author: Lansdon:

text:
    Federal Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27855.
    Promulgated November 5, 1931.

      Phil D. Moreloch, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Lansdon:

This is a proceeding under section 280 of the Revenue Act of 1926. The respondent has asserted that the petitioner is liable at law or in equity for the payment of deficiencies in income and excess-profits taxes due from the Federal Oil Company for 1920, 1921 and 1922, in the respective amounts of $174,926.64, $49,226.15, and $4,414.45. At the hearing the parties stipulated that in case the Board should find the petitioner liable as transferee of assets of the taxpayer, the correct tax liability is $9,345.81 for 1920 and no deficiencies for 1921 and 1922. It is also stipulated that the petitioner received assets of the taxpayer having a value in excess of $9,345.81, plus interest thereon as provided by law, which leaves for determination only the question whether it is liable at law or in equity as transferee of assets of the taxpayer. Under the pleadings we are also called upon to determine whether assessment and collection of the deficiency asserted is barred by the statute of limitations.

The facts are presented in a stipulation, with exhibits attached thereto, which constitute the only evidence offered. In this report we shall summarize the stipulation and quote only the material portions of the exhibits, but the stipulation and exhibits are hereby incorporated by reference as a part of this report.

The petitioner is a corporation, organized on September 4, 1924, under the laws of Virginia, with an office at Eureka, Kans. Shortly thereafter it acquired the assets of the Federal Oil Company, a Delaware corporation, organized in 1911, which also had offices at Eureka, Kans. The parties agree that the original contracts by which such acquisition occurred have been lost, but that the purport thereof is reflected in the corporate minutes, which are attached as an exhibit to the stipulation of facts. The first mention of the Federal Oil Company in the corporate minutes of petitioner is under date of September 11, 1924, and as follows:

Resolved that the agreement heretofore made on behalf of this Corporation by R. C. Megargel & Co. with the Board of Directors and Stockholders of Federal Oil Company (a Delaware Corporation) that this Corporation, when organized, should acquire all the property and assets of said Federal Oil Company in exchange for two thousand, two hundred and thirty-three (2,233) fully paid and non-assessable shares of the preferred stock of this Corporation of the par value of One Hundred Dollars ($100) each and for fifty thousand, five hundred and ninety-two (50,592) fully paid and non-assessable shares of the common stock of this Corporation without par value, be and it hereby is approved and adopted for this Corporation.
Resolved that the property and assets of Federal Oil Company (a Delaware Corporation) to be sold and transferred to this Corporation as aforesaid, are in the judgment of the Board of Directors of this Corporation of the full and fair value, in current money of the United States, of Two Hundred Seventy Three Thousand, Eight Hundred Ninety-two Dollars ($273,892) over and, above the liabilities of said Federal Oil Company.
Resolved that the proper officers of this Corporation be and they hereby are authorized and directed to issue and deliver to or upon the order of the said Federal Oil Company against a proper conveyance and delivery to this Corporation of all the assets and property of said Federal Oil Company, certificates representing two thousand, two hundred and thirty-three (2,233) fully paid and non-assessable shares of the preferred stock of this Corporation of the par value of One Hundred Dollars ($100) each and fifty thousand, five hundred and ninety-two (50,592) fully paid and non-assessable shares of the common stock of this Corporation without nominal or par value.

Under date of December 31, 1924, we find the following:

The President then stated that Federal Oil Company, a Delaware Corporation, whose assets and liabilities had been acquired by this Corporation, was called upon to pay its quarterly Dividend on its outstanding Preferred Stock; that the stockholders of Federal Oil Company would, through an exchange of stock, become stockholders of this Corporation; that the Directors of said Company had requested this Corporation to loan it $4,466.00 with which to pay the Dividend due January 1, 1925, * * *.

The books and accounts of the Federal Oil Company were closed as of September 30, 1924, with the following explanation entered in its general journal:

On October 1, 1924, the assets of the Federal Oil Company of Delaware were taken over and liabilities assumed by. Federal Oil Corporation — Virginia—See entries on following' page for final closing.

Some time prior to February 20, 1925, one Pouch, who had marketed some of the preferred stock for the Delaware Company, instituted a proceeding in the courts of Delaware to obtain an injunction against the dissolution of that company and the exchange of its stock for stock of the petitioner. On February 20, 1925, an agreement was entered into between the petitioner and Pouch which provides in part as follows:

