author: Hill: Leech,

text:
    Lee H. Marshall Heirs, et al., Fidelity Trust Company, Trustee, Petitioner, v. Commissioner of Internal Revenue. Respondent.
    Docket No. 88838.
    Promulgated January 17, 1939.

      Charles Denby, Jr., Esq., for the petitioner.

      Doren P. Oakes, Esq., for the respondent.
   OPINION.

Hill:

The first issue for consideration is whether or not during the years 1982, 1933, and 1934 petitioner was an association taxable as a corporation.

Section 13 of the Revenue Act of 1932 imposes a tax upon the net income of corporations, and in section 1111 (a) (2) it defines the term “corporation” as including “associations.” Sections 13 and 803 (a) (2) of the Revenue Act of 1934 contain similar provisions.

The term “association”, as used in the taxing acts, means “a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.” Hecht v. Malley, 265 U. S. 144. Again, it has been said that the term “association” implies associates, who enter into a1 joint enterprise for the transaction of business and sharing of its gains. Morrissey v. Commissioner, 296 U. S. 344. Additional characteristics of an “association” are (1) vesting in the trustees of title to the property embarked in the enterprise; (2) designation of the trustees as a continuing body; (3) centralized management; (4) security of the enterprise from termination or interruption by the death of the owners of the beneficial interests; (5) transfer of beneficial interests without affecting the continuity of the enterprise; and (6) limitation of personal liability of the participants. Living Funded Trust of Marry E. Lyman, 36 B. T. A. 161, 167.

Petitioner, during the taxable years, wei think came clearly within the boundary lines defining an “association” as above indicated. The four Marshall heirs, who were then the owners, as tenants in common, of the Marshall land, associated themselves together in a joint enterprise for the transaction of business and sharing of its gains. They transferred to the trustee, its successors and assigns, the property in which each owned an undivided interest, and thereby secured centralized management for their common benefit. Subject only to the right of revocation by a majority in interest of the grantors, the trust wag to continue during the life of the longest living of the grantors, but not beyond April 30, 1968. Thus, the trust was a “continuing body” and not subject to termination or interruption by the death of the beneficial owners. Likewise the continuity of the enterprise would not have been affected by the transfer of beneficial interests. And, lastly, it appears that under the law of Pennsylvania the liability of , the beneficiaries was probably limited to the property in the.hands of the trustee, even though there was no such specific provision in the trust instrument. Cf. Hartley v. Phillips, 198 Pa. 9; 47 Atl. 929. However, an extended discussion of this point is not deemed necessary, since in our opinion decision of the question presented does not turn upon whether or not there was in fact limitation of personal liability.

In the instant proceeding, as in most cases involving similar questions, there may be present some of the elements both of a trust and an association, but the essence of the issue is whether the paramount purpose of the present trust was the carrying on of a business enterprise for profit and was therefore a business trust or an association as distinguished from what is termed a pure trust. Cf. Frederick Pitzman et al., Trustees, 36 B. T. A. 81, 92. In the case of a pure trust the earning of income is merely incidental. The main purpose of an association, whether or not it be called a trust, is the earning of profits from the operation of a business venture for the benefit of the joint owners. As pointed out by the Supreme Court in the Morrissey case, supra:

In what are called “business trusts” the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. Thus a trust may be created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, the construction of improvements, and the purchase, management and sale of properties * * *

Clearly, the purpose of the present trust was not liquidation, nor was its main purpose the holding and conserving of property. While the trustee was given authority to sell the property, with the consent of a majority in interest of the beneficiaries, the evidence discloses no intention to liquidate during the existence of the trust, and so far as shown no effort was made in that direction. Prior to November 30,1925, the four Marshall heirs were the sole stockholders of the Marshall Land Co., a business corporation which held title to the Marshall land. On that date the heirs caused the corporation to transfer to them the title to the land, and on the same date they transferred the title to the trustee, and the corporation was dissolved. The principal purpose of dissolving the corporation was to avoid corporation taxes. Apparently, the trustee thereafter merely carried on. the prior functions of the corporation in the management and operation of the property and in holding the title thereto.

Obviously, the Marshall land was very valuable property. Prior to default of the tenant in 1982, rental was paid at the rate of $38,000 per annum. The trustee was vested with broad powers, essential to the carrying on of a business for profit. Among other things, the trustee was empowered to hold, manage, and control the property; to lease and rent the premises or any part thereof; to collect, receive, sue for, and recover the rents and profits; to oversee the payment of taxes, municipal assessments, insurance, and interest on mortgages; to make payments on account of the principal of any mortgage, under certain conditions; to contract for the repair and general upkeep of the premises, and to incur reasonable and necessary indebtedness incident to the management thereof; to sell at public or private sale the whole or any part or parts of the property and to make and deliver deeds therefor, with the consent of the majority in interest of the beneficiaries; to borrow money for many purposes, including the construction of a building on the premises or to pay for alterations and improvements, with the approval in writing of a majority in interest of the beneficiaries.

The Marshall land was more valuable as a unit for the purpose of selling or renting, and the heirs were not competent, by reason of the lack of business experience, to manage and operate or sell the property themselves. But that the management and operation of such a property, under the extensive powers vested in the trustee, constituted the carrying on of a business enterprise for profit is too clear, we think, to require further discussion.

Petitioner points to the fact that the tenant paid the taxes, insurance, and other expenses, and contends that during the taxable years the trustee did little more than collect the rent and distribute it among the beneficiaries. This is not the decisive factor; it is the powers conferred upon the trustee in the trust instrument which determine the character of the trust rather than the particular activities engaged in during the tax years. Otherwise it is apparent that the same organization might be classed in one year as a trust and in another as an association taxable as a corporation. See Morrissey v. Commissioner, supra, p. 361; Sloan v. Commissioner, 63 Fed. (2d) 666, 669; Commissioner v. Vandegrift Realty & Investment Co., 82 Fed. (2d) 387, 390.

Petitioner cites the decision of the Supreme Court in Lewis & Co. v. Commissioner, 301 U. S. 385, and contends it is decisive of the case at bar. We can not agree. The facts of the cited case are materially unlike those of the present proceeding. In the Lewis case, the Court held that, while there were two beneficiaries, one of them was the single grantor and the other, in substance, a mere agent of the grantor and that, hence, there was no association within the meaning of the statute because there were no associates in carrying out the purposes of the trust. Furthermore, there were no factors making the trust analogous to a corporate organization. The grantor conveyed certain real estate to the trustee to hold for the benefit of herself and an exclusive sales agent and manager of the trust, concurrently appointed. The powers and duties of the trustee were purely ministerial. In order to facilitate the subdivision and sale of the realty, the trustee held the title, executed conveyances upon the agent’s direction, and collected and disbursed other than the initial payments. In its opinion the Court said:

If it were not for tlie declaration of trust, we should have here the simple ease of an appointment by a land owner of an agent to subdivide the land and sell it, receiving as compensation for his services a fixed percentage of the payments made by the purchasers. It is quite evident that such an arrangement has no element of substance or method which would warrant its designation as an association under the statutory provision in question. Nor can we see that the intervention of a trustee to hold title, execute contracts and conveyances at the direction of the real estate agent and make collections alters the situation.
*******
The duties of the trustee were purely ministerial, with no power to control, direct, or participate in, the conduct of the selling enterprise contemplated by the contract.

On tbe first issue, respondent’s determination is approved.

Tbe second question at issue is wbetber or not assessment and collection of any tax due from petitioner for the years 1932 and 1933 are barred by limitations.

Section 275 of tbe Kevenue Act of 1932 provides in part pertinent here as follows:

(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.
* * * * * * *
(c) Corporation and Shabeholdei!. — 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.

Tbe period specified in subdivision (a) under tbe general rule begins to run from tbe date the return was filed, whereas tbe provisions of subdivision (c) are applicable only in a case where the corporation made no return of the tax imposed by tbe income tax title. Petitioner filed a fiduciary return on form 1041 for the taxable year 1932 on March 15, 1933, and a similar return on tbe same form on March 15,1934, for tbe year 1933. Tbe beneficiaries included their distributive shares of the net income for each year in their respective individual returns and paid the taxes due thereon. The last date on which any such beneficiary’s return was filed for 1932 was March 15,1933. Respondent made no adjustment to the net income reported on the fiduciary returns, but computed the deficiencies on the basis of the income so reported. Thus, it is clear that if the fiduciary’s returns were “the returns” required by the statute, the period of limitations provided in section 275 (a) has run and the deficiency notice was issued too late. If the 1041 returns were not returns of the tax, then it seems equally clear that petitioner has made “no return” within the meaning of section 275 (c), and the period for assessment and collection of the taxes due for 1932 and 1933 had not expired on March 13, 1937, when the deficiency notice was mailed.

