text:
    C. W. Murchison, Petitioner, v. Commissioner of Internal Revenue, Respondent. Murchison Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. R. Fain, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles P. McGaha, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. D. Fain, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fain-McGaha Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77945, 77946, 78093, 78094, 78095, 78096.
    Promulgated April 27, 1937.

      John B. King, Esq., W. Glif Klein, Esq., and L. E. Cahill, Esq for the petitioners.

      John F. Greaney, Esq., F. I. Van Haaften, Esq., and Henry H. Surface, Esq., for the respondent.
   OPINION.

MoRRis:

The respondent has the burden of proof in the only issue submitted for consideration, i. e., whether these petitioners, or any of them, are transferees and liable in law or in equity for the deficiencies in tax of the Murchison & Fain Oil Co. for the years 1925 and 1926.

It is shown that the Murchison & Fain Oil Co. was a trust estate, operating as a joint stock association, with beneficial interests in these individual petitioners; that on or about January 1, 1927, said association transferred all of its properties and assets to two newly organized corporations, the Murchison Oil Co. and Fain-McGaha Oil Corporation, receiving in exchange therefor capital stock having an aggregate market value of at least $300,000, which stock was immediately distributed to the owners of beneficial interests. We are satisfied that the transfer in question left the association without assets with which to pay the proposed tax and that each of the present petitioners received assets of value in excess thereof.

Action against petitioners Murchison-Fain Oil Co. and Fain & McGaha Oil Corporation is defended under the principle of Metropolitan Securities Corporation, 19 B. T. A. 299; petition for review dismissed at 51 Fed. (2d) 1075, wherein we held that the purchasing corporation was not liable for taxes due from the selling corporation in a transaction involving the issuance of stock for assets. Pointing out that when the transaction was completed the selling corporation was still the owner of assets — stock of the purchasing corporation— at least equal in value to the assets conveyed to the purchasing corporation — the alleged transferee — we said:

It is well settled that where one corporation sells its assets to another corporation for stock of the latter which is issued directly to the stockholders of the 'Seller, thus leaving the seller without assets to satisfy its creditors, the purchaser is liable to the creditors of the seller to the extent of the value of the property received, the sale being in fraud of creditors and the purchaser being a party to the fraud. United States v. Capps Mfg. Co., 15 Fed. (2d) 528; Crennell v. Detroit Gas Co., 112 Mich. 70; 70 N. W. 413; McWilliams v. Excelsior Coal Co., 298 Fed. 884; Swing v. American Glucose Co., 123 Ill. App. 156; Woodley Petroleum Co., et al., 16 B. T. A. 253. And this rule has been applied in some instances where the consideration paid was capital stock of the purchasing corporation delivered to the seller, out the reason for the application of the rule was that in those cases the transactions amounted to fraud on existing creditors. Hibernia Ins. Co. v. St. Louis & New Orleans Transportation Co., 13 Fed. 516; American Ry. Express Co. v. Commonwealth, 190 Ky. 636; 228 S. W. 433. In the instant proceeding we see no reason for applying that rule. The Metropolitan Securities Oo. purchased the assets of the Union Finance Co. and, after making provision for the satisfaction of all of the known liabilities of that company, paid to the Union Finance Co. shares of its, the Metropolitan Securities Co.’s preferred stock, which shares were at least equal in value to the assets purchased. The seller at the conclusion of the transaction was possessed of assets equal in value to those it had sold, and those assets were amply sufficient to meet the tax claim that was subsequently determined and asserted. The transaction shows on its face that it was not made with intent to defraud, and it did not amount to a fraud on any existing creditor, in that it did not leave the seller without assets or change the situs of the assets so that creditors could not reach them. Under the circumstances we are of opinion that the Metropolitan Securities Co. was a purchaser for value of the assets of the Union Finance Co., and that it is not liable for the taxes involved herein.

However, we have also said that “where a new corporation is organized to take over assets of another corporation for stock, the new company being simply a reincorporation or reorganization of the old, with the same assets and business, the new corporation is liable for debts of the old.” Waterproofed Products Co., 25 B. T. A. 648. Our conclusion there was based upon the trust fund doctrine. Here, it appears, as there, that the owners of the vendor — transferor— caused the organization of the vendee corporations— alleged transferees — for the purpose of taking over the assets and business of the vendor for stock, in a transfer recognized and treated by the parties as a reorganization within the meaning of section 203 of the Revenue Act of 1926. See also Signal Gasoline Corporation, 25 B. T. A. 532. Upon the authority of these two cases, it is held that the petitioning corporations are liable as transferees.

Furthermore, where assets are distributed to the stockholders of a corporation in dissolution — in the instant case, stock of the purchasing corporation having an admitted aggregate market value far in excess of the tax — such stockholders may also be severally held under the trust fund doctrine with all other transferees to the extent of the assets which they received on distribution. Phillips v. Commissioner, 283 U. S. 589; Updike v. United States, 8 Fed. (2d) 913; United States v. Snook, 24 Fed. (2d) 844; United States v. Klausner & Fain, 25 Fed. (2d) 608; Steinberger v. United States, 81 Fed. (2d) 1008; E. H. Dobrin, 27 B. T. A. 611. This is so irrespective of our conclusion affecting the purchasing corporations — which is based upon that well established principle that a creditor under the trust fund doctrine may follow the corporate assets, upon the faith of which credit was extended, and may not be entirely subordinated to the corporate stock received therefor, see Woodley Petroleum Co., 16 B. T. A. 253—and irrespective of the fact that under the laws of Texas such individuals, members of an association, are regarded as partners and are liable as such for the debts incurred by the association. Respecting this, it was said, in Burk-Waggoner Oil Association v. Hopkins, 296 Fed. Rep. 492; affirmed at 269 U. S. 110: “No debate can follow the assertion that the trustees of such association, and probably the members thereof, are liable for debts to third parties; but when they are viewed from a taxing standpoint and in that herding where the accepted classification puts them as well-known and distinctive commercial enterprises, they wear, likewise, another label, another livery, another name”, and in Shamrock Oil Co. v. Commissioner, 77 Fed. (2d) 553, affirming the Board at 29 B. T. A. 910:

* * * We think, too, that there is no merit in the additional point the taxpayer seeks to make here, the point that petitioner is not liable as a transferee because the original Shamrock Oil Company was a partnership, and since partners may be looked to for partnership debts, a transfer of all the partnership assets does not charge them in the hands of the transferee with a lien for partnership debts.
These proceedings deal with federal taxes. As to federal taxes, Texas stock associations are not partnerships, they are corporations. Burke-Waggoner Ass’n. v. Hopkins, 269 U. S. 110, 46 S. Ct. 48, 70 L. Ed. 183. They are liable as corporations for the taxes they incur. Whatever may be the rule in Texas as to the liability to general creditors, of the members of such associations, as partners, and whatever may be the rule there as to the effect upon general creditors of a transfer of all the assets, we think it clear that as to tax liability, a transfer by a joint-stock association which strips .it bare makes the taker liable as transferee for the federal taxes it owes. * * *

We hold, therefore, that all of the petitioners are transferees under the provisions of section 280, supra.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Muedook:

license: Public Domain

text:
    Leesa Dombrowski, Surviving Cotenant of Gottlieb Dombrowski, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78617.
    Promulgated April 27, 1937.

      P. D. Johnston, Esq., and T. 3. Poole, O. P. A., for the petitioner.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Muedook:

The notice of deficiency involved in this case was in part as follows:

Mrs. Leesa Dombrowski, Surviving Cotenant,
Gottlieb Dombrowski, Deceased,
4375 South Broadway,
Los Angeles, California.
Madam:
You are advised that the determination of the income tax liability of Gott-lieb Dombrowski, deceased, for the years 1930 and 1931, discloses a deficiency of $1,856.85 for the year 1931, and an overassessment of $635.13 for the year 1930, as shown in the statement attached.

A. petition was filed captioned “Mrs. Leesa Dombrowski, Surviving Cotenant of Gottlieb Dombrowski — Deceased.” The petitioner described herself as an individual. The verification is by Leesa Dom-browski, who therein described herself as the petitioner. Leesa Dombrowski did not allege in the petition that she occupied any fiduciary capacity in relation to the estate of Gottlieb Dombrowski.