The corporation has heretofore acquired all the property and assets of Federal Oil Company (a Delaware corporation hereinafter sometimes called “the Old Company ”) in exchange for 2, 233 shares of the preferred stock of the Corporation of the par value of $100 each, and 50,592 shares of the common stock without par value of the .Corporation. Said preferred and common stock of the Corporation is held in the treasury of the Old Company and the Corporation desires that the Old Company be dissolved and its assets consisting of said stock distributed among the preferred and common stockholders of the Old Company on the basis of 1 share of the preferred stock of the Corporation for each 20 shares of preferred -stock of the Old Company of the par value of $5.00 each, and on the basis of 1 share of common stock of the Corporation for each 20 shares of the common stock of the Old Company.
The stockholders and directors of the Old Company have approved such basis of distribution to the stockholders of the Old Company but have been unable to effect such distribution on account of an action instituted by Pouch in the courts of Delaware entitled “ Potter vs. Federal Oil Company, et al," in which suit an injunction against such distribution had been obtained.
# * £ * * * ⅝
Now, Thekefoke, in consideration of the premises and of the mutual agreements herein contained, the parties hereto hereby-agree as follows:
1. The Corporation agrees that it will not issue, or cause to be issued, any more of its authorized preferred stock than is now outstanding nor dispose of the 10,000 shares already issued and held in the Treasury until the 2,233 shares of its preferred stock to be distributed to the preferred stockholders of the Old Company or such part thereof as shall not have been converted into common stock prior to July 1, 1925, have been purchased, redeemed or retired by the Corporation.
*******
3. Pouch agrees that he will cause the action in the courts of Delaware entitled “Potter vs. Federal Oil Company, et al,” to be promptly withdrawn and discontinued and the injunction obtained in said action to be vacated, and further agrees that he will recommend to such of his clients as are the holders of preferred stock of the Old Company that they consent to a dissolution of the Old Company and a distribution of its assets as recited in the preamble to this contract and the acceptance of preferred stock of the Corporation at par in Lieu of the preferred stock of the Old Company.
⅜ ⅝ ⅝ ⅝ ⅜ ⅜

Pursuant to tlie above, 1,004.shares of preferred stock were purchased, at an average price of, $80 per share, during 1925, 1926 and 1927. '

On January 3, 1928, the petitioner filed an annual report for the Delaware Company with the Secretary of State of Delaware, in which it is stated:

In September, 1924, the Federal Oil Corporation bought the assets and liabilities of the Federal Oil Company, trading stock in the old company for stock in the new, therefore the Federal Oil Company is out of existence. They have no officers or business of any kind. We feel that they have no report to make.

By certificate dated January 13, 1931, the Delaware Company was declared dissolved as of April 1, 1929, for nonpayment of taxes.

Actual delivery of petitioner’s stock to the Federal Oil Company occurred on or about January 1, 1925. Such stock was distributed by the Federal Oil Company to its stockholders on or after February 20, 1925.

By letter dated March 12, 1927, the respondent notified petitioner of its liability as transferee of the Federal Oil Company.

Section 280 of the Revenue Act of 1926 provides:

* . * * * * * *
(b) The period of limitation for assessment of any sucb liability of a transferee or fiduciary shall be as follows:
(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or
(2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, — then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.

The taxpayer’s return for 1920 was due on March 15, 1921. Thereafter the respondent had five years, or until March 15, 1926, within which to determine, assess and collect any deficiency due from the taxpayer. See section 250 (d) of'the Revenue Act of 1918. He had, therefore, until March 15, 1927, to assert liability as transferee against the petitioner. The sixty-day letter was issued on March 12, 1927, which is within the period of limitation.

The petitioner contends that it is not liable as a transferee, since the transaction by which it acquired the assets of the taxpayer in exchange for shares of petitioner’s capital stock constituted a purchase for value, and that the taxpayer had assets, namely, stock of petitioner, with which to satisfy its liabilities. The petitioner argues that the stockholders of the taxpayer became transferees upon distribution of the stock to them and that the respondent should have proceeded against them.

Not having before us the contracts by which petitioner acquired the taxpayer’s assets, it is difficult to say exactly what petitioner has agreed to do. The parties have stipulated that the corporate minutes correctly reflect the transactions as they occurred, and from the minutes we think it is clear that petitioner assumed all the liabilities. A corporation is liable for the debts and obligations of another when it expressly assumes such debts and obligations. Fletcher, Cyclopedia Corporation, vol. 7, §4982; 14a C. J. §3620; 7 R. C. L., p. 183. And it is held ‘in many jurisdictions that an express assumption of the debts and obligations is unnecessary where the property of the old company is taken over in exchange for stock of a new corporation. Gibson v. American Ry. Express Co., 193 N. W. 274; Electric Products Co. v. St. Louis Theatre Supply Co., 273 S. W. 135; Peters v. American Ry. Express Co., 256 S. W. 100; Jackson v. Knights and Ladies of the Orient, 167 Pac. 1046. Cf. Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482; and American Ry. Express Co. v. F. S. Royster Guano Co., 126 S. E. 678; affd., 273 U. S. 274.

We think the petitioner is liable for the taxes due from the Federal Oil Company for 1920.

Reviewed by the Board.

Decision will be entered finding petitioner liable as transferee for $9f3]¡A.81 due from the Federal Oil Company for 1920, with interest thereon as provided by law. There are no deficiencies for 1921 and 1922.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Fort Pitt Bridge Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 21205, 21206, 21817.
    Promulgated November 5, 1931.

      Richard 8. Doyle, Esq., Leonard K. Guiler, Esq., Charles D. Darnel, Esq., and Alvin B. Peterson, Esq., for the petitioner.

      James L. Bachstrom, Esq., and P. A. Sebastian, Esq., for the respondent.
   OPINION.

Murdock :

The petitioner assigned a number of errors which were either waived or supported by no evidence. They were not urged and will entitle the petitioner to no relief in this proceeding. The Commissioner has conceded that the statute of limitations bars collection of the deficiencies except for certain items which have been properly credited against the assessments. We have, therefore, made no findings of fact in regard to the statute of limitations and see no reason to discuss the question. The respondent made certain claims, by amendment to his answer, alleging that the deficiency for 1917 should be increased if any income reported in 1918 were transferred to 1917, and that, in case the Board holds that expenditures made for designs and drawings should have been capitalized, there should be added to income for each year certain amounts heretofore allowed as -deductions representing the cost of the designs and drawings plus an amount for overhead expenses.