This same question was considered by the Board in Roosevelt & Son Investment Fund, 34 B. T. A. 38, on facts similar in all material respects to the instant proceeding, and it was there held that the return on form 1041 was a return under the law and served to start the running of the period of limitations provided in section 275 (a) of the Revenue Act of 1928, which contains the same provisions as section 275 (a) of the 1932 Act. Respondent filed in that case a petition for review to the United States Circuit Court of Appeals for the Second Circuit, and the court dismissed the petition for lack of jurisdiction, holding that a return on form 1041 was an information return, not a return of the tax, and that it was without jurisdiction to review a decision of the Board in any case where a retwrn of the tax, respecting which the liability arises, had not been made to a collector’s office located in its circuit. See 89 Fed. (2d) 706. In discussing the effect of an information return on form 1041, in connection with the question of limitations arising undqr section 275 (c), the court remarked:

The truth is that the information return filed by respondent [taxpayer] was not the return of a tax at all but merely detailed the information with which the tax upon the beneficiaries could be computed. It is immaterial in this respect that such a return has been held to prevent the imposition of a penalty (citing' authorities), or that it contained all the facts by which a computation of the tax could be arrived at. Section 275 (e) is explicit in its reference to the “return of the tax imposed by this title.” That means just what it says and. may not be extended to include an information return which in fact is no tax return at all.

To the same effect, see also United States v. National City Bank of New York, 21 Fed. Supp. 791, 797.

Upon reconsideration of this question, we conclude that subdivision (c) of section 275, supra, provides an exception to the general rule stated in subdivision (a). It follows that the provisions of subdivision (a) have no application to a case coming within the purview oi subdivision (c). We hold, therefore, that assessment and collection of the taxes due from petitioner for the years 1932 and 1933 are not barred by limitations.

Eeviewed by the Board.

Judgment will be entered for the respondent.

Van Fossan dissents.

Leech,

dissenting: In the recent cases of City Bank Farmers Trust Co., 39 B. T. A. 29, and George Vanderbilt Trust, 36 B. T. A. 967, the Board, in disallowing deductions of certain items as business expenses, supported that action primarily, if not entirely, on the premise that these trusts were not then in business. In this proceeding, where neither the actual nor potential activities of the petitioning trust seemed to have been as broad or businesslike, the Board sustains its finding that this trust is taxable as a corporation upon the principal ground that it was in business.

I think the same measure should apply in both situations. And, having thus restricted the meaning of “business” in the first mentioned class of cases, it should be similarly restricted here. That, it seems to me, would require a finding that the petitioner was taxable as a trust and not as an association.


source: Caselaw Access Project

author: Leech; :

license: Public Domain

text:
    Cleveland Trust Company, Trustee, Edith K. Timken, et al. Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88561.
    Promulgated January 17, 1939.

      F. E. Gleach, Esq., and H. A. Mihüls, O. P. A., for the petitioner.

      Henderson A. Melville, Esq., for the respondent.
   OPINION.

Leech; :

This case involves a deficiency in income tax of $441.56 for the calendar year 1982. The sole issue is whether petitioner derived income at the time of the cancellation of a lease of its property because of the fact that, during the running of the lease and pursuant to an agreement contained therein, the lessee had erected a building on the property. We find the facts as stipulated, supplemented by the ultimate finding therefrom that this building, when erected, became a part of the leased premises, and, if removed, had only a salvage value.

In 1919, petitioner acquired a one-half interest in certain real estate located in San Diego, California. It leased this property, in 1925, to the Exchange Securities Corporation for a term of fifty years and one month. Paragraph “Second” of the lease provided, for a term rental, as such, in the amount of $675,487.15, payable in definite amounts and on specific dates. The fifth paragraph, inter alia, provides that “In further consideration of this leasing” the lessee would, on or before January 1, 1931, at its cost, commence the erection of a permanent building to cost not less than $200,000 and that it would, on or before June 30, 1926, erect a temporary building at a cost of at least $50,000, to be replaced by the permanent building. Construction of the temporary building was completed in July 1926. It had a life of 33% years. The permanent building was never erected.

In 1932, upon lessee’s default, petitioner-lessor canceled the lease and repossessed the premises. In computing the deficiency, respondent deducted depreciation on the building at the rate of 3 percent for six years, the original cost of the building having been $22,500, and determined that petitioner received taxable income, in 1932, in the amount of $9,225, one-half of the remaining cost of the building. The first question is whether the erection of this building by the lessee can be construed to have been rental under the lease. The Supreme Court, in the recent case of Blatt Co. v. United States, 305 U. S. 267, said: “* * * Even when required, improvements by lessee will not be deemed rent unless intention that they shall be is plainly disclosed. * * *” We think such an intention is contradicted by the lease involved here. The present lease, in a separate paragraph, provided a definite rental — as such. The life of the improvement, i. e., the temporary building, was shorter than the term of the lease. However, the question remains whether, by virtue of the lessor’s acquisition of the premises, following default and its cancellation of the lease, the lessor then realized taxable income, other than rental. Despondent supports his action here oil that position alone. He does so on the authority of Regulations 77, article 63, as amended by T. D. 4539 (C. B. XIV-1, p. 141).

It is true the provisions of that regulation are identical with others, the validity of which has been sustained by the Board. Emma C. Morphy, 35 B. T. A. 289. Cf. Louise C. Slack et al., Executors, 35 B. T. A. 271; petition for review dismissed, 91 Fed. (2d) 1011; Julian B. Hart, 37 B. T. A. 360. See contra, Hewitt Realty Co. v. Commissioner, 76 Fed. (2d) 880. However, in the Blatt case, supra, the Supreme Court considered the validity of that regulation. It is true the Court there had to decide only “whether, under the lease here involved, one-tenth of what the commissioner and taxpayer call and agree to be ‘estimated depreciated value,’ as of the end of the term, was income to petitioner in the first year of the term.” But, in disposing of that question on the facts there before the Court, the majority opinion clearly invalidates the regulation under which the respondent acted here, and says:

Granting that the improvements increased the value of the building, that enhancement is not realized income of lessor. So far as concerns taxable income, the value of the improvements is not distinguishable from excess, if any there may be, of value over cost of improvements made by lessor. Each was an addition to capital; not income within the meaning of the statute. Treasury Regulations can add nothing to income as defined by Congress.

In view of that unequivocal expression by the Supreme Court, we now hold that where, as here, the improvements to the leasehold did not constitute rent and, when constructed, became a part of the leased premises, and, if removed, had only a salvage value, no taxable income is realized by their lessor upon its acquisition of possession of such premises at the termination of the lease.

Reviewed by the Board.

Decision will he entered for the petitioner.

       Art. 63. Improvements by lessees. — when buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases :
      (а) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease.
      (б) The lessor may spread over the life of the lease the estimated depreciated value cf such buildings or improvements at the expiration of the lease and report as income for each year of the lease an aliquot part thereof.
      Except in cases where the lessor has exercised the option to report income upon basis (6), if the lease is terminated so that the lessor comes into possession or control of the property prior to the time originally fixed for the expiration of the lease, the lessor derives no income by reason thereof, and, just as when the lessor comes into possession or control of the property upon the expiration of the lease, the basis for determining gain or loss to the lessor from the subsequent sale or other disposition of the buildings or improvements and for depreciation in respect of such property is the amount previously reported as income by the lessor because of the erection of the buildings or improvements, except that if the buildings or improvements were acquired prior to March 1, 1913, the basis shall be their value subject to the lease when acquired or their value subject to the lease on March 1, 1913, whichever is greater. If the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss is not compensated for by insurance or otherwise. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on their value subject to the lease when acquired or their value subject to the lease on March 1, 1913, whichever is greater, less any salvage value subject to the lease to the extent that such loss is not compensated for by insurance or otherwise. (See articles 130 and 204.)
      In all cases where the lessor has exercised the option to report income upon basis (5), if the lease is terminated so that the lessor comes into possession or control of the property prior to the time originally fixed for the expiration of the lease, the lessor derives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he becomes entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the termination of the lease shall be included. If the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss is not compensated for by insurance or otherwise.

       Art. 63. Improvements by lessees. — If buildings are erected or improvements made by a lessee and such buildings or improvements immediately become the property of the lessor, as, for instance, if they are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases:
      (а) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease.
      (б) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the expiration of the lease and report as income for each year of the lease an aliquot part thereof.
      If the lease is terminated so that the lessor comes into possession or control of the property prior to the time originally fixed for the expiration of the lease, the lessor shall report income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he becomes entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the termination of the lease shall be included.
      If the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease, to the extent that such loss is not compensated for by insurance or otherwise. (See articles 130 and 204.)

        Hewitt Realty Co. v. Commissioner (CCA 2), 76 F. (2d) 880, 884. Eisner v. Macomber. 252 U. S. 189, 207. Lucas v. Alexander, 279 U. S. 573, 577. Cf. Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 175.

        United States v. Phellis, 257 U. S. 156, 169, 175. Merchants’ L. & T. Co. v. Smietanka, 255 U. S. 509, 519-520. Taft v. Bowers, 278 U. S. 470, 480, et seq. Lucas v. American Code Co., 280 U. S. 445, 449. Eckert v. Burnet, 283 U. S. 138, 142. Burnet v. Logan, 283 U. S. 404. 412-413. United States v. Safety Car Heating Co., 297 U. S. 88, 99. Koshland v. Helvering, 298 U. S. 441, 444-445. Cf. Commissioner v. Van Vorst (CCA 9), 59 F. (2d) 677. 680.

        Koshland v. Helvering, 298 U. S. 441, 447.