Gottlieb Dombrowski filed an original income tax return and an amended return for the year 1931. He stated therein that the return was a joint return for himself and his wife.

Gottlieb Dombrowski died in 1933. His estate has never had an executor or an administrator. He and his wife held their property at the time of his death as joint tenants. Leesa Dombrowski is the widow of Gottlieb Dombrowski.

The Board does not have jurisdiction in this proceeding to determine the tax liability for 1931 of Leesa Dombrowski as an individual, as a fiduciary, or in any other capacity, nor does it have jurisdiction to determine the tax liability for 1931 of Gottlieb Dombrowski. The Commissioner has not determined any deficiency in tax against Leesa Dombrowski, and, consequently, the Board has no jurisdiction to determine her individual income tax liability. The Commissioner considered only the income tax liability of Gottlieb Dombrowski and has determined the deficiency against him, or his estate. The Commissioner does not state in the notice of deficiency that he proposes to hold Leesa Dombrowski liable for the tax in any way. He has determined a deficiency in the tax of one taxpayer and has notified another person of his determination without suggesting that that person is liable or is to be held liable in any way for the tax. The petition has been filed by Leesa who has shown no right to contest the deficiency. She does not claim to be authorized to represent the estate of Gottlieb, and there is nothing in the record to indicate that she is authorized in any way to represent his estate. There has been no showing that a surviving cotenant has any authority under the law to represent the estate of the deceased cotenant. Why the Commissioner chose to address the notice of deficiency in the way that he did, does not appear. Leesa is not a fiduciary and has not appeared before the Board as a fiduciary. Thus the Board has no jurisdiction to consider any possible liability for tax which she may have as a fiduciary. Since it is clear that the deficiency was determined against Gottlieb Dombrowski, deceased, and since the person to whom the notice was sent and the only person who has appeared as the petitioner before the Board is not a person authorized to represent the estate of Gottlieb Dombrowski, deceased, it follows that the Board has no jurisdiction to decide whether or not there is a deficiency in the income tax of Gottlieb Dombrowski, deceased, for the year 1931. Cf. Mary M. Shea, 31 B. T. A. 513; Fred Shingle, 34 B. T. A. 875. The circumstances give the Board no jurisdiction whatever and the proceeding must, therefore, be dismissed.

Counsel for the petitioner agrees that the Board has no jurisdiction, while counsel for the respondent is silent and has failed to suggest wherein the Board has jurisdiction. At the hearing when this question was first discussed, counsel for the respondent intimated that he might like to amend his pleadings to allege in the alternative that the case be treated as a transferee proceeding, but at the conclusion of the hearing he stated that he did not .desire to amend his pleadings. He filed no brief. Thus there is no contention made that this is a transferee proceeding. Although the Commissioner addressed the notice of deficiency to Leesa Dombrowski as surviving cotenant of Gottlieb Dombrowski, he has not determined any deficiency or liability with respect to Leesa Dombrowski, either individually or as a surviving cotenant of Gottlieb Dombrowski, deceased. The Commissioner has a special form which he uses to notify persons of his determination that they are liable as transferees of some taxpayer. The notice in the present case is not on that form, does not indicate that it was intended as a notice of transferee liability on the part of Leesa Dombrowski for income taxes of Gottlieb Dombrowski, and does not state that she is to be held liable for any taxes. The burden of proof in respect of transferee liability is by statute placed upon the Commissioner. The Board’s rules require that in transferee cases the Commissioner plead the facts to show transferee liability. The Commissioner has not alleged facts to show transferee liability. The only suggestion that this might be a transferee proceeding was made by respondent’s counsel at the hearing, but after he had asked several questions, apparently intended to show transferee liability on the part of Leesa Dombrowski, he decided not to attempt to amend his pleadings. Thus it appears that the Commissioner has never determined any transferee liability, has never sent out a notice of transferee liability, and has never pleaded transferee liability. The petitioner has not come before the Board as a transferee. Obviously this is not a transferee proceeding and the Board will not decide any transferee question.

Reviewed by the Board.

Smith and ARNOLD dissent.


author:
Murdoch :
      Mellott,

text:
    N. B. Whitcomb Coca-Cola Syndicate, Trust Company of Georgia, Syndicate Manager, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76367.
    Promulgated April 28, 1937.

      John E. McGlure, Esq., and Pope F. Brock, Esq., for the petitioner.

      Ralph E. Smith, Esq., for tbe respondent.
   OPINION.

Murdoch :

The Commissioner determined a deficiency in income tax of $19,817.41 against the N. B. Whitcomb Coca-Cola Syndicate for the period January 1 to March 17,1930. The question for decision by the Board is whether the syndicate in question was an association taxable as a corporation. If it was, there is the question of the profit which it realized. But if it was not, then there was no taxpayer, and, consequently, no deficiency.

The syndicate was formed on October 29, 1929, for the purpose of protecting the market value of certain stock during the period of violent market fluctuations which began in the latter part of 1929. The syndicate was dissolved on March 17, 1930. The agreement was as follows:

This Agreement, made and entered into this the 29th. day of October, 1929, by and between N. B. Whitcomb, party of the first part (hereinafter for convenience called “Manager”), and the several Subscribers hereto, parties of the second part (hereinafter for convenience called “Subscribers”).
WITNESSETH:
That Whereas, the parties hereto desire to form a Syndicate for the primary purpose of buying and selling shares of the common stock of OOOA-OOLA Company and/or COCA-COLA International Corporation.
Now, Therefore, in consideration of the mutual covenants herein contained, the Manager agrees with the Subscribers, and each of them, and the Subscribers agree with the Manager and with one another as follows, to-wit:
1: A Syndicate is hereby formed for the primary purpose of buying and selling shares of the Common Capital stock of The Coca-Cola Company, a Delaware Corporation. The Manager may be a member of said Syndicate and a Subscriber hereto, as such member, and he and each of the other Subscribers hereto, for himself and not for any other, hereby subscribes to an interest in said Syndicate represented by the number of shares of stock set opposite his. name.
2: The Manager is authorized to purchase and sell, for the account of each Subscriber, common capital stock of The Coca-Cola Company, of no nominal or par value, not to exceed at any one time the number of shares set opposite his name. The Manager shall not have in hand, as the result of such purchases, at any one time more than one hundred thousand (100,000) shares of the common capital stock of The Coca-Cola Company; or, should the total subscriptions be less than one hundred thousand (100,000) shares, the Manager shall not have in hand at any time more than the total number of shares subscribed.
3: Each Subscriber agrees to pay to the Manager, as soon as this agreement goes into effect, a sum equivalent to twenty ($20.00) dollars a share for each share of stock subscribed for by him, when and as called by the Manager.
4: All stocks bought by the Manager pursuant to the authority given to him by each of the Subscribers, shall be carried by the Manager in the Syndicate account and the Subscribers hereto shall all participate in each purchase or sale in proportion to their interest in the Syndicate.
5: The Manager is authorized to call upon the Subscribers for payment from time to time for all, or any part, of the stock purchased by such Manager hereunder, and each Subscriber will pay promptly the amount of such call or calls in Atlanta or New York funds; Provided the total amount of calls upon each Subscriber shall not exceed in his individual liability as indicated by his subscription, and .all calls for payment shall be made pro rata among the Subscribers according to their subscriptions. The payment of such calls shall be made to the Manager two days after receiving notice thereof, in writing either by telegram or by letter addressed to each Subscriber at the address which appears opposite his signature hereto.
6; Should any subscriber fail to make payment or payments as and when called, the Manager may sell rights and interest of such defaulting Subscriber in this agreement and in the shares of stock purchased under it, at public or private sale, at any time thereafter without advertisement or notice, and after deducting all interest charges or other costs and expenses properly chargeable to such defaulting Subscriber, the residue shall be applied to any liability or indebtedness of such defaulting Subscriber arising hereunder, and if it be not sufficient to discharge such liability or indebtedness, such subscriber shall immediately pay and discharge the deficiency. Should such sale of the defaulter’s interest as aforesaid, be sufficient to pay all interest charges, costs, expenses and liability or indebtedness arising hereunder, and there be an over plus, it shall be paid to the defaulting Subscriber.
The Manager may purchase, at any such sale, for the benefit of the non-defaulting Subscribers, the rights and interest of the defaulting Subscriber, and may apportion an assessment among such non-defaulting Subscribers in proportion to their several interests and call for payment thereof, which payment shall be made within two (2) days after receiving notice of such call, as here-inbefore provided; but no Subscriber shall in any event be liable for calls or assessments in excess of the liabilities assumed by him by his subscription hereto.
7: The Manager shall have the sole direction and management and the entire control of the conduct of the business and transactions of the Syndicate. He shall have the power, in his sole and unrestricted discretion, to buy and sell said shares of stock for the account of the Syndicate, either on the open market or at public or private sale, and at such prices and on such terms as he may see fit; except that he may not commit the Syndicate to the purchase or sale of any greater number of shares at any one time than the total amount covered by the subscriptions hereto.
7A: The Manager shall have authority to purchase Coca-Oola Common stock through any other Syndicate which he decides to become a member of, provided that the total number of shares held by the Syndicate of which he is the Manager, plus the subscription held in some other Syndicate, does not at any rime exceed 100,000 or the total number of shares subscribed.
8: The Manager may borrow, for the Syndicate ’ account, such amounts as he may deem necessary, not to exceed the total amount due and still unpaid by the Syndicate Subscribers, and may pledge all, or any portion, of the stock so purchased by him under this agreement, as well as the unpaid balances due by the Subscribers hereto to secure any such loan or loans made by him for the Syndicate account.
9: The Manager may deal with any firm or corporation of which he is a member, or officer or employee, for the Syndicate account and no contract made by him with any firm or corporation of which he is a member or officer or employee shall be affected in any way by reason of his interest in said firm or corporation, but all such contracts shall be valid and binding as if he had no such connection with such firm or corporation.
10: The Manager shall have exclusive custody of the funds collected from the Subscribers or received from the sale of any of the stock sold by him hereunder and may deposit the same in any bank or banks, or with any New York Stock Exchange firms selected by him, and may use all of said funds in the operations of the Syndicate.
11: The total number of shares to be subscribed herein shall not exceed one-hundred thousand (100,000) shares of stock, but this contract shall become effective whenever twenty-five thousand (25,000) shares of said stock are subscribed for hereunder, and as soon as such number of shares have been subscribed for, the Manager shall notify the Subscribers, by addressing them at the address set by each Subscriber opposite his name hereto, that the Syndicate is operative.
The Manager may admit other subscribers into the Syndicate after the twenty-five thousand (25,000) shares have been subscribed for, up to one: hundred thousand (100,000) shares in his discretion and from time to time as he may see fit.
11A: Should the Manager from time to time exercise his authority to buy and sell Coca-Cola International Common Stock, such stock so dealt in shall be carried in the account as two-hundred per cent (200%) of a similar number of shares of Coca-Cola Common Stock.
12: The Syndicate shall continue for a period of ninety (90) days from the date when it is declared to be operative, as above provided for, but the Manager may, in his discretion, without consulting the other Subscribers, extend the Syndicate for an additional period not to exceed ninety (90) days from the expiration date of the first period, and said Syndicate may be extended thereafter from time to time for such additional periods as may be consented to by the subscribers to a majority in amount of the stock subscribed for herein, provided that the total period during which said Syndicate may run shall not exceed one (1) year after the date the Syndicate is declared to be operative, as aforesaid.
13: At the expiration of said Syndicate the Manager, after paying all the costs and expenses of the Syndicate and settling all of its obligations of every character and nature, all money belonging to the Syndicate and stock remaining in hand unsold, purchased for account of the Syndicate, shall be distributed pro rata among the several Subscribers in proportion to their subscriptions, and the acceptance by such Subscriber of the stock or money distributed by him, shall operate as a full and complete release of the Manager of any and all liability hereunder, whether he takes a receipt for such distributed money or stock, or money and stock, or not.
14: The Manager shall not be liable for any error of judgment or any mistake of law or fact, nor shall he be liable save for his own gross negligence or willful default; nor liable for any act done in good faith in the exercise of the powers or authority herein conferred upon him.
15: Bach Subscriber ratifies, assents to and is bound by any action of the Manager assumed to be taken by him under this agreement, and will perform his undertakings herein to the extent as stated in this agreement in his proportion of the liabilities assumed herein by the Subscribers, represented by the number of shares subscribed for by him, but in no event and under no circumstances shall any subscriber be called upon to pay or be liable for any amount beyond the liability arising against him on the number of shares subscribed for by him. A failure to perform any of his undertakings hereunder shall not affect or release any other Subscriber.
16: Any notice which the Manager, or any other person to whom a Subscriber hereunder shall be liable because of the obligations assumed by him herein which such Manager or other person shall have occasion to give to a Subscriber hereunder, shall be a sufficient notice for all purposes as to its contents if given in writing, either by telegraph or by mail prepaid or postpaid, to the address of such subscriber as set opposite his signature hereon.
17: Nothing herein contained or otherwise arising shall constitute the Subscribers partners with or agents for one another or for the Managers, or render them, or any of them, liable to contribute in any event more than the interest in the Syndicate subscribed for by him.
18: This agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators or assigns of the parties hereto.
19: In case of the death, resignation or incapacity to act of the Manager, a successor or successors shall be appointed in writing by the Subscribers of a majority in amount of the shares subscribed for hereunder.
20: This agreement may be executed in any number of counterparts, with the same effect as if all parties executed a single instrument.
In Witness Whereof, the Manager, in his official capacity and each of the Subscribers, including the Manager, have hereunto set their signatures, the day and year first above written.

The agreement also showed the name of each subscriber and the number of shares of participation to which each subscribed. No certificates of interest were ever issued. The agreement was carried out in accordance with its terms.

The stock purchased by the manager was never taken in the syndicate name but was left in a street name as is usual in the purchase and sale of securities on marginal accounts. About 90 percent of the stock purchased was left with the New York brokers, who pledged the stock for the balance due on the purchase price in the same manner as brokers customarily do where only part of the purchase price is paid. Approximately 10 percent was pledged directly with banks by the manager to secure more favorable interest rates from the banks than the manager could secure from the brokers.- The syndicate sustained a loss up to the close of 1929, but realized a profit during the period of its existence in 1930. The Commissioner, in determining tbe deficiency, field that the syndicate was an association within the meaning of section 701 of the Revenue Act of 1928 and was subject to taxation as a corporation in accordance with the provisions of section 18 (a) of that act.

The courts have laid down a number of general principles which serve as guides in the determination of whether or not in a particular case the alleged taxpayer is an association taxable as a corporation. But each case must be decided upon its own facts. See particularly, Morrissey v. Commissioner, 296 U. S. 344. The characteristics of the alleged association must be compared with the characteristics typical of a corporation. If there is sufficient resemblance, then the taxpayer is held to be an association taxable as a corporation. But if there is little similarity, then the decision must be the other way. Such a test shows that the syndicate in question was not an association taxable as a corporation. Its activities were in some respects similar to those of a corporation. It carried on a business in one sense of the Avord, the continuity of its existence was unaffected by the death of a subscriber, and there was a limitation of personal liability of the participants to the property embarked in the enterprise. Nevertheless, in other ways this syndicate was not like a corporation. The fact that it was limited to a short period has some tendency to distinguish it from a corporation. Other differences are the way in which title to the stock was handled; the limitations which the agreement placed upon the functions of the manager; the fact that the subscribers had no voice whatsoever in the management; the fact 'that there was no provision for transferring interests in the enterprise; and the fact that the syndicate was unlike a corporation in form. Cf. Walter S. Dickey, 14 B. T. A. 1295; Mark L. Gerstle, 33 B. T. A. 830; John M. Perata, 33 B. T. A. 843; Darol Trading Account, 34 B. T. A. 837; and McCausey v. Burnet, 50 Fed. (2d) 491. The case of Vernon J. Bert, Trustee, 34 B. T. A. 805, is distinguishable on its facts, even though the cases are someAvhat similar. In that case the members not only retained control OA^er the trustee, but actually made all decisions themselves. The agreement there provided for transferable certificates of beneficial interests and for meetings of the members. It is unnecessary to decide Avhether this syndicate Avas a partnership or a joint venture. It was not a trust. It has been taxed as a corporation, and since it Avas not an association taxable as a corporation, then the Commissioner has erred and there can be no deficiency.

