made in connection with stock cancellations or redemptions from corporate funds in excess of paid-in capital, acquired after February 28, 1913, no matter how dealt with, should be treated as dividends. This it did not choose to do. Instead, it framed the definition of distributions in liquidation in paragraph (h) to include those accompanied by a reduction in stock (leaving under the definition of dividends in paragraph (a), ordinary dividends and distributions not so accompanied; see Edwards v. Douglas, supra), and then provided (paragraph (f), 1924 Act, paragraph (g), 1926 Act) that such distributions should be treated as dividends if the time and manner of the stock reduction indicated that the distribution was “ essentially equivalent to the distribution of a taxable dividend.” Thus, the Congress left to the Commissioner, in the first instance, and to this Board and the courts, the duty of scrutinizing such transactions and determining what circumstances surrounding the cancellation or redemption of stock shall constitute such time ” and “ such manner ” as to make those acts and the distributions “essentially equivalent to a taxable dividend.” Annie Watts Hill, 27 B. T. A. 73.

It seems clear that these provisions were designed to cover transactions such as those occurring in the case now at bar, and therefore we find no merit in respondent’s contention that the distributions here were dividends as defined in paragraph (a). Plainly, they were not “ ordinary dividends ” as that term is judicially defined (Hellmich v. Hellman, supra; Langstaff v. Lucas, supra). There was a reduction in stock (see Edwards v. Douglas, supra) — “ a complete cancellation or redemption of a part of its stock ” — and in such case the statute provides, in terms which admit of no ambiguity, that the payments made in connection therewith are “ amounts distributed in partial liquidation ” and shall be treated in the manner prescribed in paragraph (c). Moreover, the corporation was liquidating a considerable part of its assets and was contracting its business, though it did not dissolve. We conclude, therefore, that the transactions here in issue constituted a partial liquidation of the corporation and that the distributions were made in connection therewith. Consequently, it remains only to determine whether paragraph (f) in the 1924 Act, or paragraph (g) in the 1926 Act, section 201, or both, are applicable to these distributions.

At the onset of our consideration as to the applicability of these provisions we are met by petitioners’ contention that the distributions of 1925, because of the facts surrounding them, are specifically freed from the provisions of the section applied to them by respondent by the very language of that section. Section 201 (g) of the 1926 Act differs in effect from paragraph (f) of the same section of the 1924 Act only in that the first named contains a parenthetical clause, not found in the earlier act, expressly applying its provisions to stock not issued as a stock dividend, but then (by the last sentence) only if the cancellation or redemption is made after January 1, 1926. This limitation, argue petitioners, makes the section inapplicable to the 1925 distributions because the shares redeemed in that year had not been issued as a stock dividend, but had been purchased by them, and were canceled and redeemed prior to January 1, 1926. But, asuming the facts to be as petitioners contend, that sentence upon which they rely makes inoperative the whole of this subdivision of the 1926 Act as to the distributions in the year 1925. Section 1200 (a) of the 1926 Act repeals, excepting certain sections not material here, Title II (called Income Tax) of the 1924 Act, which includes section 201. Section 286, Revenue Act of 1926, provides that Title II of that act, again with certain exceptions, shall take effect as of January 1,1925. So, unless a specific contrary provision appears in an individual subdivision, the Revenue Act of 1926, at least that part of it with which we are concerned here, was in force during the year 1925. But, under the facts here as petitioners claim them to be, the last sentence of section 201 (g) is such a specific contrary provision. It is as follows:

In tlie ease of tlie cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

The effect of the limitation in the sentence, then, is to postpone to January 1, 1926, the application of this provision of the Act of 1926 to a transaction occurring under the facts as we have them here and, consequently, the contention that the 1925 distributions can not be treated as essentially equivalent to the distribution of a taxable dividend because of the terms of the very subdivision providing for such treatment, is unsound. However, the fact that the limitation of paragraph (g) makes inoperative the 1926 Act to the distributions occurring in 1925 does not mean that there was no statutory authority for respondent’s determination. Section 1200 (b), Revenue Act of 1926 (last sentence), continues in effect any provision of the 1924 Act imposing a tax and repealed by the later act until the tax imposed by the 1926 Act takes effect. It is clear, therefore, that section 201 (f), Revenue Act of 1924, was in force and effect during 1925 with respect to the distributions made to petitioners in that year and was sufficient statutory authority for respondent’s determination. Since paragraph (f) may be applied where, either before or after a distribution in connection with a cancellation or redemption of stock, a stock dividend has been issued and, since, in the case at bar, stock dividends were issued, it appears that the terms of the statute offer no basis upon which to rest a distinction between the transactions in 1925- and those occurring in 1926 and we pass to the general consideration of respondent’s determination that these distributions fall within that subdivision and should be treated as taxable dividends in the hands of petitioners.

Beyond our previous comment herein, we see no necessity for enlarging the discussion found in the earlier decisions of the purpose and effect of section 201 (f), 1924 Act, and the corresponding provisions of other revenue acts. See Alfred A. Laun, 26 B. T. A. 764; Pearl B. Brown, Executrix, 26 B. T. A. 901; Harry A. Koch, 26 B. T. A. 1025; Robert R. Meyer, 27 B. T. A. 44; Annie Watts Hill, supra. These cases lay as one test for determining whether a distribution in cancellation or redemption of stock falls within the provisions of the statute, the existence of a relation between the issuance and redemption of the stock which evidences a continuing plan to effect by this means a distribution of corporate earnings, freed from the usual incident of tax upon ordinary dividend distributions. In the case at bar we have no evidence of such a relation; indeed, respondent, in his deficiency notices, states:

The two transactions (issuance and redemption) were widely separated in point of time and unless shown to have been connected in their plan or purpose they should be treated separately. There appears to be no evidence of any connection between the declaring of the stock dividend in 1922 and the redemption of the preferred stock in 1925, and these transactions must be considered as separate and distinct.