The petitioner’s principal contention is that its profits taxes should be computed under section 210 of the Eevenue Act of 1917 and section 328 of the Eevenue Act of 1918. The former section is applicable to 1917 income only where a taxpayer’s invested capital can not be satisfactorily determined. Section 327 authorizes special assessment for the years 1918 and 1919 not only where invested capital can not be determined, but it also provides:

Wliero upon application by tbe corporation tbe Commissioner finds and so declares of record that tbe tax if determined without benefit of this section would, owing to abnormal conditions affecting tbe capital or income of tbe corporation, work upon tbe corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and tbe tax computed by reference to tbe representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.

The petitioner attempts to make the following points in support of this contention:

1. Valuable assets received from a predecessor partnership have not been and can not be considered in computing invested capital.

2. Old designs, drawings and patterns of great value have not been and can not be considered in computing invested capital.

3. Due to an improper accounting system known as the completed-contract method, the reporting of profits has been delayed one year, with a consequent reduction of surplus, but it is now impossible to reconstruct a proper surplus on a proper accrual basis.

4. The bookkeeping system has resulted in certain abnormalities such as (a) the deferring and shifting of income, (b) the inflation of current income caused by an incorrect method in the stock steel account, and (c) inaccuracy in income due to the absence of a proper work in process inventory.

The petitioner claims that it received valuable assets in 1896 from the partnership of Straub and Blickle which have not been considered in computing its invested capital. Good will, contracts, plant leases and equipment are mentioned in this connection. These assets were not turned in for stock or shares and must come into invested capital, if at all, as surplus. But had this young firm any good will? Had the good will, the contracts, the lease, and the equipment any value when turned in ? If they had, why can not that value be determined and included in invested capital? Special assessment is not to be applied where the petitioner does not exhaust reasonable means to show its true invested capital. Edwin M. Knowles China Co., 9 B. T. A. 1292. Both partners were witnesses, yet these assets were not shown to have had any value. On the contrary, there is evidence that they had no particular value. Furthermore, if they had value, it must have been translated into profits in the intervening twenty years and thus reflected in invested capital by 1911 through earned surplus under the petitioner’s method of accounting.

A great number of old designs, drawings, and patterns were in the possession of the petitioner during the years involved in this proceeding. Each of these had been made for the purpose of some particular contract in years gone by and the cost had been charged to expense. The actual cost of those prepared prior to 1906 can not be accurately determined at this time. The petitioner contends that all or some indeterminable part of these designs, drawings, and patterns were capital assets; they cost approximately $1,100,000; they have suffered little depreciation or obsolescence; and some part of their cost should but now can not be reflected in invested capital.

We do not agree that any part of the cost of these designs, drawings and patterns was ever a proper item to be set up as a capital account in the petitioner’s business. The testimony shows that the petitioner referred to and made use of some of these drawings in various ways after the completion of the job for which they were prepared. Wo do not know how many were thus used or how valuable they were for these purposes, but it is quite apparent that in the petitioner’s business the principal use made of each design, drawing, and pattern and the principal value of each was in connection with the job for which it was made. After that, further use was problematical and uncertain and their principal value was exhausted. They should not be carried as an asset at their cost in a proper system of accounting for this business. This is particularly true here where the drawings and patterns had been paid for by'the customers.

Every new contract requires the preparation of designs, drawings and sometimes patterns. Materials have to be applied in different ways. The draftsman and the pattern maker must give expression to the peculiarities of the particular job. No set of drawings, no design, and no pattern can be prepared with the idea or assurance of future or continued use in the business after the job is completed for which it was first prepared. At least the evidence indicates the truth of the above statement. The situation is unlike that of a plant turning out a more staple product. Cf. R. S. Newbold & Son Co., 7 B. T. A. 471; Mesta Machine Co., 12 B. T. A. 523. Out of the many thousands of old drawings on hand, the petitioner used only 159 in the three years before us in extending old work. The use of old patterns was even less and they had to be altered for such use as they were put to. In addition to the above, some undisclosed number of the old designs and drawings were used for reference in current work. They no doubt had some value for this purpose. - But we can not tell from the record the extent of this use or the value which the drawings had for this purpose except that it was not great in proportion to the value of the drawings incident to the contracts for which they were originally prepared.

The question of whether or not designs, drawings and patterns should be charged to expense or capitalized depends, in each case, upon the nature of the particular business and the use to which they are put in that business. The experience of the company and the judgment of those in charge are important factors. The petitioner’s practice creates a reasonable inference that it thought the cost should be charged to expense, it still uses that method, and the Commissioner has approved it. Furthermore, we believe it did quite right in charging the entire cost of these items to expense. Hall Printing Press Co., 2 B. T. A. 119; Co-operative Foundry Co., 2 B. T. A. 888; American Seating Co., 4 B. T. A. 649; Duguesne Steel Foundry Co., 15 B. T. A. 467. The case is distinguishable from such cases as Northwestern Yeast Co., 5 B. T. A. 232, where inability to allocate an expenditure between capital and expense was the ground for special assessment. Here the expense characteristics so predominate and the capital features are so uncertain and relatively unimportant that the whole may be charged to expense with propriety. Cost of patterns and drawings was but a small part of the cost of goods sold in the years before us. The possession of the old drawings was not a substantial income-producing factor. This item does not constitute an abnormality. Furthermore, all similar concerns may have been in the same situation for all we know. Cf. Coca-Cola Bottling Works of Pittsburgh, 19 B. T. A. 267.