       See concurring opinion of Mr. Justice Stone in the Blatt case, aupra.


author: Van Fossan:

text:
    Merkra Holding Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80583.
    Promulgated January 17, 1939.

      Manley A. Kateher, Esq., for the petitioner.

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

Van Fossan:

This case presents a question which, in its various phases, has been the subject of divergent opinions by this Board and the courts. Broadly stated, the cases involve the determination of the time when, if ever, a lessor of property realizes income by reason of the erection by a lessee, of permanent improvements on lessor’s land.

In the instant case the petitioner contests the action of respondent in holding that income was realized in the fiscal year ended February 29, 1932, because of a building theretofore erected on land owned by petitioner by a lessee under a lease for 21 years, dated October 24, 1929.

The most recent pronouncement on the subject is found in Blatt Co. v. United States, 305 U. S. 267, in which the Supreme Court reversed the Court of Claims, which had affirmed the Commissioner’s action in adding to the lessor’s income, during the year of installation, one-tenth of the depreciated cost of improvements made^ by a lessee under a ten-year lease, the lease providing that the improvements should become the property of the lessor.

Tu the Blatt case the Court observed that they were not called on “to decide whether under any lease or in any circumstance, income is received by lessor by reason of improvements made by lessee, nor to choose, for general approval or condemnation, any of the theories expounded by the United States.” It thereupon addressed itself to the question whether, under the lease there involved, one-tenth of the agreed “estimated depreciated value” as of the end of the ten-year term, was income to the lessor in the first year of the term. In considering this question the Court first took occasion to observe that the facts found were not sufficient to sustain the holding of the lower court to the effect that the making of the improvements by lessee was payment of rent. Likewise, it was stated that:

The findings fail to disclose any basis of value on which to lay an income tax or the time of realization of taxable gain, if any there was. The figures made by the commissioner are not defined. The findings do not show whether they are intended to represent value of improvements if removed or the amount attributable to them as a part of the building.

After thus ruling the findings of fact insufficient, the Court proceeded with the following observations:

Granting that the improvements increased the value of the building, that enhancement is not realized income of lessor. So far as concerns taxable income, the value of the improvements is not distinguishable from excess, if any there may be, of value over cost of improvements made by lessor. Each was an addition to capital; not income within the meaning of the statute. Treasury Regulations can add nothing to income as defined by Congress.
But, assuming that at some time value of the improvements would be income of lessor, it cannot be reasonably assigned to the year in which they were installed. * * * * It may be assumed that, subject to the lease, lessor became owner of the improvements at the time they were made. But it had no right to use or dispose of them during the term. Mere acquisition of that sort did not amount to contemporaneous realization of gain within the meaning of the statute.

Bearing in mind the specific question under consideration, as stated by the Court in the Blatt case, and albeit the findings of the lower court were held to be insufficient to support its decision, we interpret the above opinion to constitute a complete disapproval of the action of the Commissioner in holding that a lessor realizes income in the year of installation of permanent improvements by a lessee.

It is a necessary corollary of this holding that the Commissioner is not justified in spreading the “estimated depreciated value” or any other comparable amount over the term of the lease. If a pro rata part was not income in the first year it is not income in the next or any succeeding year short of the final year of the term. The question whether income is realized at the termination of the lease we need not now decide.

The above conclusion is dispositive of the present case. In this, as in the Blatt case, there is no basis for a holding that the improvements were in the nature of rent. Nor, in our view, is it necessary to dwell on the fact, here present and conceivably very important in certain contingencies, that upon the termination of the lease the lessor was under obligation to demolish and remove the building from the leased land.

The action of respondent is disapproved.

Reviewed by the Board.

TJecision will be entered wader Bule 50.

        Cryan v. Warden, 263 Fed. 248; Miller v. Gearin, 258 Fed. 225; Hewitt Realty Co., 29 B. T. A. 1205; reversed 76 Fed. (2d) 880; Louise C. Slack et al., Executors, 35 B. T. A. 271; Emma C. Morphy, 35 B. T. A. 289; Julia Willms Sloan, 36 B. T. A. 370; Julian B. Hart, 37 B. T. A. 360; Blatt Company v. United States, 23 Fed. Supp. 461; reversed by Supreme Court, 305 U. S. 267.


author: Black:

text:
    The Electric Storage Battery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63010.
    Promulgated January 19, 1939.

      J. Marvin Haynes, Esq., G. J. McGuire, Esq., and W. G. Magathan, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Black:

Upon the facts as above recited petitioner contends primarily that it is entitled to deduct from its gross income for 1929 as additional compensation the difference between the fair market value ($842,802) of the 10,342 shares of its common stock which it issued to its employees under the plan during 1929 and the amount ($333,374) paid to petitioner by its employees under the plan in respect to the 10,342 shares. This difference amounts to $509,428. The respondent contends that the issuance of stock in 1929 under the plan should, as far as petitioner is concerned, be regarded merely as the delivery of stock previously “purchased” by petitioner’s employees in 1926 and 1927 at a total purchase price of $584,110, and that in so purchasing the stock no element of additional compensation was involved and petitioner is entitled to no deduction by reason thereof. The applicable statute is section 23 (a) of the Revenue Act of 1928, the material part of which is set out in the margin.

We do not think petitioner’s primary contention contained in assignment of error (a) can be sustained, nor do we think respondent’s position that petitioner is entitled to no deduction as additional compensation paid to its employees by reason of the stock transactions with its employees is sound. For reasons which we shall state later on in this opinion, we think petitioner’s assignment of error (b) should be sustained.

There are many Board and court cases which deal with various phases of the question which we have here to decide and with other questions related to it. Some of these cases are cited by petitioner in its brief and some are cited by respondent in his brief. We have read all the cases cited in both briefs and other later cases which are not cited in either brief. We do not think it would be profitable to undertake to discuss all of these cases in detail or to endeavor to reconcile some apparent conflicts in them. Each such case, as has often been said, depends upon its own particular facts.

However from a reading of these various cases we think their holdings may be classified in about this way:

(1) Where the facts show that the stock transaction between the corporation and the employee is an outright sale of the stock to the employee, no income results to the employee by reason of the purchase even though the fair market value of the stock is greater than the price which the employee paid for it. And by the same reasoning the corporate employer is not entitled to a deduction, as compensation paid to the employee, of the excess fair market value of the stock over the price which the employee paid for it. Cf. Rose v. Trust Co. of Georgia, 28 Fed. (2d) 767; Durkee v. Welch, 49 Fed. (2d) 339; Gardner-Denver Co. v. Commissioner, 75 Fed. (2d) 38; certiorari denied, 295 U. S. 767; Irving D. Rossheim v. Commissioner, 92 Fed. (2d) 247; Delbert B. Geeseman, 38 B. T. A. 258.

(2) Where the form of the contract is that of an outright sale of the stock from the corporate employer to the employee such as an agreement of sale, with the execution by the employee of his promissory note to pay for the stock, but the facts show that nothing was to be paid by the employee from his own funds for the stock but that it was to be paid out by dividends or earnings credited to the employee from time to time as payments on the stock, such a transaction iá treated as extra compensation paid by the corporation to the employee, and if the amounts when added to other-payments made to the employee represent reasonable compensation, the corporate employer is entitled to take as a deduction the fair market value..oi-the_stock.-when delivered to the employee. Alger-Sullivan Lumber Co. v. Commissioner, 57 Fed. (2d) 3; Hudson Motor Gar Co. v. United States, 3 Fed. Supp. 834; Indianapolis Glove Co. v. United States, 96 Fed. (2d) 816.

(3) Where the contract shows that the employee is to make part of the payment for the stock which is to be acquired by him out of his own funds, either in the form of cash payments or by periodical deductions from his regular salary, and the remainder of the agreed price is to be paid hi the form of credits to the employees’ accounts, such credits to be measured in some cases by dividends which are paid upon issued and outstanding stock, in other cases by proportionate net earnings of the corporation to be applied to the purchased stock, the contract is treated as one of composite purchase and sale and of compensation. In such a case, without more, the employee is not taxed with the excess fair market value of the stock over the price paid for it in the form of cash payments and the application of credits to his account. He is taxed as income with the actual credits made to his account on the purchase price, but does not pay any tax on the excess fair market value over the price paid for the stock, unless this excess fair market value is actually realized in the form of a sale. Cf. Gordon M. Evans, 38 B. T. A. 1406; Omaha Rationed Bank v. Commissioner, 75 Fed. (2d) 434.

In the Gordon M. Evans case we pointed out in our findings of fact that the Kelvinator Corporation, which was the corporate employer, made no deduction on its books and claimed no deduction on its Federal income tax returns as compensation paid with respect to the stock sold under the option agreements. It did deduct as extra compensation, however, the amounts of the “earning credits” entered on its books to the accounts of the employees. On the facts of that case, we held that the taxpayer, Evans, who was the employee who had purchased the stock, was not taxable on the $26,500 which the Commissioner had added to his gross income on account of the fact that the 3,000 shares of Kelvinator stock which Evans had purchased under the plan at $8 per share, had a fair market value $26,500 greater at the time the stock was delivered to Evans than the purchase price which he had paid for it.