Reviewed by the Board.

Decision will he entered for the petitioner.

Mellott,

dissenting: The “primary purpose” of the formation of the syndicate was “buying and selling shares of the Common Capital stock of The Coca-Cola Company.” (Art. 1, syndicate agreement.) “The parties joined in a common enterprise for the transaction of business, and the beneficiaries [subscribers] who contributed money for that purpose became associated in the enterprise according to the terms of the arrangement” just as the beneficiaries did in Helvering v. Combs, 296 U. S. 365, from which the quotation is taken. This resulted in considerable profit, the tax upon which, as determined by the respondent, amounted to $79,817.41.

The majority cite several cases in which the courts or this Board have held that there was not a sufficient resemblance between a true corporation and the entity there under consideration to justify taxing it as a corporation. Most of the cited cases were promulgated prior to December 16, 1935, on which date the Supreme Court decided Morrissey v. Commissioner, 296 U. S. 344; Swanson v. Commissioner, 296 U. S. 362; Helvering v. Combs, supra; and Commissioner v. Coleman-Gilbert Associates, 296 U. S. 369.

Darol Trading Account, 34 B. T. A. 837, is'distinguishable from the case at bar; for as pointed out in the opinion “by no stretch of the imagination could it be said that” the petitioner was carrying-on a business enterprise. But I am unable to make any such distinction between the case at bar and Vernon J. Bert, Trustee, 34 B. T. A. 805.

* Section 701 of the Revenue Act of 1928 provides that the term “corporation” includes associations. The Supreme Court in Morrissey v. Commissioner, supra, says: “The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity. * * * While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot be regarded as decisive.” Elsewhere in the opinion it is pointed out that “association” implies associates and the entering into a joint enterprise for the transaction of business. If these things are present, as they are in the case at bar, we have “the distinctive features” of the creation of an entity “created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking.” I am of the opinion that the respondent did not err in taxing petitioner as a corporation.

Black, Smith, TuRNek, and ARNOLD agree with this dissent.


author: Moeeis:

text:
    Ferncliff Cemetery Mausoleum Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75137.
    Promulgated April 28, 1937.

      John A. King, Ksg., for the petitioner.

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

Moeeis:

It is the contention of the petitioner that the $100,000 endowment fund for building No. 1 which it agreed to and did set aside in trust, irrevocably, out of the gross sales price of crypts for the perpetual maintenance of its mausoleum should be excluded from its gross income from the sale of crypts.

In his argument the respondent divides the decided cases in two classes, (a) those where the corpus is created by specific payments of space holders, the ownership of which is recognized to be in and the use thereof to be for the benefit of such space holders, and (b) where the fund is general in its nature and inures to the trustor’s benefit, the trustor in this case being the petitioner. Conceding that in the first classification the fund should be excluded from gross income, he argues that the fund in the instant case is general and for the upkeep of the entire mausoleum property, and that, although incidentally benefiting the holders of burial space, the real and substantial benefit inures to the mausoleum company. He does not deny that there is a valid and subsisting trust, nor does he claim that there is a possibility that it may be invaded by the trustor as in Portland Cremation Association, 10 B. T. A. 65; reversed at 31 Fed. (2d) 843.

A great deal has been said upon this general subject in a multitude of cases handed down by this Board and by the courts, a review of which will serve no useful purpose in view of our recent decision in Community Mausoleum Co., 33 B. T. A. 19, in which we said:

It is now settled law that a trust created to provide means for permanent care of cemetery lots or crypts in accordance with the cemetery association’s contracts with lot purchasers will impress the agreed portion of the purchase price of such lots with its character and thus remove so much of the association’s gross receipts from taxable income. Los Angeles Cemetery Association, 2 B. T. A. 495; Greenwood Cemetery Association, 2 B. T. A. 910; Springdale Cemetery Association, 3 B. T. A. 223; Metairie Cemetery Association, 4 B. T. A. 903; Troost Avenue Cemetery Association, 4 B. T. A. 1169; Inglewood Park Cemetery Association, 6 B. T. A. 386; Evergreen Cemetery Association of Chicago, 21 B. T. A. 1194; Acacia Park Cemetery Association, 27 B. T. A. 233; affd., 67 Fed. (2d) 700; Portland Cremation Association v. Commissioner, 31 Fed. (2d) 843; Woodlawn Cemetery Association, 28 B. T. A. 882.

Finding in that case that there was an express trust and that the trust agreement was incorporated by reference into the petitioner’s contract with crypt purchasers, we held that 10 percent of the total sales price so set aside should be excluded from the petitioner’s gross income. Here the proper percentage has been agreed upon.

As we see it there could be no clearer adherence to the rule expressed in Community Mausoleum Co., supra, than in the present case. Not only did the petitioner represent orally that an endowment fund would be established, but such was made a binding condition in the contract entered into with purchasers, wherein it ivas agreed that the purchase price paid by them would include a permanent endowment fund for perpetual maintenance of the mausoleum, and this fact was highly publicized in printed literature used as a sales medium. The petitioner entered into a binding and admittedly irrevocable trust indenture at the very outset with County Trust Co., pursuant to the plan held out to its purchasers, providing for the retention by that company of a fund of $100,000 out of payments made directly to it, to be held in a special fund, known as “Ferncliff Cemetery Mausoleum Endowment Fund”, and by it invested in securities, also to be retained by it, the income therefrom to be paid to the petitioner upon the submission of vouchers to the Trust Co. for its approval. This agreement has been faithfully adhered to. Up until the time payments aggregating $100.000 had been made to the fund, under said agreement, that amount was carried on the books of the petitioner as a liability to bo satisfied out of each installment received.

Finding that a trust fund was actually established, it seems to us that it makes no difference that an incidental or indirect benefit inures to the petitioner generally, i. e., because the income may be used, for instance, to pay the wages of employees who are engaged in the general upkeep and maintenance of all crypts alike. Even where a fund is set aside in cemetery cases for the perpetual care and maintenance of a particular lot, that fund may be, and is, used to pay employees and keepers who are engaged in the maintenance of the entire cemetery. There is no conceivable case, except where separate endowments are established for separate and distinct lots or crypts, where the fund could be administered in the strict manner urged by the respondent: And, even under those circumstances, such an endowment might conceivably operate in the case of a cemetery lot, but not in the case of a crypt, which, after all, is merely a small sealed compartment or space in the walls of the mausoleum. Furthermore, •the mere fact that the petitioner maintains some proprietary interest in the mausoleum building does not necessarily mean that the benefit inures to it because, from a very practical standpoint, there is nothing for it to own or from which it can derive any pecuniary benefit after all of the crypts have been sold.

We are of the opinion that the facts of this case fall squarely within the rule of Community Mausoleum Co., supra, and that therefore the stipulated percentage of the amount of sales for the taxable year should be excluded from gross income.

tJudgment will be entered, u/nder Bule 50.


author: Mellott :

text:
    Florence W. Hunt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56325.
    Promulgated April 29, 1937.

      Olaude I. Parker, Esq., John B. MiTliken, Esq., and L. A. Luce, Esq., for the petitioner.-

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

Mellott :

The first question is whether or not petitioner is entitled to the personal exemption of $3,500 as the head of a family during the taxable years before us. The pertinent provision of the Revenue Act of 1926 and the regulations of the Treasury Department relating thereto are shown in the margin. The corresponding provision of the Revenue Act of 1928 is section 25 (c) and the regulation interpreting this section is contained in article 292 of Regulations 74. In Alfred R. Fuhlage, 32 B. T. A. 222, this Board said:

Article 292 of Regulations 74, promulgated under the Revenue Act of 1928, is set forth in the margin. This portion of the regulations is not in conflict with the statute, hut is a fair interpretation thereof. It, therefore, has the force and effect of law. Maryland Casualty Co. v. United States, 251 U. S. 342. This provision of the regulations is the same as corresponding provisions of prior and subsequent regulations, and the fact that Congress had continued to reenact, in the successive revenue acts, the provisions regarding the personal exemption of the head of a family, without change, is persuasive evidence of legislative approval of the regulation. Brewster v. Gage, 280 U. S. 327; Helvering v. Bliss, 293 U. S. 144.