The accounting system employed by the petitioner is the completed-contraet system. It is a modification of a strict accrual method and differs in the one respect that items of income and expense, though recorded in primary accounts when accrued or incurred, are not carried into profit and loss as earnings of the business until the contract to which they relate is completed. A separate account is kept for each contract. Any debit balance in the account represents the investment in the contract and any credit balance represents unearned income until the completion of the contract. A characteristic of this system is that income earned in one accounting period may not be accounted for until a later period. It is peculiarly adapted to a business fulfilling contracts which lap over accounting periods where the ultimate gain or loss can not be accurately determined until the completion of the contract. It may be used even though the contracts call for payment on the basis of a certain price per pound. The contracts need not run for more than a year. The Commissioner’s regulations permit its use. It has been approved, for tax purposes, by the courts and by this Board. In re Harrington, 1 Fed. (2d) 749; Mesta Machine Co., supra; James G. Ellis, 16 B. T. A. 1225; E. Stanley Bent, 19 B. T. A. 181; Harrison v. Heiner, 28 Fed. (2d) 985; affd., 35 Fed. (2d) 283. Its use is no reason for special assessment. Furthermore, we do not know what the petitioner’s income would amount to on any other basis and without the net income the tax could not be computed under the special assessment sections.

For about 35 years the petitioner has consistently kept its books on this system. Its business has been extensive and successful. Competition has no doubt been keen. The bookeeping system has been advantageous, adequate, and satisfactory to the petitioner. It is still in use. The Commissioner approves of it too. But the petitioner now claims in respect to a short period, when income was large and taxes were exceptionally high, that the system was antiquated, inaccurate, and improper for profits-tax purposes. The principal support for this claim comes from the testimony of an accountant who apparently was employed for the purpose of this case only and first attacked the system. His figures are accurate enough, but we disagree with most of his conclusions, and we think there is some reasonable explanation of certain defects ” which he has sought to prove. For example, according to his testimony, the stock steel account was hopelessly inaccurate and improper from an accounting standpoint; it contained arbitrary adjustments; it was forced to balance; and the average price at which steel was charged out to contracts exceeded the average at which steel was carried in this account, thus inflating income for the current year. He was content merely to disclose these phenomena without attempting any explanation. Averages are frequently puzzling and meaningless. Here apparently, steel was charged to contracts at about the current price as disclosed by recent purchases. Officers of the corporation were present when this witness gave his deposition. The books were there. These intelligent officers were responsible for and familiar with the entries in this account. We have no doubt that they could have explained them. Special assessment is not gained except by a full disclosure of the facts so that it satisfactorily appears that there is an abnormality or that invested capital can not be determined.

Another alleged defect in the accounting system is that it provided no inventory of work in process at the end of the year. This contention seems to conflict with that made above, because without such inventory it is difficult to see how the current income could be inflated by excessive charges to contracts. However, the failure to inventory work in process leads nowhere, since such an inventory is not necessary under the method of accounting employed by the petitioner. The method clearly reflects income without it and hence this is no ground for special assessment.

Considering the petitioner’s contentions separately and collectively, we can see therein no cause for applying the special assessment provisions of either act here applicable.

The petitioner contends, in connection with the second issue, that $53,500 of the total of $125,000 mentioned in the contract of July 21, 1917, with the Firestone Company was paid to it in cash in 1917 as damages for breach of the earlier contract and was erroneously reported as income in 1918 instead of in 1917. In 1918, when the contract was completed, $75,748.52 was reported as the profit on the contract. In support of this contention it claims that the original contract was for approximately 3,700 tons of fabricated steel, on which it expected to make a profit of $54,094, or about $15 a ton. Even if these figures were correct, there would be some reduction of the damages on account of the steel delivered under the later contract. But the evidence, although conflicting, shows that the tonnage contracted for originally amounted to only 2,500 tons. Two thousand tons of this were canceled. Five hundred tons were contracted for under the final adjustment contract of July 21, 1917. Furthermore, there is evidence that the estimated profit on the original contract was only $13.60 a ton, or .68 of a cent per pound. Counsel for the petitioner argue that the contract of July 21, 1917, called for only 500 tons of steel. In so doing they overlook the fact that the agreement calls for “ all grillage and in addition approximately Five Hundred (500) tons of structural steel.” The petitioner’s offer of the same date stated, “ we will furnish you the fabricated grillage * * * and also an additional tonnage amounting to 500 tons.” It also stated that the petitioner would erect the 500 tons for a certain amount, but the Firestone Company was to erect the grillage. Thus, it is clear that two products were contracted for, 500 tons of steel and an undisclosed amount of grillage. We can not tell from the record how much steel or grillage was actually furnished, or the price at which the latter was furnished. The petitioner’s offer of July 21, 1917, mentions “ fabricated ” grillage and “ additional ” tonnage. These terms may mean that the grillage had already been fabricated before work ceased on the original contract. Perhaps costs incident to the original contract have been carried forward into 1918.