Nor does the record before us contain evidence from which we might reasonably infer the existence of a continuing plan to distribute corporate earnings by means of distributions made in connection with cancellation or redemption of stock, rather than by the declaration of ordinary dividends. Cash dividends in substantial amounts were paid in eight of the fifteen years since 1912 of which we have evidence; in one year when cash dividends were omitted the company sustained a loss from its operations, and in another made but a small profit. And from the facts concerning the company’s plans for expansion into new lines of merchandise and into new policies of operation and ownership, necessitating an increase in capital structure, we can not but conclude that the stock dividends were issued to meet legitimate business demands existing at that time and not for the ends sought to be prevented by the statute.

But, as another test of the applicability of the statute to trans-cations such as these before us, we must scrutinize the redemption and distribution with respect to the time and manner when they occur, and the circumstances surrounding them at that time. Annie Watts Hill, supra. Such scrutiny here reveals nothing to indicate that the distributions, coupled with the redemptions, were “essentially equivalent to the distribution of a taxable dividend.” They were made at a time when the company, having found that its program of expansion resulted in increased business with decreased profit, had decided to contract sharply, discontinue many of its merchandise lines and return to its old policies of operation on a smaller scale. The reasons assigned for the redemptions seem to us sufficient and compelling.and in nowise related to an attempt to distribute corporate earings by an artifice to escape the usual tax thereon. Therefore, under the tests laid by the decisions (and no other is suggested) we conclude that the distributions received by petitioners in 1925 and 1926 in connection with the cancellation and redemption of their stock of Babson Bros, fall without the terms of sections 201 (f), Revenue Act of 1924, and 201 (g)', Revenue Act of 1926, and that respondent erred in including the amounts so distributed in the incomes of these petitioners as taxable dividends.

The parties, by counsel, have stipulated that, if we find these distributions are taxable as distributions in partial liquidation of the corporation and not as dividends subject only to surtax rates, we may enter orders of redetermination to the effect that the several petitioners have overpaid their respective income tax liabilities for the years before us as follows:

Since we have so concluded, we need not consider petitioners’ alternative contention.

Reviewed by the Board.

Judgment will be entered for -petitioners as above set out.

       Sec. 201. (a.) The term “ dividend ” when, used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.

       Sec. 201. (h) As used in this section the term “ amounts distributed in partial liquidation " means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

         Report No. 350, 67th Cong., 1st sess., House Committee on Ways and Means, p. 8. Report No. 275, 67th Cong., 1st sess., Senate Committee on Finance, p. 9.

       Report No. 179, 68th Cong., 1st sess., House Committee on Ways and Means, p. 11. Report No. 389, 68th Cong., 1st sess., Senate Committee on Ways and Means, p. 11.

       Report No. 1, 69th Cong., 1st sess., House Committee on Ways and Means, p. 6.

       That this result was intended by the Congress is disclosed by the following excerpt from Senate Report No. 52, 69th Cong., 1st sess., p. 15: “ The committee recommends that the provisions of the 1924 act in this respect remain in effect during the calendar year 1925 and that the change in the law should become effective only as of January 1, 1926.”

       The deficiency notices contain no explanation for the erroneous statements that the stock dividend was declared in 1922 and preferred stock was redeemed in 1925. The facts are that stock dividends were declared in 1920 and in 1923, and no preferred stock ever was issued by this company.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Louis Rorimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58850.
    Promulgated March 7, 1933.

      H. A. MihMls, O. P. A., for the petitioner.

      Hartford Allen, Esq., and E. A. Bede, Esq., for the respondent.
   OPINION.

Van Fossan:

The issue is whether or not the amount of $14,644 received by the petitioner upon the redemption in 1927 of 144-64/100 shares of the preferred stock of the Rorimer-Brooks Studios Company, which were issued to him as stock dividends in 1917 and 1920, is taxable as income under the provisions of section 201 (g) of the Revenue Act of 1926.

The petitioner contends that as a result of the redemption he realized a gain of $4,205.70 which is taxable as a capital gain for the reason that the stock was held by him for more than two years. The parties have stipulated to the effect that if the petitioner’s contention prevails in this proceeding the taxable gain is $4,205.70. Section 201 (g) of the Revenue Act of 1926 reads as follows:

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption' in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

The preferred stock here involved was admittedly issued to the petitioner as stock dividends in 1917 and 1920 and the redemption was effected after January 1, 1926. Consequently the question for determination is whether the redemption of the stock in 1927, under the circumstances set out in the findings of fact, was “ at such time and in such manner ” as to make the amount paid by the corporation essentially equivalent to the payment of a taxable dividend. We have heretofore considered the principles underlying the provisions of section 201 (g) and the manner of their application. Alfred H. Laun, 26 B. T. A. 764; Pearl B. Brown, Executrix, 26 B. T. A. 901; Harry A. Koch, 26 B. T. A. 1025; Robert R. Meyer, 27 B. T. A. 44; Annie Watts Hill, 27 B. T. A. 73. In Harry A. Koch, supra, we stated that the purpose of the quoted provisions of the statute “ is to make futile the employment of a roundabout plan of distributing corporate earnings which, if made as dividends are ordinarily paid, would be taxable.” In Pearl B. Brown, supra, we said:

While the obvious device, by a close corporation having a surplus, consisting of an expansion of capitalization, a stock issue and stock redemption, all within a short time pursuant to a unified plan, is plainly within the statute (see O. B. VIII-2, p. 133), the flexible language of the provision makes it clear also that its burdens were not to be imposed arbitrarily (see O. B. VI-2, p. 14). As the taxpayer may not, in view of this statute, avoid the tax by an artificial device of empty forms, cf. W. C. Suntoon, 14 B. T. A. 459, so the Government may not, under this statute, impose a tax merely because there has been a stock redemption, where the circumstances are free from artifice and beyond the terms and fair intendment of the provision. Of course, where the language of the statute is specific and inelastic there is no room for avoiding its effect, whatever the inconsistency with the general purpose as disclosed by later enactments, cf. John Stewart Bryan, 20 B. T. A. 573; but, generally speaking, the provisions should be treated as special and applied to promote its special purpose (see Lawn et al., 26 B. T. A. 764).