Although in the Evans case we did not have the corporate employer, the Kelvinator Co., before us claiming a deduction as compensation paid out to an employee, this $26,500 in question, it seems certain that, if we had had the Kelvinator Co. before us, the same logic that holds the $26,500 was not income to Evans would compel a holding that it was not an allowable deduction as compensation paid out by the corporation.

The facts in the instant case show that petitioner, like the Kelvi-nator Co. in the Evans case, did not deduct from its income tax return the excess fair market value of the stock at the time it was delivered over the price which the employee had paid for it, including the credits placed to his accounts. Petitioner in the instant case, like the Kelvinator Co. in the Evans case, has deducted from its income tax returns the earnings credit entered on its books to the accounts of the employees.

In our findings of fact it is shown that in 1929 when the stock was delivered to the employee-purchasers petitioner sent each of them a statement which showed just how much of the agreed purchase price had been paid by deductions from the stockholders’ regular salary and just bow much had been paid by earnings credits placed to the credit of the purchasing employees’ accounts. This notice called the employees’ attention to the fact that the earnings credits which had been placed to the credit of the purchasing employees’ accounts should be returned as taxable income. Nothing was said in these notices to the employees to the effect that the excess fair market value over the purchase price was to be treated as increased compensation to the employee. In fact there is nothing in the stipulated facts which shows that there was any agreement or understanding between petitioner and its employees that it should be so treated.

In this respect the instant case appears to differ in this important respect from the facts in W. M. Ritter Lumber Co., 30 B. T. A. 231, 251, 274 (issue No. 22), and is therefore distinguishable. In the latter case, in distinguishing it from the case of Gardner-Denver Co., 27 B. T. A. 1171, we said:

* * * However in the present controversy, the circumstances and conditions surrounding the execution of each contract disclose that the intention of the parties was not only a purchase and sale of stock but in addition thereto and primarily, the payment by the Ritter Co. of a stock bonus, as compensation for services actually rendered. The amount of this bonus was predetermined to be the difference between the purchase price and the market value of the number of shares allotted to each employee.

While we recognize of course that the treatment by the parties of the transactions on their books and income tax returns is by no means conclusive, nevertheless in the instant case, taken in connection with other facts and circumstances, it is persuasive as to the agreement and understanding between the parties. As has already been pointed out, petitioner took the sum of $276,631.48 as a deduction on its income tax return for compensation paid to its employees in the form of credits to their accounts on the stock which was delivered to the employees in 1929. Petitioner now wants to increase this deduction to $509,428, which, if allowed, would not only include the $276,631.48 actually credited to the employees’ accounts but would also include the excess of fair market value of the stock at the time it was delivered over the $333,374 which had been deducted from the employees’ accounts and the $276,631.48 which had been credited as above stated.

For reasons which we have endeavored to state, we think this additional deduction should not be allowed. Petitioner kept its books and made its income tax returns on an accrual basis and under ordinary circumstances the deduction to which petitioner would be entitled in 1929 would be the $270,202.67, mentioned in petitioner’s assignment of error (d). This amount was what petitioner actually credited in 1929 to employees’ accounts on stock purchases for all years including the year 1929. The $276,631.48 which we have said should be allowed as a deduction represents not only the amounts credited in 1929 to employees’ accounts on the 10,342. shares of stock actually delivered in that year, but credits which had been made in former years to this same stock. The credits in former years respecting these 10,342 shares had not been deducted from petitioner’s income tax returns because they were only, tentative. If the employee quit the service of the company, as actually a good many of them did, then the credits lapsed back into the company’s treasury and the retiring employee received only the amounts which had actually been deducted from his pay plus 5 percent interest.

Therefore the credits were not regarded as final and complete until the agreed purchase was completed. Then the stock was turned over to the employee and it was unconditionally his property. As stated in our findings of fact, 10,342 shares of stock were delivered in 1929 to employees by virtue of their subscriptions in 1926 and 1927. As to these shares, $276,631.48 had been credited to employees’ accounts in 1929 and prior years to apply , on the purchase price. It is this amount which we hold petitioner is entitled to deduct from its gross income in the taxable year under the provisions of section 23 (a) of the Revenue Act of 1928. On this point, as of what time the deduction should be allowed, cf. Alger-Sullivan Lumber Co. v. Commissioner, supra; Hudson Motor Ocur Co. v. United States, supra; Indianapolis Glove Co. v. United States, supra.

Reviewed by the Board.

Decision will be entered vmder Bule 50.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.


author: OppeR :

text:
    First National Bank and Trust Company of Minneapolis as Representative of the Estate of Edward Starr Judd, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91229.
    Promulgated January 19, 1939.

      John W. Windhorst, Esq., and Leland W. Scott, Esq., for the petitioner.

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

OppeR :

The question is whether insurance on the life of petitioner’s decedent under a so-called group life insurance policy was “taken out by the decedent upon his own life”, with the consequence that its proceeds should be included in his estate. It is clear from our decision in M. W. Dobrzensky, Executor, 34 B. T. A. 305, that in order to fall within that language it is not necessary that the policy be procured by the decedent personally nor that he pay the premiums directly. Accordingly, the facts that the policy was applied for by the Mayo Clinic, the organization with which decedent was associated, rather than by decedent, and that the premiums were paid by it are not conclusive. The question still remains whether the premiums were paid “indirectly” by the decedent either on the theory that they were additional compensation to him, which was used by the Mayo Clinic to pay premiums for his account, or that a part of his distributive share in the net profits of a partnership or association was applied to the payment of the premiums.

Because of the somewhat involved history of the Mayo Clinic it may not be entirely clear whether the premium on the policy which was in effect at decedent’s death was paid by an organization more nearly analogous for tax purposes to a partnership on the one hand or to a corporation on the other. From 1925, when the policy was originally issued, to 1933, decedent and his associates were admittedly partners and filed income tax returns as such. As of January 1, 1933, the articles of association were amended slightly and thereafter returns were made as an association taxable as a corporation. They were so accepted by the respondent. As pointed out by petitioner, the policy in question being a term insurance policy, renewable annually, the specific contract which was in effect at decedent’s death was made within the period when corporate returns were being filed. But the fact that an association may be taxable as a corporation under the specific provisions of the revenue act would not necessarily be conclusive on the question whether the respective rights of the associates and particularly their interest in the annual income of the enterprise were those of partners on the one hand or stockholders on the other.

Since, however, in our view the same result would follow under either hypothesis, we refrain from a determination on this point. If the organization was in effect a corporation it seems to us the situation is controlled by the language in the Dobrzenshy proceeding, supra, (p. 311):

The directors could not legally give away the corporate property. We will not assume they acted illegally. Decedent had furnished and was even then furnishing the company with his “invaluable advice, counsel and personal influence which would justify a very large compensation” * * *.
Then “as some slight evidence of appreciation and recognition of these valuable services” the directorate assumed the costs incidental to * * * its future premiums. We conclude that action constituted not a gift to decedent but compensation paid to him for those services. Frank D. Yuengling, 27 B. T. A. 782; affd., 69 Fed. (2d) 971; George Matthew Adams, 18 B. T. A. 381; Chauncey L. Landon, 16 B. T. A. 907. Cf. David Herbert Botchford, 29 B. T. A. 656: affd., 81 Fed. (2d) 914.
And, since decedent acquired this policy for such services, that policy must be regarded, in law, as “taken out by the decedent upon his own life.”

Here also, according to the certificate issued to decedent, his protection under the policy was “provided by the Mayo Clinic in appreciation of your cooperation and in recognition of your contribution to the perpetuation of its purposes and ideals.”

The language quoted from the Dobrzenshy case refers to an individual policy. Consideration of a group policy in the same decision resulted in a determination that it was not to be included in the estate, upon the authority of Bessie M. Ballinger, Executrix, 23 B. T. A. 1312. For the reasons about to be stated, however, we believe the language quoted to be more nearly applicable to the present situation than the decision as to the group policy.

As a preliminary it is to be observed that the mere designation of the policy is of little consequence. In N. Loring Danforth, 18 B. T. A. 1221, we said, p. 1222: “There is nothing to justify the petitioner’s pleaded contention that this was ‘group insurance,’ and if it were to be so designated, the designation alone would not warrant the omission of the premiums for [from] petitioner’s income. That the purpose, plan and effect was to give petitioner this additional compensation for his services is manifest. The benefit was directed to him, and the corporation received no more benefit than any employer derives when it increases the compensation of its employee,”

Except for the designation, however, there is little, if anything, to characterize the present policy as true group insurance from decedent’s standpoint. Decedent was not only a member of the Mayo Properties Association and a director of the Mayo Clinic, but he and the other directors responsible for their conduct, including the issuance and terms of the policy, were the sole “stockholders” of the latter and preferred beneficiaries under the policy. For it is significant that the policy, with an upper limit, was proportional in its benefits to the salaries of those insured and that the premiums were based upon their ages. The group involved was a personal service enterprise readily distinguishable from a large industrial corporation. All of the foregoing characteristics have been considered and determined to be consequential in the decision of similar cases. Giving effect to all of them and without attempting to evaluate their separate importance we have arrived at the conclusion above set forth.