We are satisfied that the “ lump sum ” of $125,000 should not be divided into $71,500 for 500 tons of steel at 7.15 cents per pound and $53,500 for damages for breach of the prior contract. This leaves nothing for the grillage. The record indicates that damages in some amount were paid under the contract of July 21, 1917, but we can not say that the amount was in excess of $27,200 (2,000 tons at a profit of $13.60 per ton). It may have been less, depending upon the price of the grillage. This really disposes of the question, for, even if this amount were shifted from 1918 to 1911, the deficiencies would not be wiped out. It does not appear, however, that any amount should be shifted to income of 1917. The contract was for a lump sum. The petitioner’s method of bookkeeping and of reporting income treated the contract as a whole. The profit was all accounted for and reported in 1918, when the contract was completed. At the end of 1917 the books showed a credit balance in the contract account of only $21,030.56 and the contract uncompleted. We think that the income as reported should not be disturbed in this connection.

The third issue relates to whether or not a profit of $161,091.29 should be taxed as provided in section 301 (c) of the Eevenue Act of 1918. It is conceded that the amount of this profit is correct and that it was properly reported in income for the taxable year 1919. Section 301 is in part as follows:

(c) For the taxable year 1919 and each taxable year thereafter there shall be levied, collected, and paid upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following:
(1) Such a portion of a tax computed at the rates specified in subdivision (a) as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess-profits credit and the war-profits credit applicable to the taxable year shall be used.

The contract for the fabrication of material for the construction of 21 hangars was a Government contract made between April 6, 1917, and November 11, 1918. The income eventually realized from furnishing the 16 hangars and certain material was derived in the year 1919 and was more than $10,000. Was it derived from or attributable to the Government contract relating to 21 hangars ? This is the only question on this issue. The petitioner contends that the contract for 21 hangars was canceled by the Government through the telegram of November 12, 1918; the orders for the 16 hangars and the miscellaneous material were new contracts distinct from the old and accepted by the petitioner on that basis; therefore, the gain was derived from the latter contracts and is not taxable as provided in the above quoted section. However, it nowhere appears that the petitioner ever agreed to allow the Government to cancel the contract for the 21 hangars or indicated that it would make no claim for damages in case the Government refused to take and pay for the material already fabricated. Considering all of the circumstances, we do not think that the telegram referred to served to

rescind the original contract. See Willston on Contracts, section 1826; United Transportation & Lighterage Co. v. New York & Baltimore Transportation Line, 185 Fed. 386; Gillespie v. United States, 47 Ct. Cls. 167. This is true even though the petitioner’s letter dated November 14, 1918, acknowledging receipt of the telegram stated:

“We will make up a statement of cancellation charges and advise you later.” Two days later the petitioner received assurance that the Government did not care to cancel the contract, but merely desired to save additional expense by having all work cease, and the petitioner learned in that same letter that there was great likelihood that the Government could eventually use the hangars. Shortly thereafter, the Government notified the petitioner to ship certain of the material originally fabricated for the 21 hangars, and in less than two months after the armistice it had directed the petitioner to ship 16 hangars and certain miscellaneous material. All of this material was to be shipped from material already fabricated on Order No. 50,263 which was ordered for the construction of 21 hangars “ 110 x 160.” The price was that originally agreed upon, in other words, the war-contract price. The total length of the 16 hangars finally taken by the Government was greater than the length of 19½ of the hangars originally ordered. Thus, the petitioner failed to deliver the material for less than 1 ½ hangars, and, so far as we know, this material had never been fabricated. The evidence does not indicate that the orders for the 16 hangars were new contracts separate from the earlier war contract, but, on the contrary, it strongly indicates that the Government, under the war contract, was taking certain fabricated material which it needed and was under obligation to pay for. The material and the price were the same as that provided for in the war contract, so that the source of the gains was in the original war contract. The gain must be regarded as income derived from or attributable to that contract.

The petitioner cites Goss Printing Press Co., 11 B. T. A. 365, but we think A. B. Kirschbaum Co., 5 B. T. A. 65; Kirschbaum v. United States, 52 Fed. (2d) 602; R. Hoe & Co., 7 B. T. A. 1277, affirmed on this issue in 30 Fed. (2d) 630, are cases more in point.

Keviewed by the Board.

Judgments of no deficiency and no overpayment will be entered.

McMahoN did not participate in deciding this proceeding after the hearing had in the first instance.


author: Smith:

text:
    Preston County Coke Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33066.
    Promulgated November 5, 1931.

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

      J. M. Leinenhugel, Esq., and T. G. Histon, Esq., for the respondent.
   OPINION.

Smith:

1. Affiliation. — The petitioner claims affiliation with the Greer Steel Company on the grounds of ownership or control of substantially all of the stock of both companies by the same interests. See section 240 (b), Revenue Act of 1918.

The majority stockholders of the petitioner, H. C. Greer and Agnes R. Greer, owned substantially all of the stock of the Greer Steel Company but the petitioner’s minority stockholders, owning approximately 26 per cent of the petitioner’s stock, owned no interest in the Greer Steel Company, except for the one qualifying share owned by Bierer. The petitioner’s principal minority stockholders were W. L. Curry, who owned 405 shares, or 16.16 per cent; Ever-hart Bierer, who owned 150 shares, or 6 per cent; and Carl Springer and J. W. Abraham, who owned 50 shares, or 2 per cent each. Except for the one qualifying share owned by Bierer, none of these individuals owned any stock in the Steel Company. Only 71.89 per cent of the petitioner’s stock was owned by the stockholders common to both companies. The petitioner does not contend that this constituted substantially all of the petitioner’s stock. It does contend, however, that the stock of both companies was controlled by the same interests; that H. C. Greer actually controlled the stock and dominated the policies of both companies and that H. C. Greer, Agnes R. Greer, Everhart Bierer and A. W. Hawley constituted tbe same interests within the meaning of the statute; and that the companies operated as a single business unit.