This proceeding is distinguished from Annie Watts Hill, supra, in which we held that the existence of a relationship between the issuance and redemption of stock, evidencing a continuing unified plan to distribute surplus, is not the sole test to be applied in determining whether or not a distribution coupled with a redemption or cancellation of stock is equivalent to the distribution of a taxable dividend. We said that: “ We must also scrutinize the redemption and distribution with respect to the time and manner when they occur and the circumstances surrounding them at that time.” In that proceeding preferred stock was redeemed and canceled at a time when it was supplanted simultaneously in the capital structure of the corporation by a like amount of common stock. Consequently, the corporation’s liability upon its outstanding capital stock was unchanged in amount because of the transaction. We, therefore, held that this fact, coupled with the existence at that time of accumulated undivided earnings available for the payment of a dividend, brought the redemption and cancellation within the provisions of section 201 (g).

Manifestly, the facts in the present proceeding are not such as to bring it within the purview of our decision in Annie Watts Hill, supra.

In the present proceeding the respondent concedes in his brief that there was no premeditated plan or artifice on the part of petitioner in connection with the entire transaction and that the element of tax avoidance or evasion is not present. That petitioner was motivated in all respects.by a perfectly lawful purpose adequately appears from our findings of fact. The redemption and retirement of the stock worked a reduction in the capital structure. The 285 shai’es of stock redeemed in 1927, included 58-56/100 shares bought from other stockholders at par in 1917; 80 shares similarly acquired in 1925; 141-44/100 shares received as a stock dividend in 1917 and 5 shares likewise received in 1920. There is no evidence of a subsequent reissuance of all or any part of this stock.

We find nothing in the present proceeding to distinguish it essentially from Pearl B. Brown, Executrix, supra, and Robert R. Meyer, supra. We, therefore, hold that the redemption in question was not made at such time and in such manner as to make it “ in whole or in part essentially equivalent to the distribution of a taxable dividend.” The petitioner owned the stock redeemed for more than two years. His gain is, therefore, taxable as a capital gain, amounting to the sum stipulated.

Decision will be entered under Rule 50.


author: Seawell :

text:
    L. B. Peeples, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43312, 60232.
    Promulgated March 7, 1933.

      George G. Witter, Esg., and M. F. Mitchell, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Seawell :

The Commissioner has determined that the petitioner and his wife during the years here under review were not legal residents of the State of Washington, but of the State of California, and accordingly they should not have filed income tax returns on the community property basis. The petitioner controverts the position of the Commissioner and rests his appeal solely upon the ground that he was a legal resident of Washington during said years. The interests respectively of husband and wife in community property during the life of the husband are determined by the law of the domicile. In Washington the wife’s interest is vested, whereas in California it was, for the years here involved, a mere expectancy— Norman De Vaux, 14 B. T. A. 205. Hence the materiality of the place of the petitioner’s legal residence. What is meant by residence is sometimes difficult to define with accuracy. Under the Homan law it is said that a man’s residence is the place where his family dwells, or which he makes the chief seat of his affairs. The words residence and domicile are often used synonymously, but domicile is the more inclusive word. Any temporary place of abode may be a residence, but a domicile is a place of abode fixed and permanent, or, at least, of indefinite duration. (See Standard Dictionary, word “ domicile.”) Time alone, however, does not necessarily mark the distinction, for a temporary residence may extend over months or even years, while a domicile may be established by the first moment of occupancy. Mitchell v. United States, 21 Wall. 350, 853; Gilbert v. David, 235 U. S. 561. The distinction is largely one of intention, but evidenced by conduct rather than by declarations of the party. In determining the question of temporary residence or domicile, “we are not limited to, or necessarily bound by, expressions of the party.” Rogers Hornsby, 26 B. T. A. 591; Corel v. Chicago, R. I. & P. Ry. Co., 123 Fed. 452. Perhaps the best definition of legal residence or domicile which can be used to clarify our difficulty here is that found in Marston v. Watson, 129 Pac. 611, 612: “The place where one remains when not called elsewhere for labor or other special or temporary purpose, and to which he returns in seasons of repose.” The often quoted definition or description of Judge Story (Conflict of Laws, Tth Ed., sec. 46, p. 41) is to the same purport: “If a person has actually removed to another place, with an intention of remaining there for an indefinite time, and as a place of fixed present domicile, it is to be deemed his place of domicile, notwithstanding he may entertain a floating intention to return at some future period.”

Legal residence as here involved and as mentioned in the applicable statutes (Revenue Acts of 1921 and 1924, sec. 227 (b), and in Treasury Regulations 65, art. 446), it is conceded, means domicile as con-tradistinguished from temporary residence. And where one lives is deemed to be his domicile, nothing else appearing. In the often quoted opinion of the United States Supreme Court (Ennis v. Smith, 14 How. 400, 423), it is said: “When there is a removal, unless it can be shown or inferred from circumstances that it was for some particular purpose, expected to be only of a temporary nature, or in the exercise of some particular profession, office, or calling, it does change the domicil * * * the place of residence is prima facie the domicil.”