In George Matthew Adams, 18 B. T. A. 381, 383, we said:

Counsel for the respondent argues that ordinarily group insurance is taken out without the consent and without the knowledge in most cases of the employee, who is not consulted, who does not make the application for the insurance, and who is told about the matter after the thing has been accomplished; that here we have the actual participation by all the employees insured, who were also directors as well as the beneficiaries; that the employees on whom the policies were taken out made out the applications, had knowledge of what was being done, and gave tbeir consent to wbat was done; and that tbe amount of tbo insurance (the face value of the policy) obviously was set by the individuals, since they were directors of the corporation and the minutes show that the directors passed on such insurance.
It was also urged upon us on behalf of the respondent that group insurance could not be compared to the situation existing in the instant proceeding, since it would appear that the corporation was practically a personal service corporation, where the activities of the stockholders, and especially the activities of petitioner, produced the income and that such a situation is not at all analogous to one where insurance is taken out for thousands of employees who know nothing about it * * *. We agree with counsel for respondent that the situation here is quite different from the one contemplated by that portion of Article 33, Regulations 62, relative to premiums paid on group insurance policies * * *.

And in Chauncey L. Landon, 16 B. T. A. 907, 909, we said: “The fact the payments to all of the employees were based upon the amount of their salaries, carries with it a strong indication that the payments were in consideration of past services * *

Some of the cases cited consider whether such premiums are additional compensation, taxable as such to the employee. While this precise question is not before us, the applicable reasoning is comparable (see M. W. Dobrzensky, supra, p. 310), and the absence of any estate tax regulation as to group insurance makes this if anything a stronger case for the respondent than the Adams and Danforth proceedings.

It follows that nothing in the Ballinger or Dobrzensky decisions, where some or all of these facts were absent, is inconsistent with our conclusion in this proceeding that if the organization with which decedent was associated is to be regarded as a corporation the proceeds of the policy before us should be included in his estate.

If, on the other hand, the organization was a partnership for some part or all of the critical period, the argument that decedent indirectly paid the premiums is even stronger. For whatever voluntary arrangement with i*espect to the disposition, of the net profits might have been made by the partners, their right to receive the income in the first instance and their interest in the partnership property and profits can only result in the conclusion that payments made by the partnership were no more than agency transactions in which the funds were actually the property of the partner benefited. M. W. Dobrzensky, supra, 311, 312; Sampson v. United States, 1 Fed. Supp. 95. And, while not conclusive, it is of some significance that for the greater part of this period tax returns were being filed by decedent as a partner and income tax was being paid on his proportionate share of the partnership profits, an amount which was, according to the stipulation, reduced by the premiums paid for the “group policy.”

We accordingly conclude that the policy was taken out by decedent on his own life because it was procured and paid for at least indirectly by him.

Reviewed by the Board.

Decision will be entered for the respondent.

Leech concurs only in the result.

       Section 302 (g), Revenue Act of 1926.

       See also Igleheart v. Commissioner, 77 Fed. (2d) 704; 711, where the court said: “The manifest purpose of that provision is to include in the decedent’s estate for purposes of the tax the proceeds of all insurance on his life receivable under policies acquired through expenditure by him.” This case was cited with approval in Lang v. Commissioner, 304 U. S. 264.

      Regulations 80 (1934 Ed.), art. 25: “Insurance is deemed to be taken out by the decedent in all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly. * * *” (Emphasis added.) The Supreme Court in Lang v. Commissioner, 304 U. S. 264, held a similar regulation to have been “approved by Congress.”

       In that case “this Board construed the quoted words [of the statute] literally.” M. W. Dobrzensky, supra, p. 310. In Edgar A. Igleheart et al., Executors, 28 B. T. A. 888, 908, we expressed our unwillingness “to ignore the intent of the statute or to nullify it by mere technical construction.” On appeal, this position was sustained, the court there saying (77 Fed. (2d) 704, 711): “The statute readily could be evaded if a policy, under which the beneficiary may be changed, could be taken out by a corporation or firm on the life of an official or member of that corporation or firm, and the latter could acquire the policy and have a new beneficiary designated, with the result of excluding from his gross estate the amount in excess of $40,000 receivable by the beneficiary under the policy * *

       Cf. Regulations 86; art. 22 (a) 3 — “* * * Premiums paid by an employer on policies of group life insurance covering the lives of his employees, are not income to the employees.”

       Cf. Helvering v. Reybine, 83 Fed. (2d) 215.

       This treatment was apparently accepted by respondent, perhaps upon an interpretation of his regulations. Regulations 65 and 69, art. 293; Regulations 74 and 77, art. 283; Regulations 86, art. 24-3.


author: Muedook :

text:
    L. & E. Stirn, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86115.
    Promulgated January 19, 1939.

      Andrew B. Trndgian, Esq., for the petitioner.

      Thomas M. Lewis, Esq., for the respondent.
   OPINION.

Muedook :

The Commissioner determined a deficiency of $13,352.21 In the petitioner’s income tax for the fiscal year ended November 30, 1932. One of the adjustments which he made in determining that deficiency was the addition to income of $136,280.31 as profit on redemption of bonds. The only issue for decision is whether or not the Commissioner erred in making that particular adjustment. The facts are found as stipulated by the parties.

L. & E. Stirn, a partnership, acquired 4,636 shares of 7 percent cumulative preferred stock of Concordia-Gallia Corporation on December 1, 1929. Those shares had a basis for gain or loss in the hands of the partnership of $327,319.69. The preferred and common stockholders of the Concordia-Gallia Corporation held a special meeting on December 1, 1931, at which it was agreed that the 4,636 shares of 7 percent cumulative preferred stock of the corporation held by L. & E. Stirn, the partnership, and representing 55.08 percent of the total shares; of that class of stock outstanding, could be retired by issuing therefor 6 percent debenture bonds of the corporation of the total face value of $463,600. They also agreed that the authorized preferred capital stock should be reduced from $1,000,000, represented by 10,000 shares, to $400,000, represented by 4,000 shares. The partnership of L. & E. Stirn owned at that time 64.55 percent of the outstanding common stock of the corporation. The transactions were carried out promptly as agreed upon by the stockholders. No other stock of the corporation was retired at that time. The partnership, also purchased at that time from the corporation additional 6 percent debenture bonds of the latter at their face value for $36,400. The fair market value of the bonds at that time was equal to their face value. One-fifth of the bonds were to be retired at the end of each year.

The petitioner, L. & E. Stirn, Inc., was incorporated on June 3, 1932. The partnership of L. & E. Stirn then transferred assets to the petitioner, including the debenture bonds of the Concordia-Gallia Corporation having a face value of $500,000, solely in exchange for stock of the petitioner, and immediately after the exchange the partnership was in control of the corporation. The petitioner thereafter became indebted to the Concordia-Gallia Corporation in the amount of $500,000, and on September 30, 1932, it surrendered the $500,000 face value of debenture bonds to the corporation in discharge of its debt of $500,000 to that corporation and the bonds were thereupon retired.

The parties are in agreement that the basis of the partnership for gain or loss upon the 4,636 shares of 7 percent cmnulative preferred stock was $327,319.69. The Commissioner has held that the debentures, received by the partnership in exchange for that preferred stock, retained in the hands of the partnership the same basis for gain or loss as the stock had had. He then added the cost of additional debentures purchased for $36,400, to arrive at a figure of $363,719.69, representing the basis for gain or loss which the $500,000 of debentures had in the hands of the partnership. He further held that the debentures had the same basis for gain or loss in the hands of the petitioner, and computed a profit to the petitioner of the difference between that cost and $500,000, the amount of the debt canceled by the surrender of the bonds for retirement.

The taxable year involved is a fiscal year which began during 1931 and ended during 1932, so that both the Revenue Act of 1928 and the Revenue Act of 1932 must be considered. However, as the petitioner concedes, there is no material difference in the acts in so far as this case is concerned.

The exchange of the $500,000 face value of debentures by the partnership to the petitioner was a nontaxable exchange within the provisions of section 112(b)(5) of the Revenue Act of 1932, and, because of the provision of section 113(a)(8), the basis which the debentures bad in the hands of the petitioner was the same as it had been in the hands of the partnership. Obviously, the $36,400 face value of the debentures which were purchased for cash had a basis of their cost, or $86,400. So far the parties are not in disagreement. The real question in the case is, Was the basis of the partnership for gain or loss on the remaining debentures the fair market value of those debentures at the time they were acquired by the corporation, to wit, $463,600, or was that basis the same as that of the preferred stock which was exchanged for those debentures, to wit, $327,319.69 ? The Commissioner contends that the basis was the latter arid lower figure. He argues that there was a recapitalization of the Concordia-Gallia Corporation on December 1,1931, and, therefore, a reorganization of that corporation within the definition contained in section 112(i) (1) (C); no gain or loss resulted to the partnership by reason of the provisions of section 112(b) (3); and, by reason of section 113 (a) (6), the basis of the property acquired by the partnership (the debentures) is the same as that of the property exchanged (the preferred stock). The last sentence of section 113 (a) (6) does not apply. The argument of the respondent is irresistible.