The respondent contends that petitioner is not entitled to the exemption because she did not maintain a home during the years 1927 and 1928. The petitioner bases her claim to the exemption on the fact that she provided in full for the support of her son, Warner, during the years involved, and also helped to support her married son, John. Neither of said sons, however, was under 18 years of age or incapable of self-support because mentally or physically defective. (Sec. 216 (d), Revenue Act of 1926.)

The regulations provide that a parent is entitled to the exemption even though a child or other dependent is away at school or on a visit, if the common home is still maintained. In the instant case the evidence convinces us that during the taxable years petitioner was living in Cleveland, Ohio, in an apartment maintained by her sister. Petitioner introduced no evidence showing that she maintained a home during the taxable years, or that she contributed to the maintenance of the Cleveland apartment. Under these circumstances we must decide this issue for the respondent, for the maintenance of a home is essential to entitle her to the classification of the head of a family. Respondent did not err in disallowing the personal exemption of $3,500.

The remaining question is what amount of taxable gain, if any, was realized by petitioner when she sold the 6,000 shares of United preferred stock in 1927 for $540,000. To answer this question we must determine the basis which the stock had when sold.

Petitioner contends: (1) that she received 1,200 shares of Western by gift from her husband and that her basis for gain or loss on this stock was the amount he paid for it, or $70,250; (2) that she received another 1,200 shares of Western from her husband’s estate by inheritance and that the basis for gain or loss on these shares was their fair market value at the time of her husband’s death, or $240,000; (3) that in order to secure the stock from the bank where it had been pledged as security for her husband’s loan, she paid the loan which, with accrued interest, amounted to $75,000, which payment should be treated as additional cost of the stock; (4) that she made a taxable exchange in December 1925 of the 2,400 shares of Western stock for stock of United, which had a fair market value of $600,000, and that she thus realized a taxable gain in 1925 of $215,000, which should be added to her basis; and (5) that in 1927, when she sold the 6,000 shares of United preferred stock for $510,000 she realized no gain because the stock sold bad a cost basis of $600,000 which was in excess of the amount realized on the sale. In the alternative, petitioner contends that even if the exchange in 1925 was not taxable, the cost basis should be $385,000, computed as follows:

Cost basis of shares individually owned-$70, 000
Additional cost- 75, 000
Cost basis of shares inherited- 240, 000

The respondent contends that the original 1,200 shares of Western stock, which were acquired by petitioner as a gift, had the same cost basis they would have had in the hands of the donor husband, or $70,251; that as a result of the receipt of the stock dividend of 1,200 shares, the cost of the original 1,200 shares became the cost of the 2,4.00 shares; that petitioner did not receive 1,200 shares by inheritance; that having been the oAvner of 1,200 shares of stock when the stock dividend was declared, she was likewise the absolute owner of the 1,200 shares issued as a stock dividend, even though the certificate for those shares was issued in the name of her husband because of the fact that the original stock had not been transferred to her name on the books of the corporation; that the mere fact that through error the 1,200 shares were included in the estate tax return as an asset of the estate of her deceased husband and were taxed as such, does not change the legal ownership of the stock; that petitioner’s cost basis should not be increased by the sum of $75,000, alleged to have been paid by petitioner to the bank; that the record shows that this $75,000 was a debt of her deceased husband paid by petitioner as the executrix of his estate; that the exchange by petitioner of her 2,400 shares of Western stock for 6,000 shares of common and 6,000 shares of preferred stock of United was a nontaxable transaction, and that the cost or other basis of the preferred stock of United sold in 1927 should be computed as follows:

Sale price of preferred_$540, 000. 00
Less allocated cost basis_ 48, 740. 30
Capital net gain. 491, 259. 70

We shall first consider the events which occurred prior to the sale by petitioner of the stock in question, and determine what effect, if any, they had upon the cost or other basis of the stock sold.

The parties agree that Hunt acquired 1,200 shares of Western stock sometime prior to 1922 at a cost of $10,257. They also agree that he made a gift of this stock to petitioner in January 1922, although the stock remained in his name on the books of Western until sometime after his death. In discussing this transfer in Estate of Warner D. Hunt, supra, this Board said:

* * * The fact that the assignment made by the decedent to his wife on January 13, 1922, constituted a complete and unequivocal transfer of title to the stock is fully supported by the evidence. It is none the less absolute because the donor retained or exercised some of the rights and privileges usually incident to stock ownership. Estate of James F. Foster, 13 B. T. A. 496. Nor does the failure to have such stock transferred on the books of the company impair the validity of the transfer. Estate of James F. Foster, supra; George W. Dulany, Jr. et al., 17 B. T. A. 486. See also Ewalt v. Ames, 6 Ohio App. 374; McCoy v. Gosser, 8 Ohio App. 145.

Having received the 1,200 shares of Western stock as a gift after December 26, 1920, petitioner’s basis for gain or loss was the same as that of her donor, or $70,257. (Sec. 204 (a) (2), Revenue Act ’ of 1926.)

At the time petitioner received the 1,200 shares of Western stock as a gift from her husband, it was in the possession of a bank as collateral security for his obligations, aggregating approximately $55,000. She authorized the bank to continue to hold it as security; but all recognized that she was the absolute owner of it, subject only to the payment of the amount owing by her husband. The question of the ownership of these shares is no longer in dispute; for it was definitely settled by the decision of this Board in Estate of Warner D. Hunt. But the effect of the issuance of the stock dividend upon the basis of this stock must be determined.

Respondent in his answer to the amended petition affirmatively alleges that the dividend stock did not belong to Hunt at the time of his death and that it was not an asset of his estate. He alleges that he erred in determining that the value of such stock at the time of Hunt’s death, or $240,000, was the proper basis for determining the profit realized by petitioner when the shares were sold in 1927 and that the proper basis for gain or loss upon such sale is $35,128.50.

It is well settled that the burden of proof rests upon the party who asserts the affirmative of the issue or question in dispute. Having made the affirmative allegation, the respondent had the burden of proving that Hunt was not the owner of the dividend stock at (he time of his death but that it was the personal property of petitioner. Clark Dredging Co., 23 B. T. A. 503; affd., 63 Fed. (2d) 527; Clifford Hemphill, 25 B. T. A. 1351; Security First National Bank of Los Angeles, Executor, 28 B. T. A. 289; Alexander D. Falck, 26 B. T. A. 1359; affd., 71 Fed. (2d) 656; certiorari denied, 293 U. S. 608; Texas Pipe Line Co., 32 B. T. A. 125 (on appeal, Third Circuit). Cf. Tex-Penn Oil Co. v. Commissioner, 83 Fed. (2d) 518; affd., Helvering v. Tex-Penn Oil Co., 300 U. S. 481. We are of the opinion and hold that the respondent has not sustained his burden of proof.

The evidence discloses that when the 100 percent stock dividend was declared in December 1922, Hunt being the record owner of tile original 1,200 shares which he had given to his wife, received the dividend stock and deposited it with the bank as security for the payment of his loans. It also appears that after the gift of the original shares some cash dividends were paid to Hunt on those shares. He deposited the checks therefor in the joint account maintained by him and petitioner and -reported the amounts received as part of his income. After Hunt’s death, petitioner received cash dividends upon the dividend stock and reported them as income of the estate.