- There is no contention that •when the petitioner left Portland and went to Seattle to live, his domicile in Oregon ceased and, that a new domicile at once began in Washington. It required no declaration of purpose to accomplish this result. There is no practical distinction, so far as the law of the case is concerned, between the removal from Portland and the removal from Seattle. At Seattle petitioner was an older man; he had accumulated property; he had a wife and daughter; he had a home and doubtless the circle of his friends had materially widened. It was this situation that called for the consultation with friends. Their advice was not sought about a temporary change of residence; it was as to the breaking up of ties of two decades of happy associations. The advice of his friends to accept and go agreed with the dictates of sound judgment and apparently with petitioner’s own predilection. He wired his acceptance of the offer, placed his house with a friendly realtor for sale, resigned his membership in The Rainier Club, and other clubs, stating that he was thereafter making his “ permanent ” home in Los Angeles. The talk at the time about “ trying out ” the proposition did not change the fact that he was going to California to reside permanently, or, at least, for an indefinite time. Such talk and expression of a “ floating intention ” sometime possibly to return could not overcome the stronger and more definite actions and expressions of the petitioner. Lee Rosenberg, 10 B. T. A. 601, 613. Then too, if there was a “ try out ” of the proposition, the residence in California seems to have proven satisfactory. In 1926 he built and occupied a new home in Pasadena. In 1928, when promoted to the vice presidency of his company and placed in charge of all its west coast agencies, including Seattle, with privilege to reside, as he testified, wherever he desired, he never returned to his old home in Washington State, but continued to make his home in California.

We have not overlooked the contention of petitioner’s counsel, and the authorities cited in support thereof, to the effect that in the State of Washington one does not lose his right to vote by absence from the state on business, provided he has not claimed or exercised the right elsewhere; and that, in analogy to a divorce proceeding brought by one an actual resident of the state against a spouse also actually residing there at the time complaint was filed, the burden of proof is upon the party denying the residence. These contentions seem to lack any forceful application here, and under all the attending facts and circumstances, we are impelled to the conclusion that in none of the years here under review was petitioner a resident of the State of Washington, and we so conclude and decide.

Judgment will be entered for the respondent.


author: MoMahon :

text:
    Continental Baking Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44873.
    Promulgated March 7, 1933.

      Robert N. Anderson, Esq., for the petitioner.

      B. V. Steele, Esq., for the respondent.
   OPINION.

MoMahon :

The only question here presented is whether the petitioner is liable at law or in equity, as a transferee, for the additional taxes asserted by the respondent to be due from the Livingston Baking Company for the fiscal year ended June 30, 1924, and for the period July 1, 1924, to January 10, 1925.

The burden of proof in a transferee proceeding is upon the respondent to show the liability of the alleged transferee, but not to show the correctness of the determination of the tax liability of the trans-feror corporation. Section 912 of the Revenue Act of 1924, as amended by section 602 of the Revenue Act of 1928.

It is our opinion that the respondent has met the burden of showing that the petitioner is liable for the taxes in question under its contract with the Livingston Baking Company. In the minutes of the meeting of the board of directors of the petitioner held on September 24, 1926, wherein the acquisition of the assets of the Livingston Baking Company was authorized, the officers were authorized and directed to “ take such steps as may be necessary to acquire said properties and assets and assume all existing liabilities of said corporation ”. By assuming “ all existing liabilities ” at the time of the transfer on September 18, 1926, the petitioner assumed any additional tax liability of the Livingston Baking Company for the fiscal year ended June 30, 1924, and for the period July 1, 1924, to January 10, 1925, even though at such time such deficiencies were not assessed against the Livingston Baking Company and may not have been determined by the respondent. At that time all the events had occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay it. United States v. Anderson, 269 U. S. 422. Cf. Updike v. United States, 8 Fed. (2d) 913; and United States v. Armstrong, 26 Fed. (2d) 227. It is true that Brayton Campbell, who is secretary and treasurer of the Continental Baking Corporation and its subsidiaries, testified that it was his understanding that the petitioner was to assume only those liabilities contained in the balance sheet as of September 18, 1926. However, the petitioner did not introduce the contract in evidence and we can not accept, as binding, the understanding of Campbell upon this question as against petitioner’s written minutes evidencing the agreement of the parties. The agreement is binding on the parties to it. His understanding is not binding here. The minutes of the petitioner are a written admission by the petitioner of its liability in this respect, which is not overcome by Campbell’s understanding to the contrary. It is for the Board to construe these minutes and it is not bound by Campbell’s construction. As stated, we believe the respondent has met the burden placed upon him in this respect. Such a contractual liability is enforceable under section 280 of the Revenue Act of 1926. Americans, Equitable Assurance Co. of New York, 27 B. T. A. 247.

If petitioner did not assume such taxes in its agreement with the Livingston Baking Company, petitioner is nevertheless liable under the well established doctrine that if one corporation takes over all the assets of another corporation without giving adequate consideration, thereby leaving the transferor without means of paying its creditors, it is liable for the amounts due to the creditors, to the value of the assets received by it. It is true that the stock of petitioner which was transferred to the Livingston Baking Company in exchange for the assets had a value of $1,510,000, which was greatly in excess of the amount of tax here in controversy, but it is well settled that creditors may not be forced to give up the real, tangible assets of a corporation as security and look for payment alone to stock of another corporation.

In Signal Gasoline Corp., 25 B. T. A. 532, there was involved a situation substantially similar to that in the instant proceeding and we held the transferee liable. We there stated:

Similar questions of transferee liability have been before us on numerous occasions, and it is now well settled by decisions of the Board that where one corporation transfers its- assets to a new corporation in exchange for stock of the latter which is issued directly to the stockholders, leaving the trans-feror without assets to satisfy its creditors, the new corporation is liable to the creditors of the old to the extent of the value of the property received. Woodley Petroleum Co. et al,, 16 B. T. A. 253; Concrete Industries Co., 19 B. T. A. 655; Gideon-Anderson Co., 20 B. T. A. 106; Wayne Body Corporation, 22 B. T. A. 401, and cases cited therein. Many courts have reached the same conclusion where stock of the new corporation was delivered to the old corporation and later distributed to its stockholders, which is the situation in the instant case. Jennings Neff & Co. v. Chrystal Ice Co., 128 Tenn. 231; 159 S. W. 1088; Altoona v. Richardson, 81 Ks. 717; 106 Pac. 1026 ; 26 L. R. A. (N. S.) 651; Hibernia, Insurance Co. v. St. Louis & New Orleans Transportation Co., 13 Fed. 516; American Railway Express Co. v. Commonwealth, 190 Ky. 636; 228 S. W. 433; Grenell v. Detroit Gas Co., 112 Mich. 70; 70 N. W. 413; Chicago I. & S. R. Co. v. Taylor, 183 Ind. 240; 108 N. E. 1. The reason for application of the rule in cases of the latter group where the old corporation is not without assets, having received stock of the new corporation, is stated as follows in Jennings Neff & Co. v. Chrystal Lee Co., supra:
Creditors of the old corporation cannot be required to look alone to the stock and bonds which were substituted for the real, tangible assets of that corporation. The value of securities so substituted is more or less problematical, and creditors should not be forced to surrender their claim against available, visible assets, and transfer such claim to new securities. The remedy cannot thus be hindered and impaired for the benefit of stockholders. * * *

See also to the same effect McIver v. Young Hardware Co., 144 N. C. 478; 57 S. W. 169. These principles were recognized and applied by this Board in Waterproofed Products Co., 25 B. T. A. 648, and in West Texas Refining & Development Co., 25 B. T. A. 1254, wherein we held the transferee corporation liable even though the stock which it exchanged for the assets of the transferor corporation was shown to have a value at least equal to the net value of the assets.

The transferee corporation is liable whether it was organized for the purpose of absorbing the business of the transferor or whether it was already in existence. In City of Altoona v. Richardson Gas & Oil Co., 81 Kan. 717; 106 Pac. 1025, the court quoted with approval the following:

“ * * * ‘Where, however, there is an absorbtion of the business and assets — in other words, a merger de facto — by either a corporation formed for the purpose, or one already in business, the liability of the corporation receiving the assets is rested upon the familiar trust fund doctrine, since such receiving corporation does not stand as a bona fide purchaser for value. In such case the extent of the liability is necessarily determined by the value of the property received.” Page 1120 of 11 L. R. A. (N. S.). * * *

The cases of Kinnett-Odom Co., 19 B. T. A. 1124, and Exclusive Prescription Pharmacy, 21 B. T. A. 83, cited by petitioner, are distinguishable from the instant proceeding. In Kinnet-Odom Co., supra, the taxpayer retained its cash, bills and accounts receivable, and stock on hand, and the Commissioner did not prove that the value of these retained assets was less than the amount of the taxes and other obligations. In the instant proceeding no assets of the transferor were retained by it. In Exclusive Prescription Pharmacy, supra, it was not shown that the value of the consideration received by the taxpayer, other than stock, was less than the amount of the tax sought to be collected from the alleged “ transferee ”.

Metropolitan Securities Corp., 19 B. T. A. 299, relied upon by petitioner, is also different from the instant proceeding. In that proceeding the transferor “ at the conclusion of the transaction was possessed of assets [preferred stock of the transferee] equal in value to. those it had sold.” The proof in the instant proceeding does not sustain such a conclusion. Here the net worth of assets received by petitioner, as shown by the balance sheet of the Livingston Baking Company, was $1,645,124.13, not including any going concern or good will value, while the value of the stock transferred to the Livingston Baking Company was $1,510,000.

The assets which petitioner received had a value, according to the balance sheet of the Livingston Baking Company as of September 18, 1926, substantially in excess of the liabilities shown upon the balance sheet and the additional taxes herein involved.

We hold that the petitioner is liable for the additional taxes determined by respondent. The petitioner’s liability also includes interest upon such amounts from September 18, 1926, the date as of which petitioner received the assets. Henry Cappellini, 16 B. T. A. 802, and Wayne Body Corp., 24 B. T. A. 524.

Decision will be entered under Bule 50.

       Sec. 912. In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.


author: TRAMmell :

text:
    M. Ernest Greenebaum, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33196.
    Promulgated March 7, 1933.

      Henry J. Brandt, Esq., for the petitioner.

      Arthur Oamduf, Esq., for the respondent.
   OPINION.

TRAMmell :

The sole issue in this proceeding is whether the profit realized by the petitioner from a certain real estate transaction in 1923, under the circumstances detailed in our findings of .fact, is taxable as ordinary income or as capital gain.

The Revenue Act of 1921, in section 206 (a), provides that:

(1) The term “ capital gain ” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
ifc * * ¡ft * ❖ #
(6) The term “capital assets” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business) * * *.

The respondent contends that when Marx, acting for himself and the petitioner, purchased the fee title in 1928 to the real estate in question, the leasehold estate theretofore acquired in 1914 by Marx and the petitioner merged in the greater estate; hence, that what they sold to Rosen in 1923 was the fee and not the leasehold estate which had then become merged therein; that since they sold the fee title during the same year in which it was acquired by them, it did not constitute a capital asset within the meaning of the statute above quoted, and that the profit derived from such sale, not being capital net gain, is taxable as ordinary income. The deficiency in controversy was determined by the respondent on this theory.

The petitioner takes the position that the fee title was purchased by Marx for Rosen and was paid for with Rosen’s money, which he had obtained as a loan to be secured by a mortgage on the property being purchased; that, therefore, the fee title never at any time belonged to Marx and the petitioner, and could not have been sold by them, since a resulting trust arose in favor of Rosen at the moment Marx took the title for him, and that Marx was merely the conduit through which the title was passed to Rosen. On this theory, the profit derived from the transaction by Marx and the petitioner could only have resulted from the sale of their leasehold estate, which constituted property held by them for more than two years. Said profit would, therefore, constitute capital net gain and be taxable as such.