The respondent relies upon the more strict rule of ownership or control by the same 'beneficial interests and cites Ice Service Co. v. Commissioner, 30 Fed. (2d) 230; Hirsch & Co. v. Commissioner, 30 Fed. (2d) 645; Conley Tin Foil Corporation, 17 B. T. A. 65; Empire Safe Deposit Co., 19 B. T. A. 1137.

The evidence leaves no doubt in our minds that H. C. Greer actually controlled all of the stock as well as the business policies of both companies. There were also intercompany transactions tending to formulate the separate companies into a single business unit. For a period of five months in 1920, at a time of labor shortage, the Steel Company transferred labor and equipment from its lime plant to the petitioner without cost. At the same time the petitioner furnished the Steel Company with a small amount of electric current. There were other intercompany transactions and working agreements of mutual benefit. The petitioner lent the Steel Company $31,000 in 1920 upon which no interest was charged.

We think that this unity of ownership and control coupled with the community of business interests which existed during the year 1920, entitled the petitioner and the Steel Company to the status of affiliated corporations in that year. See Detour Dock Co. et al., 22 B. T. A. 925.

2. Depletion. — The petitioner contends that the deduction allowed by the respondent for depletion of its coal lands in 1920 is inadequate; that the depletion allowance should be computed upon a March 1, 1913, value of $400 per acre, whereas the respondent in his- deficiency notice has determined a value of $300 per acre.

We are of the opinion that the evidence before us does not warrant any increase of the value as determined by the respondent. The extension of the Morgantown & Kingwood Railroad and the increase in demand for coal and coke; which the petitioner claims were factors in the increase in value of the coal lands, occurred prior to 1907, the year in which the petitioner acquired the property in an arm’s-length transaction for less than $120 an acre. In 1907 the petitioner sold 62 acres for $200 an acre and received an offer in that year of $200 an acre for an additional 200 acres. In 1912 the Elkins Coal Company offered to purchase 60 acres at $300 an acre. There was a further lump-sum offer of $650,000 for the entire property, but in this offer there was no segregation of coal lands from the plant equipment.

H. C. Greer, the petitioner’s president and principal stockholder, testified that in his opinion the coal lands had a value at March 1, 1913, of at least $400 an acre. He did not state any facts other than those discussed above in support of his valuation. Considering all of the evidence the petitioner’s contention for a value at March 1, 1913, in excess of $300 an acre as determined bj the respondent is not properly supported.

3. Expense deductions. — In 1920 the petitioner purchased and charged to expense account various items of mine and plant equipment at an aggregate cost of $36,968.18, which it claims as a deduction of that year. The cost of each separate item and the purpose for which it was used are set forth in the above findings. The petitioner contends that the items all served to maintain the normal production of coal and coke and did not increase production, decrease the cost of production, or add to the capital value of its property. We are satisfied from the 'evidence that the fan, pump, steel rails, bending machine, and mining machine come within the petitioner’s claim and that they are deductible as expenses of the year 1920 under the rule laid down by the courts in Marsh Fork Coal Co. v. Lucas, 42 Fed. (2d) 83; United States v. Roden Coal Co., 39 Fed. (2d) 425; Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777. See also West Virginia-Pittsburgh Coal Co., 24 B. T. A. 234.

The facts are different as to the two remaining items — the coke machine and the steam shovel. The coke machine was used exclusively in removing the coke from the ovens and the steam shovel was used in handling the finished coke after removal from the ovens. The conversion of coal into coke is not a mining process, but is a manufacturing process. The petitioner’s mining operations ceased when the coal was removed from the mine and delivered at its- coke plant. Since neither the coke machine nor the steam shovel was used in this process, they can not be classified as items of mine equipment and as such charged to expense account. They are clearly capital expenditures returnable to the petitioner through depreciation allowances.

4. Irwested capital. — The respondent has conceded that petitioner’s invested capital as computed in the 30-day letter was erroneously reduced by the amount of $15,386.43, representing the cost of surface lands.

5. Irwested capital. — The petitioner contends that its invested capital should be further adjusted on account of the items of $7,542.32, representing the cost of additional coal lands acquired in 1910 and 1912, and $15,000, representing an erroneous credit to coal lands account in order to set up a royalty reserve.

The computation appearing in respondent’s . 30-day letter shows a cost of coal lands at acquisition of $163,007.25, with an addition of $12,939.75, making a total cost of $175,947, which is the amount shown in the deficiency notice. We do not know what the $12,939.75 adjustment represents. The petitioner’s witness, H. C. Greer, testified that the petitioner paid approximately $175,000 for the original 1,500-acre tract purchased in 1907. The evidence further shows that the petitioner in 1907 sold 62 acres of its coal lands for $12,400 and in 1910 and 1912 purchased additional acreage for $7,542.32. We can not tell from the information at hand whether or not these transactions were taken into account by the respondent in his determination of the cost of the coal lands. It is not shown either that the book entries with respect to the item of $15,000, which the evidence shows was erroneously credited to coal lands account and charged to depletion reserve in 1913, in any way affects the cost of the coal lands to the petitioner, or that the respondent has not made whatever adjustment was necessary on account thereof in his determination of the cost. In these circumstances we will not disturb the Commissioner’s determination that the cost of petitioner’s coal lands for invested capital purposes was $175,947.