The dividend stock remained in Hunt’s name from the time of its issuance in 1922 until his death in September 1924, or almost two years. It might be that petitioner could have compelled him to turn over to her both the cash dividends and the dividend stock; but she did not attempt to do so. Perhaps even after his death, petitioner, either in a special proceeding in the probate court (see sections 10728 et sequa, Page’s Annotated Ohio General Code), or in the estate tax proceeding before this Board, could have established the fact, if it was a fact, that both the cash dividends and the dividend stock belonged to her rather than to her husband. The fact that she did not attempt to do so is a strong circumstance indicating that she did not consider herself to be the owner of them. Possibly she had made a gift of them to her husband; or perchance she may have assumed that he was entitled to receive them, either because of his prior ownership of the gift stock or because of some agreement made at the time of the gift. We do not know; and the evidence is not very satisfactory upon this point. We are satisfied, however, that petitioner acquiesced in the appropriation of the cash dividends and the dividend stock by her husband. Apparently the respondent shared this view when the ownership of the 1,200 shares of the original issue was in controversy before this Board in the estate case, supra; for in that proceeding he admitted that the dividend stock was an asset of the estate and received an estate tax thereon which would not have been due if petitioner had been the owner of the stock.

Under the circumstances we think that respondent has not sustained his burden of proof merely by showing that petitioner was the owner of the original shares of stock and that she may have had a beneficial interest in the dividend stock. We conclude that respondent has failed to show that he erred in determining that the dividend stock had a value of $240,000 when received by this petitioner as residuary legatee under her husband’s will. We accordingly hold that said basis was correctly used by respondent in computing petitioner’s capital net gain upon the sale of the stock in 1927. (Sec. 204 (a) (5), Revenue Act of 1926.)

/The next question is whether or not the $75,000 which petitioner paid, being the $55,458 note of her deceased husband with accrued interest, may be added to her basis for the 1,200 shares of stock received by her as residuary legatee. We think not. The debt was an obligation of the estate. Petitioner was not legally liable for its payment. If she had chosen to do so she could have sold some of the property of- the estate, including the shares of stock pledged as collateral security for its payment, in which event both the value of, and hence the basis of, the property which she would have received as residuary legatee -would have been lessened. She, however, adopted the practical plan of making a voluntary payment of an obligation which could not be enforced against her to the end that she might thus receive securities having a value of $240,000 and thereby also secure the release of her own shares of stock having an equal value. But she did not thus become a purchaser of the stock belonging to her husband’s estate nor may the sum so expended be considered as part of the cost of such stock to her. The property was acquired by petitioner as the residuary legatee of her husband and its basis to her is the fair value — no more and no less — at the time of such acquisition. We accordingly hold that the $75,000 may not be added to such basis./

The next contention of petitioner is that she made a taxable' exchange of the 1,200 shares of Western common stock which she owned and of the 1,200 shares owned by the estate for preferred and common stock of United and that she realized a profit of $215,000 which should be added to the basis for gain or loss of the stock received in the exchange. Respondent contends that the exchange was made pursuant to a plan of reorganization, that hence it was nontaxable, and that petitioner’s cost basis on the stock received in the exchange continued to be the same as that of the stock transferred. In this connection he is claiming that the basis is $70,257, being the cost of the original 1,200 shares; but the combined basis of the 2,400 shares will be discussed later.

Section 203 (b) (2) of the Revenue Act of 1926 provides that “no gain or loss shall be recognized if stock or seciirities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock-or securities in such corporation or in another corporation a party to the reorganization.”

Section 203 (h) (1) of the same act provides that “the term ‘reorganization’ means (A) a( merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock in another corporation).” The evidence shows that United acquired all of the stock of Western. There was, therefore, a reorganization within the meaning of the parenthetical clause above set forth. It is unnecessary to decide or discuss -whether or not the subsequent acquisition by United of all of the assets of Western resulted in a complete merger or consolidation. The acquisition by. United of all of the stock of Western partook of the nature of a merger or consolidation. A strict merger or consolidation is not one of the essentials of a statutory reorganization. Helvering v. Minnesota Tea Co., 296 U. S. 378.

The other requirements of section 203 (b) (2), supra, namely, that there be a plan of reorganization and that both corporations be parties to the reorganization, are met in the instant proceeding. The plan of United to acquire all of the stock of Western was a plan of reorganization. Western and United were both parties to a reorganization as that term is defined in section 203 (h) (2) of the Revenue Act of 1926, for the term “a party to a reorganization” includes both corporations in the case of an “acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.”

Petitioner invites our attention to the fact that Western continued its corporate existence. It is now well settled that the dissolution of a corporation is not essential to a reorganization. Helvering v. Minnesota Tea Co., supra. Prior to the exchange petitioner and the other stockholders of Western owned stock in that corporation. Subsequent thereto they held in place of such stock, stock in United, which gave them a substantial and continuing interest in the affairs of that corporation.

It is our conclusion that the exchange of petitioner’s Western stock for preferred and common stock of United was a nontaxable exchange within the meaning of section 203 (b) (2), supra, and that the basis for gain or loss which formerly attached to the Western stock continued to be petitioner’s basis on the preferred and common stock of United received in the exchange. Sec. 204 (a) (6), Revenue Act of 1926.

We have heretofore determined that the cost basis for the 1,200 shares of stock which we have found petitioner acquired from the estate of her deceased husband is $240,000. There remains for determination the cost basis of the shares which she received as a gift, in which connection we must decide whether such basis is $70,257 or $35,128.50. We are of the opinion that it is the latter sum. The cost of the 1,200 shares was $70,257. When the 100 percent dividend was declared the $70,257 then became the cost of the 2,400 shares. If petitioner had received the dividend shares and had given them away it could not be gainsaid that the shares retained by her had a cost basis of only $35,128.50. While we have not found that she • did receive them, and that she thereafter made a gift of them to her husband, the effect of her failure to insist that the dividend stocks be issued to her as the legal owner of the original stocks was the same, so far as her basis is concerned, as it would have been if she had received them and given them to her husband. We accordingly find that the basis was, as determined by the respondent, $35,128.50.

The sole undetermined issue is whether the allocation of cost between the preferred and common stock of United was correctly made by the respondent or whether petitioner’s theory should be adopted. Petitioner contends that the exchange was consummated between December 17, 1925, the date of the offer, and December 22, 1925, when the offer expired; that in December 1925, the United preferred had a value of $100 per share while the United common had no fair market value; that the cost or other basis of the 2,400 shares of Western should not be allocated between the preferred and common of United but became the basis of the preferred; that she is therefore entitled to a basis of $600,000 for the preferred, and having sold it in 1927 for $540,000, actually sustained a loss measured by the difference between said amounts.

Respondent contends, and we have found as a fact that in January 1926 the preferred had a fair market value of $89 per share and the common had a fair market value of $40 per share. These are the values upon which the respondent determined the deficiency, and they are supported by evidences of actual purchases and sales made by a firm of New York brokers during the month of January. This firm made numerous purchases and sales during that month and the lowest price at which the common stock was sold was $78.50 on January 5. The lowest price paid for United preferred was $89.50 on January 11. Approximately 3,000 shares of United common were sold by this firm during the month of January. One of petitioner’s witnesses testified that he tried to purchase United common in J anu-ary 1926 for $20 a share but was unable to do so as the price asked at that time was $70 a share. This and other evidence in the record convinces us that the values of $89 a share for United preferred and $40 a share for United common, as found by the respondent, were quite conservative.

Section 204 (a) (6) of the Revenue Act of 1926 provides, in effect, that where stock is acquired upon an exchange without the recognition of gain or loss, the basis of the property given up in the exchange shall be allocated between the properties — classes of stock— received, “and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange.” If, therefore, the exchange was consummated in January 1926, the allocation as made by the respondent should be approved.

In support of her contention that the date of the exchange was December 1925 instead of January 1926, as found by the respondent, petitioner points out that she testified she signed the acceptance of the offer about the middle of December. She did so testify; and inasmuch as there is no evidence to the contrary, we accept that as a fact; But was the exchange then complete? We think not. The offer which petitioner accepted specifically provided that the United stock would not be delivered until after January 2, 1926, and the evidence clearly indicates that petitioner received it in that month and not in December of 1925.