The petitioner suggests four questions and contends that if any one of the four is to be answered in the negative, then the determination of the Commissioner necessarily must have been in error. The first question he asks is, Was the retirement of the preferred stock of the Concordia-Gallia Corporation, surrendered for the debenture bonds, a recapitalization, and therefore, a reorganization within the meaning of section 112(i) (1) (C) of the Eevenue Acts of 1928 and 1932? The term “recapitalization” is not defined in those acts. However, there was in this case clearly a change of capitalization. The preferred stock was surrendered and retired and the amount of authorized preferred stock was reduced from $1,000,000 to $400,000. The material change in capitalization was a recapitalization. Lelia S. Kirby, 35 B. T. A. 578. There was at least one important difference between the preferred stock and the debentures. A holder of a share of preferred stock was a stockholder, whereas the holder of a debenture was a creditor of the corporation. The fact that the capital of the corporation was reduced rather than increased, does not seem to be material. We find nothing in the dictionary definitions of “capitalize” quoted in the petitioner’s brief to show any error in our conclusion that here there was a recapitalization within the meaning and intendment of section 112(i) (1) (C). Therefore, the answer to the petitioner’s first question is in the affirmative.

The next question is, Were the debenture “securities” within the intent of section 112(b) (3) ? The resolution of the stockholders of December 1, 1931, provided that one-fifth of the total of the debentures should mature in one year from the date of issuance, and one-fifth should mature in each succeeding year thereafter. The petitioner points out that in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599, a series of promissory notes all maturing within fourteen months of the date of issuance were held not to be securities within the meaning of a similar provision of an earlier act. It also cites Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, where the Court held that short term notes all payable within four months were not “securities” but were a mere evidence of an obligation to pay the purchase price agreed upon in a sale. The present case is distinguishable from those cases. The resolution of December 1, 1931, further provided “that such bonds shall be issued upon the payment of the par value thereof to the corporation, or in the alternative, upon the exchange for the seven per cent, preferred stock of this corporation held and owned by L. & E. Stirn, such exchange to be made at the par value of such stock at the rate of one hundred ($100) dollars per share.” Here there was an exchange rather than a sale. The debentures were not short term promissory notes and they were not mere evidence of an obligation to pay the purchase price agreed upon in a sale. Cf. Lucien H. Tyng, 36 B. T. A. 21, 27. The evidence does not show that they were not in a true sense securities of the issuing corporation within the meaning of the statutes.

The petitioner’s next question is whether the transaction was an “exchange” within the meaning and intent of section 112(b). It contends that the transaction was a sale and quotes the following as the dictionary definition of an “exchange”: “Act of giving or taking one thing in return for another regarded as an equivalent.” It seems obvious that in the light of the provisions of section 112, where sales are contrasted with exchanges, and also in the light of the generally recognized understanding of the two words, this transaction was an exchange rather than a sale. The retirement of the debentures in September was a subsequent event which did not affect the nature of the transaction in June.

The next question which the petitioner asks is, Was the transaction a nontaxable one within the intent of section 112(b) ? Here it cites Gregory v. Helvering, 293 U. S. 465, but we are unable to see the applicability of the situation. The transaction comes precisely within the terms of the statute and there is no suggestion that the transaction was not entered into for a business purpose.

Decision will be entered for the respondent.


author: Smith :

text:
    Ada Small Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88944.
    Promulgated January 19, 1939.

      Horace N. Taylor, Esq., and Winihrop G. Brown, Esq., for the petitioner.

      John B. Wheeler, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of deficiencies in gift tax for 1984 and 1985 in the respective amounts of $87,768.18 and $3,649.68. The petition alleges that the respondent erred (1) in including $654,531.62 representing the alleged remainder interest in a transfer made by the petitioner to a trustee on December 3, 1934, under the provisions of which she was to receive the income for her life and upon her death the corpus should be paid over to whomsoever she should devise her real estate at Pride’s Crossing, Massachusetts, and (2) that the respondent erred in the determination of the deficiency for 1935 by allowing the deduction of $5,000 instead of $10,000 upon gifts made to two grandsons in that year.

The respondent concedes the correctness of the petitioner’s contention upon the second point.

The petitioner is a resident of New York City. On December 3, 1934, she was a widow 76 years of age and had living two sons and a number of grandchildren and great grandchildren. On the date named she executed an indenture of trust under which she transferred to the Bankers Trust Co. of New York City, the trustee therein named, on December 6,1934, securities constituting the corpus of the trust fund. These consisted of $300,000 face value United States of America Liberty Loan Sy2 percent bonds, due 1932-1947, having a fair market value of $310,687.50 at the time of transfer, and 5,000 shares of American Can Co. common stock, having a fair market value at the time of $525,625. Under the terms of the trust indenture the petitioner retains and reserves the income from the trust during her lifetime. The remainder of the trust fund is to be paid upon the death of the settlor to “whomsoever said Ada Small Moore [the petitioner] may leave her property at Pride’s Crossing, Massachusetts, under her Last Will and Testament”, and in default of such designation the remainder is to go to the lawful issue of the petitioner in equal shares per stirpes. The trust instrument specifically provides that it is created under the laws of the State of New York and shall be governed in all respects by the laws of that state. The trust instrument does not declare that the trust is irrevocable and makes no provision whereby the settlor can revoke the trust.

The question presented by this proceeding is whether the petitioner made a gift in 1934 of any part of the property transferred to the Bankers Trust Co., as trustee under the trust indenture of December 3, 1934. The respondent contends that she did. In his deficiency notice he says:

* * * Under the terms of the trust the income therefrom is payable to Ada Small Moore for life and the remainder at her death was to be paid over to whomsoever Ada Small Moore may leave her property at Pride’s Crossing, Massachusetts, under her last will and testament and in default of such devise the corpus of the trust is to be distributed to the settlor’s issue surviving at her death in equal shares per stirpes and not per capita. This office holds that the remainder interest in the trust vests in the remainderman even though such interest may later be divested by the exercise of a power of appointment.
Section 501 (c) of the Revenue Act of 1932 provides that the gift tax will not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor. The donor not being the sole beneficiary even though she retained the substantial equivalent of a power of appointment, such power did not prevent the vesting of the remainder in the class designated as takers upon failure of the exercise of the power.

It is to be noted that the trust instrument in the instant case specifically says that it is to be “governed in all respects by the laws of that State [New York].” Under the laws of the State of New York the instant transfer is not a gift because the donee is not named. Beaver v. Beaver et al., 117 N. Y. 421; 22 N. E. 940; In re Bostwick's Estate, 160 N. Y. 489; 55 N. E. 208; Vincent v. Rix, 248 N. Y. 76; 161 N. E. 425; In re Hoyt's Estate, 86 Misc. Rep. 696; 149 N. Y. S. 91; affirmed without reference to this point, 223 N. Y. 616, 119 N. E. 1083; In re Babock's Estate, 85 Misc. Rep. 256, 260; 147 N. Y. S. 168; In re Humphrey's Estate, 191 App. Div. 291; 181 N. Y. S. 169; Curry v. Powers, 70 N. Y. 212. In the last named case the New York Court of Appeals said:

An absolute gift requires a renunciation by the donor and an acquisition by the donee of all interest in and title to the subject of the gift.

The decisions of this Board are consonant with the above cited authorities. Adolph Weil, 31 B. T. A. 899; affd., 82 Fed. (2d) 561; Dollie M. Stine, 32 B. T. A. 482; Delight Ward Merner, 32 B. T. A. 658.

Tbe contentions of the respondent in this proceeding are the same as those made by him in Hesslein v. Hoey (C. C. A., 2d Cir.), 91 Fed. (2d) 954; certiorari denied, 302 U. S. 756; and Harriet W. Rosenau, 37 B. T. A. 468, and the facts in the last named case are substantially the same as in the proceeding at bar. Upon the authority of those cases it is held that the petitioner is not liable to gift tax in respect of any portion of the value of the securities transferred to the Bankers Trust Co. pursuant to the provisions of the trust indenture of December 3,1934.

Judgment will he entered under Bule 50.


author: Disney :

text:
    West Side Tennis Club, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83338.
    Promulgated January 20, 1939.

      Lawrence A. Baker, Esq., for the petitioner-

      Olay O. Holmes, Esq., for the respondent.
   OPINION.

Disney :

The Revenue Acts of 1932 and 1934 exempt from taxation:

Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder. [See. 103 (9), 1932 Act; sec. 101 (9), 1934 Act.]