6. Invested capital. — The petitioner offers as an alternative contention, in the event that the deduction of the amount of $36,968.18 representing the cost of the items of equipment purchased in 1920 is denied, that its invested capital should be increased by the amount of $52,401.15, representing the cost of certain items purchased and charged to expense account during the years 1910 to 1914, inclusive. In view of our partial disallowance of the deduction claimed in issue 3, we will assume that the petitioner urges its alternative contention.

A list of the items in question showing the date of purchase and the cost of each appears in our findings above, the aggregate amount thereof being $57,149.37 instead of $52,401.15, the amount claimed in the petitioner’s original and amended petitions. The evidence before us contains no further information about any of the items. We do not know for what specific purposes they were used, or whether in the process of mining coal or the process of manufacturing coke. Some of the large items such as mine rails, mine cars, and mine openings appear to be similar to those items purchased in 1920 which we have held were correctly charged to the expense account of that year. It is possible that the facts pertaining to the character of the other items of equipment and the purposes for which they were used would warrant the restoration of some of them to capital account of the prior years, but this information is not before us. The petitioner’s contention is therefore denied.

7. Depreciation. — The petitioner offers a further alternative contention, in the case of an adverse decision in issue three, that it is entitled to the deduction in 1920 of a reasonable allowance for exhaustion, wear and tear of the equipment purchased in the prior years 1910 to 1914, inclusive, referred to above in issue 6. This contention is likewise denied. All of the items in question were charged to expense account of the prior years in conformity with the petitioner’s method of keeping its books and accounts. The evidence before us does not show that any of the items represented capital expenditures or that any adjustment of the petitioner’s 1920 tax liability should be made on account thereof.

8. Special assessment. — The petitioner contends that, because of abnormalities affecting its capital and income, its profits tax for 1920 should be determined in accordance with the provisions of section 328 of the Revenue Act of 1918. The abnormal conditions claimed by the petitioner are that a substantial part of the value of its coal lands was excluded from its statutory invested capital; that the savings of $200 an oven on the construction of 194 coke ovens resulted in a value ascribable to these assets greatly in excess of the value at which they were carried on its books and included in its invested capital; and that the use in 1920 of the labor and equipment from the lime plant of the Steel Company for a period of five months without any offsetting expense created an abnormality affecting its income for that year.

The petitioner’s claim for the right to special assessment rests principally upon the grounds that the appreciated value of its coal lands, or the excess of their 1920 value over their cost, is not reflected in its invested capital. The petitioner contends that the coal lands had a value in 1920 in excess of $1,000,000.

The statute makes no provision for the inclusion in invested capital of the appreciated value of assets used in a business, but it purposely limits invested capital to the capital actually embarked in the enterprise (section 326 of the 1918 Act). La Belle Iron Works v. United States, 256 U. S. 377.

There is no evidence before us that the increase in the value of the petitioner’s coal lands was in itself abnormal or that it gave rise to any abnormalities affecting either capital or income. We have held in numerous cases that the mere statutory exclusion from invested capital of the value of assets used in a business does not entitle a taxpayer to relief under the provisions of section 328. See Morris & Co., 1 B. T. A. 704, and subsequent cases. While the statute does not specifically exclude the appreciated value of tangible property, it purposely makes no provision for its inclusion in invested capital. La Belle Iron Works v. United States, supra. In most of the cases where we have allowed special assessment on account of the exclusion from invested capital of the value of assets, the assets in question were in the nature of patents, secret processes, or valuable contracts upon which the life of the business depended and which were the chief source of income. Bates-Bowman Corporation, 20 B. T. A. 460; Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; J. M. and M. S. Browning Co., 6 B. T. A. 914.

The petitioner relies upon Roslyn Fuel Co., 16 B. T. A. 285. The facts in that case are strikingly similar to the facts in the instant case, the alleged abnormality in both instances being the result of the exclusion from invested capital of the appreciated value over cost of coal lands. Upon a careful consideration of that case we are convinced that it is wrong in principle in so far as it recognizes as an abnormality, affording grounds for special assessment, the exclusion from invested capital of the appreciated value of assets used in the business. We find no other cases where the Board has adopted this view. Certainly we can not say in the instant case that such an abnormality existed when there is no evidence whatever that the same conditions did not obtain throughout the entire coal industry. See Higginbotham-Bailey-Logan, Co., 8 B. T. A. 566.

The evidence before us does not show to what extent the petitioner’s capital or income was affected by the labor and equipment furnished to it without cost by the Greer Steel Company for a period in 1920, nor does the evidence show the value of the coal and electric current which the petitioner furnished to the Steel Company without cost during this same period. The exchange may have been equally beneficial to both companies.

The fact that the petitioner was able to save $200 an oven in the construction of 194 of its coke ovens does not indicate such an abnormality as would entitle the petitioner to special assessment relief. The extent of the resulting undercapitalization claimed is not of great significance when compared with the petitioner’s total invested capital as determined by the respondent of approximately $500,000.

The petitioner is not entitled to have its profits tax computed under the provisions of section 328.

Reviewed by the Board.

Judgment will be entered under Rule SO.