The action of the respondent, in our opinion, must be approved. While the petitioner testified at the hearing that the fee title was purchased by Marx for Rosen, “ with Rosen’s money,” which money all came out of his (Rosen’s) loan,” it is not at all clear that the money used to purchase the fee was in any legal sense Rosen’s money at that time, and we are unable so to find the fact to be.

It appears that Rosen had made some sort of arrangement to procure a loan from a trust or investment company of which the petitioner was vice president, to be secured by a mortgage on the property being purchased by Rosen. The petitioner’s testimony seems to indicate that Marx, acting for himself and the petitioner under the terms of their contract with Rosen, purchased the fee title and after the property had been conveyed to Rosen and a mortgage was executed thereon by Rosen to the petitioner’s corporation, Rosen then procured the loan and paid to Marx and the petitioner the total consideration of $313,000 agreed to be paid for the property, which amount consisted of the proceeds of the loan in the amount of $225,000 and $88,000 otherwise furnished by Rosen.

If the facts be as indicated, then the fee title purchased by Marx was not paid for with Rosen’s money, since Rosen did not get the money from the loan until after the fee had been purchased by Marx and transferred to Rosen under the contract of sale, and Rosen had executed and delivered the mortgage on the property to the mortgagee.

However that may be, it is not necessary for us to base our decision upon inferences or doubtful conclusions of fact. The parties stipulated in clear and unambiguous language (1) that on February 2, 1923, Marx entered into a contract with Rosen whereby Marx agreed to sell the property in question to Rosen for $313,000; (2) that Marx, acting for himself and the petitioner, then exercised the option to purchase the fee title for $95,000 in accordance with the terms of the lease; and (3) that the owner of the fee title then conveyed title in the fee to Marx, who in turn conveyed title to Rosen, pursuant to the contract of purchase. (See paragraphs 6 and 7 of the stipulation, set out in our findings of fact hereinabove.)

This stipulation of the parties, we think, is binding upon us, and its plain legal effect can not be avoided or modified by the ambiguous testimony of the petitioner, even if such testimony be construed to be in conflict with the stipulation.

On the other hand, Rosen did not obtain the $95,000 until he acquired the property. This was a part of the $225,000 loan procured by Rosen on the property as security. It is difficult to see how he could have used the propert}'' as security for a loan until he first acquired the property. In any event we think the testimony that the $95,000 was paid out of Rosen’s money is a conclusion not warranted by this record.

Prior to the purchase of the fee by Marx, acting for himself and the petitioner, the legal title to the building erected by them on the leased premises was in the lessor. Upon the purchase of the fee, the legal title to the whole property vested in Marx, who held same for himself and the petitioner, and the leasehold merged in the fee. This is the generally recognized rule, Wisconsin Nat. Bank, 4 B. T. A. 109, at pp. 112, 113, and authorities cited. The same rule prevails in Illinois. Carroll v. Ballance, 26 Ill. 9; Bond v. Moore, 236 Ill. 576; 86 N. E. 386, 391; Hill v. Hill, 264 Ill. 219; 106 N. E. 262, 265.

It follows that the profit derived by the petitioner from the transaction in question represents his share of the gain realized from the sale of the fee title, which was purchased and sold within the taxable year by Marx, acting for himself and the petitioner. Hence, said property, to wit, the fee title, did not constitute a “ capital asset ” within the meaning of the taxing statute, since it had not been held by Marx and the petitioner for more than two years prior to the sale, and the profit derived is not taxable as capital gain, but as ordinary income.

Reviewed by the Board.

Judgment will be entered for the responderá.


author: Akundell:

text:
    Thomas M. Schumacher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43965.
    Promulgated March 7, 1933.

      Jo sefli J. Klein, Esq., for the petitioner.

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

Akundell:

This proceeding involves a deficiency in income tax for the calendar year 1924 in the amount of $1,448.76, all of which is in controversy. At the hearing counsel for the parties stipulated that the amount reported as dividends received and included in income for surtax purposes should be reduced from $26,825 to $24,746. This reduction will be reflected in the recomputation to he made under Rule 50.

There is but one other issue, namely, whether the amount of $75,000 received by petitioner in 1924 constituted taxable income or was a gift, and hence exempt from tax. The petitioner testified briefly, relating some of the circumstances surrounding the alleged gift. The essential facts were stipulated in detail and we adopt the stipulation filed as our findings of fact, setting forth here only a brief summary suflicient to an understanding of the question involved.

From January 1, 1924, to October 31, 1924, petitioner was president of the El Paso and Southwestern Railroad Company, hereafter called the operating company. He was paid in full salary due him as an employee of the operating company up to the conclusion of his employment on October 31, 1924. The stock of the operating company was owned by a holding company, the El Paso and Southwestern Company, until November 1, 1924, when it transferred the stock of the operating company to the Southern Pacific Company in exchange for certain stocks and bonds of the latter company. In the latter part of 1924 after the holding company had effected the exchange the stockholders of the holding company authorized the directors thereof to pay “ additional compensation ” to officers and employees “ in recognition of long and faithful service of the officers and employees of the Railroad.” Pursuant to the authority so granted checks were issued to the persons selected to receive additional compensation. Of the checks so issued petitioner received one dated December 26, 1924, in the amount of $75,000, and another dated January 2,1925, in the amount of $100,000. Each of these checks was accompanied by a card upon which was printed “ With appreciation and best wishes of El Paso and Southwestern Company from Committee appointed November 19,1924.”

No deduction for tax purposes with respect to the distribution to officers and employees was taken by the stockholder’s committee, the holding company, any of the stockholders thereof, or the operating company. The amount of $75,000 received by petitioner in 1924 has been included by the respondent in petitioner’s taxable income for that year.