An exchange has been defined as “a mutual transfer of one or more pieces of property for property other than money.” 23 C. J. 184. “An exchange is an executed contract; it operates, per se, as a reciprocal conveyance of the thing given, and of the thing received in exchange.” Preston v. Keane, 39 U. S. (14 Pet.) 132, 137. Cf. Elisha Roper, 7 B. T. A. 1112; Florence G. Baldwin, 23 B. T. A. 512; and Edgar Stanton et al., Executors, 34 B. T. A. 451, on appeal to the Seventh Circuit. While the acceptance of the offer by petitioner in December 1925 constituted a valid contract to make an exchange, there was no “mutual transfer” or “executed contract” until the United stock was delivered to petitioner, which occurred in January 1926. We accordingly hold that “the date of the exchange” as used in section 204 (a) (6), supra, was January 1926; and, having found that the fair market value of the stock at that date was as determined by the respondent, it follows that he did not err in allocating the cost of the Western stock between the preferred and common stock of United in the manner set out in the original notice of a deficiency and as shown in our findings of fact.

It follows that the deficiency as originally determined by the respondent should be and it hereby is approved. His claim for an increased deficiency, however, is disallowed.

Judgment will be entered that there is a deficiency of $36,893.79 for the year 1987 and a deficiency of $$96.05 for the year 1988.

       CREDITS ALLOWED INDIVIDUALS.
      Sec. 216. For the purpose of the normal tax only there shall be allowed the following credits:
      ****** *
      (c) In the case of a single person, a personal exemption of $1,500; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $3,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $3,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them.
      [Treasury Regulations 69.] Art. 302. Personal exemption of head of family. — A head oí a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. If a father is absent on business,’ or a child or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. As to the amount of the exemption, see article 301.

       Sec. 204 (a). The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      * # >): )js s': * s*«
      (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.


author: Murdock:

text:
    Morris D. Kopple, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69323.
    Promulgated April 29, 1937.

      Herbert D. Gohen, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Murdock:

A situation similar in most respects to that involved herein was considered by the Board in the case of Tex-Penn Oil Co., 28 B. T. A. 917. There stock of the Transcontinental Oil Co., a new corporation, was subjected to a restriction against sale for a limited period. The Board held that the restricted stock had a fair market value of $7 per share. Unrestricted shares were currently selling on the New York Curb Exchange at prices exceeding $47 per share. There was much other evidence which the Board considered in reaching its conclusion as to value. The Board was reversed, 83 Fed. (2d) 518, 300 U. S. 481. The following is from the opinion of the Supreme Court:

In the peculiar circumstances of this case, the shares of Transcontinental stock, regard being had to their highly speculative quality and to the terms of a restrictive agreement making a sale thereof impossible, did not have a fair market value, capable of being ascertained with reasonable certainty, when they were acquired by the taxpayers.

The Court held that in the absence of such value no tax should be computed upon a gain at the time the shares were received. See sec. 202 (b), Revenue Act of 1918.

The restriction placed upon the shares of the Reliance- Bronze & Steel Corporation was not materially different, so far as its effect upon fair market value is concerned, from that placed upon the Transcontinental shares. Unless the “highly speculative quality” of the latter distinguishes the two cases, the result in each should be the same. The Reliance Bronze & Steel Corporation was a new corporation. Although it was taking over established businesses, nevertheless, its future was uncertain. As the petitioner described the experience of the company, “It started in a scrap and ended in bankruptcy.” The evidence as a whole indicates that the “quality” of this stock was also “highly speculative.” Following the decision of the Supreme Court in the Tex-Penn case, we hold that the stock when acquired by the petitioner did not have a fair market value, capable of being ascertained with reasonable certainty, and that no taxable gain should be computed upon its receipt in the year 1929. Propper v. Commissioner, 89 Fed. (2d) 617. It is thus not necessary to consider or decide the other issue raised.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: HaReon:

text:
    John J. Flynn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76599.
    Promulgated April 30, 1937.

      Pressly R. Baldridge, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

HaReon:

The respondent having conceded error as to the 5 percent negligence penalty of $461.04 proposed by him, the two issues remaining in this proceeding are (1) the amount of gain, if any, from the petitioner’s exchange of real estate for preferred stock of the Queen City Realty Co. and (2) whether a loss on W. B. Foshay Co. stock is deductible by the petitioner in 1930, and, if so, in what amount.

Issue (1). The respondent alleged the petitioner received a gain of $45,000 on an exchange of petitioner’s real estate for preferred stock of the Queen City Realty Co., which gain was computed by determining a basis to petitioner of $5,000 for the real estate and $50,000 as the fair market value of the 500 shares of preferred stock received in exchange. The petitioner had returned no income from the exchange in 1930. The real estate which the petitioner exchanged was composed of two parcels, one of which was acquired in 1928 at, an undisputed cost of $11,500. The other parcel was acquired in 1891 and its basis is therefore its fair market value on March 1, 1913. Petitioner presented competent testimony of real estate experts that the March 1, 1913, value of this parcel was not, less than $28,000. This would give the petitioner a total basis of $39,500 for his real estate. The respondent in his brief conceded $39,500 to be the correct basis for the real estate and we have accordingly so found.

The only question remaining relates to the correctness of respondent’s determination of a fair market value of $50,000 for the 500 shares of preferred stock of the Queen City Realty Co. received in exchange for the real estate. This presents only an issue of fact. The respondent’s determination of the fair market value of this stock is prima facie correct and the burden is on the petitioner to present facts to overcome this presumption and to show the correct value or that the stock had no fair market value. The only evidence offered was the opinion of petitioner himself, who is a banker in Burlington, that the $50,000 par value of shares received in exchange for real estate had no market value when received. After examining the evidence, which is limited to the petitioner’s testimony setting forth his own opinion, we have found as a fact that the value of the stock Avas $50,000 as determined by respondent.

The petitioner bases his contention that the stock he received from the Queen City Realty Co. had no fair market value in 1930 upon his own opinion, as a banker, with respect to the value. It has been held that this Board is not obligated to accept opinion evidence as to value: Tracy v. Commissioner, 53 Fed. (2d) 575; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893. Where sales of the property to be valued have been made they are preferred as evidence of value rather than opinion. Olson v. Commissioner, 67 Fed. (2d) 726; Andrews v. Commissioner, 38 Fed. (2d) 55.

At the time the petitioner exchanged his real estate for 500 shares of the preferred stock of the Queen City Co., the company sold the preferred stock to investors to raise money to build a theatre on the realty acquired. The petitioner was interested in the enterprise and, while he did not sell the stock himself, he was acquainted with the promotion activities and has testified that about 2,250 shares of preferred stock, par value $100, were sold at par. Although his testimony on this fact is vague, he has testified without hesitation that five or six hundred shares were purchased for par value by the Paramount Motion Pictures Corporation and that he purchased, in a separate transaction, 250 shares for their par value of $25,000 cash. These purchases were made by willing buyers under no compulsion to buy who must have regarded this stock as worth its par value. We are not informed regarding the total number of shares of preferred stock that were sold but we are told that a theatre costing $315,000 was built from the proceeds of these sales. In our opinion this stock had a fair market value of $100 per share based on subscriptions at par by investors including the additional purchases by the petitioner at par.

It seems to be the theory of the petitioner that absence of actual trading in the stock and the fact that it was not accepted by banks as ready collateral for loans proves that it had no fair market value. It may well be that the subscribers to the stock preferred to hold the stock as an investment rather than offer it for sale and there is no evidence that owners were unable to sell their stock. The absence of active trading does not show necessarily lack of fair market value. George M. Wright, 19 B. T. A. 541; affd., 50 Fed. (2d) 127; certiorari denied, 284 U. S. 652.

The Queen City Realty Co. had operated theatres successfully for fifteen years. Apparently it owned other property than the new theatre properties. We must assume that investors willing to purchase the preferred stock at par exercised some judgment as to the value of the newly issued stock with reference to assets which the Queen City Co. already owned and the promised earnings of the new theatre. While petitioner has failed to offer evidence as to the intrinsic value of the stock, we must take notice of the fact that realty valued by petitioner at close to $40,000 and a new theatre costing $315,000 were assets behind the preferred stock. The Queen City Realty Co. has paid the agreed 6 percent dividends on this stock from the time of issuance to the present. It also has redeemed about fifty shares at 102, although the date of redemption is not given.