The applicable provisions of the statute must be strictly construed and the petitioner had the burden of showing clearly that it comes within their terms. Waynesboro Manufacturers Association, 1 B. T. A. 911; Farmers’ Co-Operative Milk Co., 9 B. T. A. 696; Northwestern Drug Co., 14 B. T. A. 222. The purpose for which a club was organized may be within the statute, but if it is not operated exclusively for nonprofitable purposes or if part of its net earnings inure to the benefit of a private shareholder, the statute does not operate to give exemption from tax. The Associates, 28 B. T. A. 521; The Jockey Club, 30 B. T. A. 670; Farmers Union Co-Operative Co. v. Commissioner, 90 Fed. (2d) 488. Under the statute a corporation may be exempt even though it derives earnings as an incident to its general nonprofitable purpose. Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578; Roche's Beach, Inc. v. Commissioner, 96 Fed. (2d) 776; Santee Club v. White, 87 Fed. (2d) 5. In the Santee Club case it was said that “The purpose for which the corporation, if otherwise exempt, engaged in the transaction in question is the test.” The profit realized from an isolated sale is not exempt from tax if the transaction, instead of being merely incidental to the activities of the club, was entered into with gain as the primary object in view. Juniper Hunting Club, Inc., 28 B. T. A. 525. In Jockey Club v. Helvering, 76 Fed. (2d) 597, affirming The Jocleey Club, supra, the court, in discussing the meaning of identical provisions of 1926 and 1928 Acts, said:

* * * This does not o£ course mean that a club may on no occasion make a profit without losing its exemption, but it does mean that the returns from transactions with outsiders, taken by and large, shall be no more than a reimbursement of their cost to the club; shall not be a source of income. If.it turns out upon computation that they are such a source over a substantial enough period to justify the conclusion that this is deliberate, we agree with the Board that the club is making earnings which “inure to the benefit” of the members, though they are not distributed. * * *

The respondent does not contend that the petitioner was not organized for purposes within the statutes. He argues that it was not operated exclusively for pleasure, recreation, and other nonprofitable purposes and that part of its net earnings inured to the benefit of its members. He points to the profits realized from major tennis tournaments to show that during the taxable years a part of the activities of petitioner were deliberately entered into for profitable purposes. The petitioner argues that the profits derived from tournaments awarded to it by the Association were in connection with “an activity clearly incidental to and in furtherance of the essential purpose of an otherwise exempt social club” and that the activity is “directly related to and in keeping with the objects” for which it was organized and has been exclusively operated.

In 1928 the petitioner and the Association were in agreement that the facilities then in use at the club for accommodating all who desired to witness the matches were not only inadequate but were of such a nature as to cause considerable inconvenience to members each year for about three months and damage to the grounds. Committees were appointed by each to consider the existing condition at petitioner’s club. Their action resulted in a contract under the terms of which the Association awarded petitioner a major tennis tournament each year for ten years, subject to the construction by it on its grounds of a permanent stadium of a specified seating capacity and an agreement for dividing the net proceeds of the matches. Upon the termination of the agreement in 1933, another contract, with similar provisions, was entered into for a like period.

The petitioner claims that these tournaments stimulated interest among its members to use the normal facilities of the club and had the effect of retaining membership and encouraging others to join. It claims that this is the primary purpose it had in seeking awards of major tennis tournaments from the Association and that the continuation of the attraction over a long period of time is not enough to make the undertaking a business. A purpose of that nature, when properly limited, may not carry a club, otherwise exempt, into the field of taxation. There was no such limitation here as we view the facts.

Tbe financial result of tournaments held prior to 1933 is not in evidence, but upon brief the petitioner admits that, with the exception of 1917, when a small loss was sustained, and in 1918, when no event was held, since 1914 the matches resulted in net profits each year. By 1923 the petitioner had had sufficient experience in conducting major tournaments awarded to it by the Association to be able to predict with a reasonable degree of certainty the financial outcome of any like events held in the future. With this knowledge in its possession, in that year it provided permanent facilities to continue the venture for ten years and then sought, and received, an award of matches for a like term. The stadium erected under the plan to hold major tournaments annually for ten years has a permanent seating capacity considerably in excess of the temporary stands previously used each year, and the agreement with the Association was to make provision for increasing the normal capacity about 50 percent, or to more than twice the seating capacity of the temporary stands. This action of the petitioner is strong evidence of a desire at least to be in a position to offer to the Association for many additional years adequate facilities for holding major championship matches at terms to be agreed upon.

The members of the club were obliged to forego some of the facilities of petitioner during the tournaments. It is apparent that the tournaments were not an activity conducted solely for the benefit of the membership of the club, but rather to their inconvenience, and the rule set forth in G. C. M. 2867, C. B. VII-1, p. 115, cited by the petitioner, may not be applied here. In view of the small membership of the club in comparison with the attendance at the matches, the petitioner’s new venture was of such an extent and the financial burden so large that it was obviously necessary to draw upon the general public for most of the patronage to avoid risk of large deficits. Support by outsiders was received.

The major matches held at the stadium in each of the taxable years under an award of the Association resulted in profits, substantially all of which were derived from outsiders in the form of admission fees and from sources characterized in the report of petitioner’s treasurer as catering and parking. It was not necessary for an applicant for admission to the tournaments, in order to be in a position to qualify as a spectator, to manifest the same interest in tennis or the normal social and recreational activities of the club which was requisite to membership. The only requirement was that he present a ticket for admission in the same manner as is required in any other form of public entertainment.

Considering the admission that the activity in question was conducted over a long period at a profit and facts of record, there is justification for bolding, and we do hold, that the tournaments were deliberately entered into for profit. If profits were not the primary object in view, steps would have been taken, after many years of profitable operation as a guide, to fix prices for permission to witness the matches that would not have resulted in profit from outside sources.

The petitioner cites Trinidad v. Sagrada Orden de Predicadores, supra, to support its contention. There, as we pointed out in The Associates, supra, the Supreme Court considered the benefit the public derived from the activity and the “ ‘beneficent purpose of Congress’ in allowing exemption to charitable organizations.” The public received no benefit from the income derived from the tournaments. In 193S the earnings were sufficient to offset a deficit in normal club operations and leave about $8,500 as a credit to surplus. In 1934 the profit of about $11,000 from the tournament operations was less than the loss from other activities, but the amount served to reduce the deficit. In each year the earnings were used to pay debts of petitioner.

We are unable to distinguish the present proceeding in principle from Jockey Club v. Helvering, supra. Therein the corporation was vitally interested in the improvement of the breed of horses and expended large sums upon, and obviously contributed materially to, that laudable objective. It received substantial income from various sources such as fees from registrations, fees for issuance of licenses, fines and penalties, percentages of prize moneys, etc. These characteristics prevented the allowance of a claim of exemption from tax. Yet the Jockey Club did not own, lease, or operate race tracks; whereas herein the petitioner does own, operate, and derive profit from, a stadium, an institution somewhat analogous to a race track. See also Uniform, Printing & Supply Co. v. Commissioner, 33 Fed. (2d) 445; certiorari denied, 280 U. S. 591. Under the circumstances present here, it can not be said that the earnings did not inure to the benefit of petitioner’s members even though they were not distributed.

We conclude that the petitioner has failed to establish its right to exemption and accordingly sustain the action of the respondent in holding it to be subject to tax.

The petitioner contends in the alternative that the amounts it collected for dues and initiation fees do not constitute taxable income on the ground that they represent capital contributions. The revenue was reported as income in returns filed for the taxable years, and there is no indication in the record that the petitioner ever entered the amounts in his books as capital items. Neither does it appear that the petitioner was denied the use of the income for general operating purposes. In The Jockey Club, supra, the tax of 10 percent on dues paid by members bad been paid to tbe collector of internal revenue for a number of years. The amounts in question represent taxable income of the petitioner. The Jockey Club, supra; Pontiac Employees Mutual Benefit Association, 15 B. T. A. 74; United Retail Grocers Association, 19 B. T. A. 1016.

The respondent imposed a 25 percent penalty for petitioner’s failure to file returns within the time prescribed by law. The Revenue Acts of 1932 and 1934 provide for a penalty equal to 25 percent of the tax in cases, as here, where the return is filed after the due date thereof unless “it is shown that the failure to file it was due to reasonable cause and not due to willful neglect * * Sec. 291.

The evidence before us on the issue is limited to facts set forth in the stipulation. These are merely that prior to 1934 petitioner’s officers and directors believed that it was exempt from payment of Federal income taxes. Thereafter, at some undisclosed date, the petitioner received a notice from the Commissioner that he considered it subject to payment of income taxes, and on August 2, 1935, the petitioner filed returns for the taxable years accompanied by claims for exemption.

The respondent does not claim that petitioner willfully neglected to file timely returns for the taxable years, but contends that its failure in that regard was not due to reasonable cause. We have said that the term “reasonable cause” used in the statute means “such a cause as would prompt an ordinarily intelligent and prudent business man to have so acted under similar circumstances.” Charles E. Pearsall & Son, 29 B. T. A. 747. We do not know the steps taken by petitioner to ascertain its status as a taxpayer and, without knowledge of the basis for the belief of its officers and directors that it was exempt from tax, we are in no position to test the reasonableness of the conclusion. We can only speculate on the reason for the belief and such speculation would not in the final analysis help petitioner’s cause. Nothing more than belief that one is not required to file a return is not enough to discharge the penalty. Eagle Piece Dye Works, 10 B. T. A. 1360; Rafael Sabatini, 32 B. T. A. 705; affd., 98 Fed. (2d) 753, in which the court said: “The taxpayer may well have believed that he was liable for no tax and yet have had no reasonable cause for not filing timely returns.”

In The Jockey Club, supra, relied upon by the petitioner, the taxpayer filed blank returns within the time prescribed by law and claimed exemption. We think that feature of the case is sufficient to distinguish it from the instant proceeding.

The respondent committed no error in imposing the 25 percent penalty for failure to file timely returns.

Decision will be entered for the resyondent.


author: Murdock : HakRon,

text:
    Jack W. Schiffer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83249.
    Promulgated January 20, 1939.

      Walter H. Liebman, Esq., for tbe petitioner.