The question of whether the distributions made in 1924 and 1925 by the holding company to officers and employees of the operating company constituted taxable income has been involved in several cases. In William C. Barnes, 17 B. T. A. 1002, it was claimed by William C. Barnes, vice president of the operating company and Eugene Fox, general traffic manager of the operating company, that the amounts they received in 1924 out of the distribution made by the holding company were gifts and not additional compensation. We sustained the claim of the petitioners, holding that all the essential elements of the gift were present in the distribution. Since the opinion in those cases was rendered the Court of Claims, in Schumacher v. United States, 74 Ct. Cls. 720; 55 Fed. (2d) 1007, has held that the amount of $100,000 received by the petitioner before us here in 1925 as above described was taxable as compensation for. services rendered and was not a gift. The United States Circuit Court of Appeals for the Fifth Circuit, in Bass v. Hawley, 62 Fed. (2d) 721, held that the share of the distribution received in 1925 by Hawley, general auditor of the operating company, was a bonus or compensation paid him in recognition of long and faithful service and was not a gift.

Upon careful consideration of the facts, the arguments of the parties, and several opinions rendered concerning the nature of the distributions made by the operating company, we believe that the opinions by the Court of Claims and the Circuit Court of Appeals present the sounder view. In line with those opinions we hold that the $75,000 received by petitioner in 1924 was an item of taxable income and we decline to follow our holding in the Barnes case, supra.

Reviewed by the Board.

Decision will be entered under Bule 50,


author: Lansdon:

text:
    South Memphis Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44500.
    Promulgated March 7, 1933.

      F. E. Hagler, Esq., and E. G. Reynolds, Esq., for the petitioner.

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

Lansdon:

The respondent has determined deficiencies in income taxes for the years 1925 and 1926 in the respective amounts of $12,847.74 and $782.65. The petitioner contends (1) that it sustained a net loss in 1924 in the amount of $7,409.99, resulting from the compromise of certain litigation which the respondent has refused to carry forward to reduce its tax liability for 1925; (2) that it sustained a net loss in 1925 resulting from the sale of a certain light and power franchise which it acquired before March 1, 1913; and (3) that the respondent erroneously computed the profits resulting from the sale in 1926 of shares of stock which it acquired before March 1, 1913. The determination of these several contentions requires the Board to find the fair market value at March 1, 1913, of the contract, franchise and stock owned by the petitioner on that date. The parties have filed a stipulation of facts, which is incorporated herein by reference, and the petitioner has adduced certain oral and documentary evidence intended to establish the values in controversy.

Petitioner is a Tennessee corporation, with its principal office at Memphis. In or about 1905, it acquired about 4,000 acres of land approximately one mile south of the corporate , limits of Memphis. Something like 200 acres of such land were suitable for industrial sites and the remainder was well adapted to residential purposes. Since the date of its incorporation it has been engaged in subdividing and selling such land.

When acquired this land above described was served by only one railway, the Illinois Central, and switching charges for handling cars over that road were about $2 per car higher than for locations within the city of Memphis. In order to attract industries, it ivas necessary to have better railway facilities and lower switching rates. Accordingly, the petitioner, on September 14, 1905, entered into a contract with the Union Railway Company, a subsidiary of the Missouri Pacific Railway, which provided for the construction of the -tracks and switches necessary to the development of its acreage suitable for industrial sites. Under the terms of such contract the petitioner paid the Union Kailway Company $12,500, which was to be used before January 1,1907, for the construction of a levee to protect the proposed track extensions, and the railway agreed to construct the specified trackage on or before January 1, 1907, and, after completion, to establish switching charges not in excess of rates prevailing in Memphis.

When the Union Kailway Company undertook the construction of the tracks provided for in the contract it was enjoined from crossing the tracks of the Illinois Central at grade. Long continued litigation followed, during which it was impossible to build the track-age provided for in the contract. In 1924 such litigation was terminated by a compromise settlement in which the petitioner surrendered its contract and received $50,500.

Kelying on its contract with the Union Railway Company, the petitioner, prior to January 1, 1907, sold to the McLean Hardwood Company a 10-acre tract for a sawmill site and in the conveyance guaranteed that the proposed trackage would be constructed. Upon the default of the Union Railway Company as to the proposed construction the lumber company sued the petitioner for damages and in the first trial was awarded a favorable decision, which was reversed by a higher court, but subsequent litigation resulted in judgment against the petitioner for $17,500, which was affirmed by the Circuit Court of Appeals and accepted by the parties as final. On July 2,1914, in full settlement thereof, the petitioner paid the lumber company $25,978.69, which included, all the costs and expenses incurred by the plaintiff in the prosecution of the suit.

In its income tax return for 1924, the petitioner reported no profit from the receipt of the $50,500 by it in the compromise in which it surrendered its contract as set out above. Upon audit of such return the respondent determined taxable income therefrom in the amount of $13,456.69, which he computed by deducting from the said $50,500 the amounts of $25,978.69 and $11,064.62, representing the judgment and legal expenses paid by the petitioner as the result of the damage suit of the McLean Hardwood Company. The petitioner contends that the respondent erroneously disallowed any value of the contract in question as of March 1, 1913, and at the hearing undertook to prove a substantial value thereof at that date.

Section 204 (b) of the Revenue Act of 1924 provides that:

The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be '(A) the cost of such property * * * , or (B) the fair market value of such property as of March 1, 1913, whichever is greater. * * *

The evidence indicates that the contract, if accomplished, would have added greatly to the value of the land owned by the petitioner at March. 1, 1918. It is clear, however, that at such date the Union Railway Company was in default of its obligations, the ultimate performance of which was dependent upon the favorable outcome of litigation. There is no testimony that the contract had any market value at any time or that it was possible to sell it as a separate item of property, or as to the amount that could have been realized from such a sale. On this issue the determination of the respondent is affirmed.