Upon review of the record, we find that there is not sufficient evidence to overcome the respondent’s determination that the stock in question was worth its par value of $50,000. The sales of the stock at par to buyers under no compulsion to buy supports respondent’s determination which is sustained. See: H. H. Blumenthal, 21 B. T. A. 901; Young & Vann Supply Co. v. United States, 10 Fed. Supp. 697; Crawford v. Helvering, 70 Fed. (2d) 744; Helvering v. Kendrick Coal & Dock Co., 72 Fed. (2d) 330; John B. Murphy, 8 B. T. A. 416; Anna S. Richards, 13 B. T. A. 1279; James Couzens, 11 B. T. A. 1040, 1164; First Seattle Dexter Horton National Bank et al., Executors, 27 B. T. A. 1242; affd., 77 Fed. (2d) 45.

Issue 2. The second issue is the deductibility in 1930 of $59,800 as a loss on petitioner’s stock hi the W. B. Foshay Co., a Delaware corporation, for which a receiver was appointed by the U. S. District Court for the District of Minnesota, and was subsequently liquidated, paying nothing to its stockholders. In his income tax return for 1930 the petitioner claimed a loss of only $49,800 on his 398 shares of preferred and 100 shares of common stock of the W. B. Foshay Co. which he listed as acquired in 1926. In the present proceeding he claims the loss to be $59,800, alleging a cost of $100 per share for the preferred and $200 per share for the common. In our opinion the petitioner is not entitled to this deduction. In the first place, he has failed to prove the cost or other basis of this stock to him and the burden is upon the taxpayer claiming a deduction to prove the amount thereof, Burnet v. Houston, 283 U. S. 233. His testimony on this point is vague and sometimes contradictory. He does not state with definiteness in what year either the preferred or common stock was acquired, but estimates that it was from 1926 through 1929. It appears that part of the preferred stock was originally obtained in connection with the sale of the Burlington Traction Co., in which the petitioner was a majority stockholder, to the W. B. Foshay Co., a Minnesota corporation, hut the petitioner was unahle to say how many shares were thus received nor did he give any details of the exchange transaction to show whether it was taxable or nontaxable, or the basis to him of the property or stock exchanged. Later he exchanged the preferred stock in the Minnesota corporation for preferred stock in the W. B. Foshay Co., a Delaware corporation. Again no details of the exchange transaction are given, making it impossible for us to determine his basis. As to the common stock on which the loss is claimed, the petition alleges that its “average cost” was $200 per share. The petitioner stated at the conclusion of his testimony that he paid $200 cash for every share of the common stock. But he also stated at three different places in the record that the common stock •was received in an exchange or reorganization either of the Burlington Traction Co. or of the Foshay Co. and the facts of neither exchange are in evidence. His statement that he paid cash for the stock is not supported by any evidence and is contradicted by tho above statement. No canceled checks, books of account, or any corroboration whatever of this self-serving declaration were offered, although they were called for by the respondent. Indefiniteness about the year of acquisition of the common stock is significant at this point, for if purchased before April 30, 1928, it was rather the stock of the Minnesota predecessor to the Delaware corporation, since the Delaware corporation was not organized until April 30, 1928. In that case the common stock on which the loss is being claimed was necessarily received in a reorganization as was the preferred. Again, we are not given the details of the exchange necessary to determine the petitioner’s proper basis. It is impossible from the conflicting statements and the paucity of facts to arrive at any basis for the petitioner’s stock. A deduction for the alleged loss is therefore not allowable for failure to establish the cost or other basis of the stock to petitioner. See sections 23 (e) and 113 (a), Revenue Act of 1928; Edward P. Haney, 5 B. T. A. 1039; Isabelle H. Bonbright, 22 B. T. A. 668; Harry Symons, 11 B. T. A. 886; Estate of T. J. Taylor, 7 B. T. A. 931; Edmond A. Hughes, 27 B. T. A. 1022; affd., sub nom Little v. Helvering, 75 Fed. (2d) 436; Strangman Manufacturing Co., 9 B. T. A. 670; J. E. Robertson, 13 B. T. A. 550; Hans C. Stricker, 12 B. T. A. 109; Maie Kimball Mapes, 1 B. T. A. 855; Albert W. Finlay, 17 B. T. A. 828.

The petitioner’s claimed stock loss is unallowable for the further reason that he has failed to overcome the presumption of correctness attaching to the Commissioner’s determination that the stock became worthless in 1929 rather than in 1930 when it is claimed. The chief relianee of the petitioner to overcome the Commissioner’s determination is the receiver’s report which states that the books of the company showed an excess of assets over liabilities as of the date of the appointment of the receiver, November 1, 1929. That report also shows, however, that the company through highly speculative management had already borrowed up to the limit of its credit, had hypothecated most of its assets, and that a large part of its assets consisted of stock of its subsidiaries which almost immediately upon the appointment of a receiver became worthless or greatly depreciated in value. We are of the opinion that, under the circumstances, the book value of the company’s assets taken alone would not be sufficient to overcome the Commissioner’s determination that the stock of the company was worthless in 1929. But, however that may be, it can not overcome the presumption where, as here, it is shown that those assets experienced an immediate and precipitous decline in value resulting from the institution of the receivership. Evidence of the value of assets as of November 1, 1929, would not in any event establish the value as of December 31, 1929, and where there is uncontradicted evidence of a severe decline in values of the securities held as assets between those two dates, a showing of an actual value of the stock involved as of the end of the year would be necessary to overcome the Commissioner’s determination. Since the only evidence of value of assets introduced by the petitioner was book value and no evidence at all was introduced as to value subsequent to the date of the receivership, the respondent’s determination that the stock became worthless in 1929 must stand for failure of proof to the contrary. See Mark D. Eagleton, 35 B. T. A. 551; Paul Pryibil, 31 B. T. A. 164; John Crosby Brown, 21 B. T. A. 176; William E. Steinback, 30 B. T. A. 1252; Gowen v. Commissioner, 65 Fed. (2d) 923, affirming 24 B. T. A. 1028; Sacks v. Commissioner, 66 Fed. (2d) 308, affirming 25 B. T. A. 415; R. D. Jones, 29 B. T. A. 928; A. C. Gwynne, 22 B. T. A. 164; Hans C. Stricker, supra.

We are of the opinion that the petitioner’s stock loss is not allowable in 1930 for the further reason that he is estopped from asserting his claim in that year. To allow the claimed deduction would be equivalent to double deduction. The facts are clear that while the petitioner originally claimed this loss only in his tax return for 1930 he acquiesced in the respondent’s determination following a field investigation that the loss occurred in 1929 and he voluntarily accepted and retained the benefits flowing from that decision. He accepted a refund with interest of the income tax paid for the year 1929 which was based upon allowance of the loss in that year. His failure at any time to protest that determination and his acceptance and retention of the refund check are to our minds sufficient to constitute such an acquiescence in the respondent’s decision as now prohibits the petitioner from taking a different position. As the court said in Hartwell Mills v. Rose, 61 Fed. (2d) 441:

Especially is it true that where the government and taxpayer hy acquiescence in the manner of performing an act have given a definite character 'and effect to it, the taxpayer will not be permitted after deriving benefits from this acquiescence to deny this character and effect to it, or to change its position at the government’s expense.

It is immaterial under which of the conceptual classifications we place the petitioner’s inability now to claim his deduction. As stated in Stearns Co. v. United States, 291 U. S. 54:

Sometimes the resulting disability has been characterized as an estoppel, sometimes as a waiver. The label counts for little. Enough for present purposes that the' disability has its roots in a principle more nearly ultimate than either waiver or estoppel, the principle that no one shall be permitted to found any claim on his own inequity or take advantage of Ms own wrong.

The revenue act contemplates that a taxpayer shall be allowed his deductions only once. Burnet v. Aluminum Goods Manufacturing Co., 287 U. S. 544; Ilfeld Co. v. Hernandez, 292 U. S. 62. The petitioner has obtained his deduction once and is not in our opinion entitled to it again.

Decision will be entered wider Rule 50.