      8. L. Young, Esq., for tbe respondent.
   OPINION.

Murdock :

The decision of this case turns upon a question of fact, i. e., were the General Cigar Co. shares and the Van Camp Packing Co. shares held by the partnership primarily for sale in the course of its business. If they were so held, then the shares were not capital assets within the meaning of that term as defined in section 101 (c) (8) of the Kevenue Act of 1932, the loss from the sale of the shares was not a capital loss, and the loss should be deducted from the gains of the partnership from the sales of other securities in determining the petitioner’s distributive share of the net income of the partnership. Cf. Charles Wesley Purdy, 36 B. T. A. 572. It is conceded that the partnership was regularly engaged in the business of trading in securities for profit. We have found as a fact that the securities in question were held, at all times material hereto, primarily for sale in the course of the partnership’s business of trading in securities for profit.

The respondent has contended that the intention of the partnership in holding these securities must have been different from its intention in holding all of the other, securities in account No. 67, since these alone were held for more than two years, whereas all of tbe others were sold1 soon, after they were purchased. Obviously the mere holding of the securities for more than two years is not fatal to the contention that the securities were held primarily for sale in the course of the taxpayer’s trade or business, since such a situation would deprive the words of section 101 (c) (8) of all meaning and significance. Cf. I. T. 2948, C. B. XIV-2, p. 158. The petitioner testified that these particular securities, like all of the others, were purchased and held at all tunes primarily for sale in the course of the partnership business of trading in securities for a profit. He explained that the Yan Camp Packing Co. shares were purchased, upon the recommendation of a friend of his partner, in the belief that the market price of the shares would increase and the partnership would have a good chance to sell them at a substantial profit; the shares declined in value so that the partnership never had a chance to, sell them at a profit; and, when they finally became almost worthless, the partnership ceased to pay much attention to them, but merely retained them in the hope that they might some time increase in price. He explained that he was quite familiar with the affairs of the General Cigar Co., of which he was a director; the company was enjoying a prosperous year in 1929 when the shares were purchased, and he thought the, pricei would increase; however, the price fell off when the crash came in the stock market, but the petitioner continued to believe that the stock had a value in excess of its current market price, because the company was continuing to have good business up to 1933; the company had a large inventory loss in 1933 and its earnings decreased; the petitioner then came to the conclusion that the partnership should sell the stock at once rather than wait longer for the market price to more nearly approach what he regarded as the true worth of the shares.

The respondent contends that the petitioner’s testimony in explaining why the General Cigar Co. stock was held for such a long period shows that the stock was not held during all of that period primarily for sale. He points to the fact that the market price of the stock increased at various times during that period, and he argues that the firm would have sold the stock during one of those flurries, if it really was holding the stock primarily for sale in the course of its trade or business. Obviously a taxpayer may decide for himself when and under what circumstances he will sell his stock, even where he is holding it primarily for sale. Many taxpayers, holding stock primarily for sale in the course of their business of trading in stocks for profit, have missed favorable opportunities to sell. If a taxpayer holds a security too long in the hope of obtaining a higher price, that circumstance does not prove that he is not holding the security primarily for sale in the course of his business. We have taken into consideration all of tlie evidence in this case and have considered all of the arguments of counsel in making the finding of fact which decides this case.

Reviewed by the Board.

Decision will be entered under Rule 50.

HakRon,

dissenting: The partnership of Toerge & Schiffer carries on a business as trader in securities; It is not a dealer. In 1933 it traded in approximately 91,000 shares of stock and $160,000 par value of bonds. The total cost of securities purchased in 1933 was $3,076,082.25, and the cost of securities sold was $3,257,690.48. From 1929 through 1933 ah securities purchased for trading account No. 67 were sold within two years of the date of purchase and a majority of the securities were sold within periods ranging from a few days to six months of the date of purchase except the shares of General Cigar and Van Camp stocks involved in this proceeding. Petitioner was a director of the General Cigar Co. during the period from 1929 to 1933. He was not a director of any other company whose securities the partnership purchased in its trading transactions. The record does not show whether petitioner owned, as qualifying shares of a director of the General Cigar Co., any shares other than those involved in this proceeding. But there is a coincidence in the facts that petitioner was a director from 1929 to 1933 and that is the same period during which the partnership held the General Cigar stock. All the above facts are of significance.

It is true that decision of the question in this proceeding is a fact question. It is also true that the petitioner has the burden of proving a negative proposition, namely, that the General Cigar stock was not a capital asset, although held for more than two years. In attempting to come within the exception provided in section 101 (c) (8), petitioner has argued that, in general, securities held by a trader in securities for more than two years must always be excepted from the statutory classification! of capital assets and that the reasons for holding securities for more than two years are not important because such securities are always purchased for sale in the business. However, the test set forth in section 101 (c) (8) to gain exception from classification as “capital assets” relates to the purpose of holding property. The property must be held primarily for sale. In any proceeding in which a trader in securities claims the benefit of the exception in section 101 (c) (8) the fact question is bound to be a close question. But there is always present the inescapable fact that it is the nature of the trading-in-securities business to make quick turnovers in capital. Liquidity of capital is a primary consideration in the trading business and net profits are made by transactions on the market that may be frequent compared to the transactions of one who is not a trader and that minimize or eliminate loss by the skill of the trader. Also, a trader occupies a different position from a dealer in securities who carries an inventory of securities for sales to customers and who is less able to recoup losses by trading transactions. Trading in securities may not always consist of selling securities at a profit. There is no evidence in this proceeding that every sale in the trading account No. 67 was made at a profit. A trader may make some sales at a loss but recoup such loss in later transactions, according to his astuteness in judging and taking advantage of the fluctuations of market prices. Therefore, it is entirely material to deciding such question as is present here, to weigh the reasons for holding a particular stock for more than two years. An original purpose to trade in a stock may be abandoned and the stock may be held for other reasons than for sale in the course of business.

Petitioner has testified that the General Cigar stock was purchased for the purpose of making a profit, i. e., the stock was purchased in a trading account with the hope of making a profit. There is some inconsistency in petitioner’s position that the purpose in acquiring the General Cigar stock to make a profit required that the stock be held for over four years so that it could be sold at a profit. The net profits made by a trader may accrue after a series of trading transactions, some of which may result in loss, and others, in gain. Trading operations may be and are carried on in the usual course of that business to minimize losses. As a matter of fact, the General Cigar stock in question was finally sold in 1933 at a loss. Nevertheless, during the period this stock was held, there appears to have been a fairly good market for trading in General Cigar stock and it is conceivable that, if the original purpose of trading in this stock had been adhered to, the partnership might have realized a net gain or considerably less loss out of trading as the market prices fluctuated up and down.

Under such circumstances as set forth above, considerable weight attaches to the reasons why the particular stock received such exceptional treatment as to be held for over four years.

Petitioner was asked on direct examination whether there was any reason in his knowledge why the General Cigar stock was held for over two years. He testified as follows:

A. * * * I was a director of the General Cigar Company and was in intimate contact with what was going on in the company, and in 1929 I knew that they were enjoying a very, very prosperous year, and when we purchased these stocks at 69% the outlook was exceedingly good, and when the crash came in November the stock was selling lower than we paid for it, but on account of the good earnings that the company was making that year I felt that it was foolish to sell these securities at a loss. The stock in 1929 had a low of 42, and a high of 74. The earnings for that year were in the neighborhood of $8, and it was on that account that the stock was selling so few times its earnings that I felt that the price of the stock had over-discounted anything that might happen to the company. The company continued to do well in 1930 and 1931. In 1930 they made $6 and the high and low on the stock was 61 and 30. In 1931 the stock company made $5 and the high and low was 25 and 48%. In 1932 the company continued to do well and made $3.61, and as it had done so well in some of the severe years of depression, I thought that the price of the stock was still too low to sell and it would ultimately come back. In 1933, however, they ran into a tremendous inventory loss, and while the operating profits were good, they took that loss that year— the loss on this leaf tobacco. They only made 79A And in .Tune of 1933 I did change my mind on the company and thought it wise that we sell the stock.

This line of reasoning persisted for four years. When the General Cigar stock was finally sold at losses in 1938, the factor that brought about the decision to sell was that General Cigar Co. in that year earned only 79 cents a share. Then petitioner changed his mind about the company. The General Cigar stock was sold at prices ranging from $39 to $45 in 1933, which prices were less than the range between high and low prices in 1930, one year after purchase of the stock. Trading in this security appears not to have been the primary consideration for holding it over four years.

If due weight is given to .the above testimony, it would appear that the petitioner has not succeeded in proving that the stock was held for more than two years “primarily for sale” in the course of business. The above testimony shows that the reasons for holding the stock in question were founded preponderately on considerations relating to intrinsic value of the stock, earnings, conditions of the business. Little if any consideration appears to have been given to the comparative and possible advantages of trading in the stock on the market during the entire period. There is totally lacking here any condition that can be termed accurately as unfortunately missing favorable opportunities to sell. The partnership just did not consider any of the selling opportunities over four years.

Therefore, I dissent from the majority holding as to the General Cigar stock.

TURNER, Mellott, Hill, Disney, and Kern agree with this dissent..

       The facts show that from 1929 to 1935 the partnership dealt in over 456,000 shares of stock in the trading account, involving a total cost of over $32,000,000. Over the five-year period the General Cigar and Van Camp stocks were the only stocks held for more than two years.