During the period from 1905 to 1925 the petitioner owned electric light and power facilities which it operated under the trade name of South Memphis Light and Traction Company. In the year 1925 it sold such facilities and business to the Memphis Power and Light Company for $145,000. The parties have stipulated that in connection with its operations the petitioner owned and operated the necessary light plant and also had perpetual and exclusive right of way or franchise over the streets, alleys and public places on and across about 4,000 acres of land in and around New South Memphis, which was at that time a rapidly growing industrial and residential section situated immediately south of the city limits of Memphis, Tennessee; that the petitioner also had other valuable and exclusive franchise rights granted by the court of Shelby County, Tennessee, all of which franchise rights were included in the sale to the Memphis Light and Power Company; that during the period 1918 to 1925 the patronage of the South Memphis Light and Traction Company was substantially increased, both in number of customers and in amount of current used.

In its income tax return for 1925 the petitioner cla 'med a net loss in the amount of $81,009.65 resulting largely from the sale of its light and power business as above set forth and a net loss of $71,184.18 which it computed upon the basis of an alleged value of franchise at March 1, 1913, of $150,000.

Upon audit of such return the respondent held that the franchise was without value at March 1, 1913, disallowed a net loss in the amount of $9,943.54 which petitioner sought to carry forward from 1924, held that the sale of the light and traction property resulted in a profit of $100,864.05, based on the depreciated cost of the tangible assets of $39,635.95, March 1, 1913, value of land of $1,500, and sales commissions of $3,000.

The deed transferring title to the petitioner’s light and traction property recites that it conveys (1) the entire physical plant, (2) and an easement in land on which poles stand, including those in public streets, on alleys, and all other property, except cash and notes and accounts of the South Memphis Light and Traction Company, forming a part of and appertaining to or used or occupied or employed in connection with said distributing system and stations used for purposes of receiving and distributing electrical energy; together with all rights of ways, easements, permits, licenses, immunities, privileges, franchises and rights for or related to the construction, maintenance or operation of such system, through, over, under or upon any public streets, or highways, of the public or other lands, and all materials and other supplies which are now held by the said South Memphis Light and Traction Company or South Memphis Land Company for use in connection with such distribution, all of the foregoing being located in or adjacent to what is now known as New South Memphis. Certain real estate about which there is no controversy as to value at March 1, 1913, was also included in the sale.

It is stipulated that the franchise and other rights and property which the petitioner owned and used in its light business at March 1, 1913, were all included in this sale to the Memphis Power and Light Company in 1925. The only controversy here is as to the value of such property at the basic date, which the petitioner contends was in excess of $150,000. The respondent has held, and, in the brief, argues that at such date the property had no market value. In support of its contention of value the petitioner adduced the oral evidence of its president, former general counsel, and several men not in any way connected with it.

Thomas H. Allen, a consulting engineer of more than twenty years experience, familiar with the light and power business, and with the petitioner’s property and prospects, placed the value of the franchise in question at $100,000 at March 1, 1913. J. T. Eamier, a public utility engineer from 1908 to 1921, was well acquainted with the property and was at one time connected with the purchaser. He testified to $100,000 as a very reasonable figure to cover the franchise value in controversy. By agreement of counsel, the affidavits of General S. T. Carnes and L. G. Van Ness, both now deceased, were admitted in evidence. General Carnes in his lifetime promoted and built the Memphis Telephone Company and the Memphis Power and Light Company. In his opinion the franchise sold by petitioner in 1925 was worth $150,000 in cash or more at March 1, 1913. Van Ness was vice president and general manager of the Merchants’ Power Company, which acquired a franchise from the City of Memphis about 1906, and under his direction constructed a lighting system for the city. He was engaged in the electric light and power business until 1927. In his opinion the value of the franchise in question at March 1, 1913, was not less than $75,000. The president of the petitioner testified to value of $200,000 to $250,000 as of the basic date. A former general counsel of the petitioner testified to considerable experience in the light and power business in connection with petitioner, the Merchants’ Power Company and other similar concerns. In his opinion the franchise in question was worth at least $100,000 at the date material here. The respondent introduced no evidence in rebuttal and in cross examination did not weaken or discredit that adduced by the petitioner. After careful consideration of all the testimony we are of the opinion that the franchise in question had a value of $100,000 at March 1, 1913. Such value should be used as the basis for computing the gain resulting from the sale thereof in 1925. ■

In the yeai-1912 the petitioner acquired 300 shares of the common stock of the Memphis Terminal Corporation of the par value of $100 per share. In the year 1924 it exchanged such shares for an equal number of $100 shares of the preferred stock of the same corporation. In 1926 it sold such preferred shares for $31,500 and in its income tax return for that year reported a profit from such sale in the amount of $16,500, based on alleged market value at March 1, 1913, of $50 per share. Upon audit the respondent increased such profit to $24,000, computed on a basis of $25 per share at March 1, 1913.

Pétitioner acquired the 300 shares of the common stock of the Memphis Terminal Corporation in connection with the reorganization of the said corporation, at which time bonds were issued and with the sale of eanh $1,000 bond one share of common stock was given to the purchaser. The books of the corporation show a surplus at August 31, 1911, in the amount of $145,045.60 and that it earned net profits in the year 1912 and the six months ended at March 1, 19Í3, in the respective amounts of $132,595.26 and $45,620.19 and that the book value of its stock at the later date was $26.13 per share. The stock in question was never listed and no sales on or about the basic date were proved. No evidence was introduced to show the nature or value of the preferences in the preferred stock for which the common stock was exchanged in 1924. The books indicate earnings for the year and one-half prior to March 1, 1913, equal to about 8 per cent of the par value of the common stock after provision for bond interest. The common stock was quoted in Memphis newspapers on August 9 and August 18, 1914, at $20 bid — $25 asked. In April, 1912, the bonds of the corporation sold at approximately 90 per cent of par value. In the light of these facts we are of the opinion that the petitioner has failed to overcome the presumption of correctness attaching to the respondent’s determination that the market value of the stock of the corporation was $25 per share at March 1,1913.

Reviewed by the Board.

Decision will be entered wider Rule 50.