MuedocK dissents.


text:
    W. T. Waggoner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ella Waggoner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33516, 33517.
    Promulgated November 5, 1931.

      Walter E. Barton, Esq., Raymond 0. Gushwa, Esq., and W. L. Olarh, O. P. A., for the petitioners.

      O. R. Marshall, Esq., for the respondent.
   OPINION.

Smith:

The petitioners are husband and wife, residents of the State of Texas. The appeals, involving identical issues, were consolidated for hearing. The petitioners filed separate income-tax returns on the community property basis for 1922. The respondent has determined a deficiency against each for that year in the amount of $67,959.67.

The only question for our determination is whether the oil and gas leases executed by the petitioners in 1922 operated as a conveyance to the lessees of a seven-eighths portion of the oil and gas in place so that the cash consideration received by the petitioners from the lessees in that year is taxable as capital gains under the provisions of section 206 of the Eevenue Act of 1921.

Prior to 1920 the petitioners acquired with community funds the fee simple title to certain real estate situate in Wichita and Wilbar-ger Counties, in the State of Texas. The properties were acquired and held for investment by the petitioners for a period of more than two years prior to 1922.

During 1922, the petitioners executed approximately 50 oil and gas leases on the real estate referred to. All of the leases were similar in form and were the ordinary type of oil and gas lease. The following are the material provisions of one of such leases:

Tliat for and in consideration of the sum of One Dollar, cash in hand paid the receipt of which is hereby acknowledged, and the further consideration of the sum of $2500.00, to be paid in oil produced from said premises,, said payment to be made not later than the tenth day of each month, for the preceding month, and not' less than one fourth of the oil so produced to be applied to this indebtedness, and the covenants and agreements hereinafter set out to be kept and performed by the lessee, have granted, demised, leased and let and by these presents does demise, lease and let unto the lessee, for the sole and only purpose of drilling and. mining for gas and oil, the following lands, in Wichita & Wilbarger County, Texas, to-wit:
*******
Subject to the terms and conditions herein this lease shall remain in full force and effect for a term of three years from date hereof, and as much longer as gas and oil are found and produced in paying quantities, provided however no one well shall hold more than ten acres, in a square form, said well being the center thereof.
In consideration of the premises, the lessee covenants and agrees:
To deliver to the lessor, free of charge, in the pipe line to which said lease may be connected, the equal one-eighth (⅛) part of all the oil and gas produced on said premises, settlement to be made not later than the tenth day of each month for the preceding month.
That the lessee will pay ⅞ of all increase in taxes, by virtue of gas and oil, or either, that may be assessed against said premises.

During 1922, the petitioners received $281,710 representing the consideration of “ One Dollar, cash in hand paid ” stipulated in the leases and a further amount of $19,151.06 representing “ further considerations ” which was paid out of the lessees’ seven-eighths of the oil and gas produced. No part of the total consideration of $300,861.06 received by the petitioners in 1922 was paid from the one-eighth of the oil and gas, which under the terms of the leases was to be delivered to the petitioners.

We have considered this question in similar form in numerous prior cases and have consistently held that, with reference to the applicable provisions of the Federal income-tax laws, leases such as the ones here under consideration are to be treated as ordinary oil and gas leases and not as sales of capital assets, notwithstanding that the leases may be recognized as conveyances or sales under the laws of the state having jurisdiction of the property. Nelson Land & Oil Co., 3 B. T. A. 315; Henry L. Berg, 6 B. T. A. 1287; affd., Berg v. Commissioner, 33 Fed. (2d) 641; John T. Burkett, 7 B. T. A. 560; affd., Burkett v. Commissioner, 31 Fed. (2d) 667; R. H. Hazlett, 10 B. T. A. 332; James R. Parkey, 16 B. T. A. 441; Henry Harmel, 19 B. T. A. 376 (on appeal to the Circuit Court of Appeals, Fifth Circuit); W. P. Ferguson, 20 B. T. A. 130; reversed by the Circuit Court of Appeals, Fifth Circuit, in Ferguson v. Commissioner, 45 Fed. (2d) 573. See also Hirschi v. United States, 67 Ct. Cls. 637. An exhaustive discussion of the question may be found in the cases referred to above.

The instant proceedings are not distinguishable from W. P. Ferguson, supra. On appeal, the Circuit Court of Appeals for the Fifth Circuit, in Ferguson v. Commissioner, supra, reversed the Board, holding that the question as to what title or interest passed under the leases must be determined with reference to the laws of the State of Texas and that under the laws of that state the transfers amounted to sales and the vesting in the transferees, of title to real property. The court further held that the proceeds of such sales are taxable as capital gains under the provisions of section 206 of the 1921 Act. Being of opinion that the decision of the Circuit Court is binding upon the Board in all cases falling within its jurisdiction we hold upon authority of Ferguson v. Commissioner, supra, that the cash consideration received by the petitioners in 1922 upon execution of the leases in question, amounting to $300,861.06, represents capital gains taxable to the petitioners under the provisions of section 206 of the Eevenue Act of 1921.

Judgment wild be entered under Rule 50.


author: Black: Tkammell, Goodeich,

text:
    Fred A. Hellebush and John G. Lippelman, Trustees for the Stockholders of the Blackburn Varnish Company (Dissolved), Petitioner, v. Commissioner of Internal Revenue, Respondent. Daisy O. Turner, Petitioner, v. Commissioner of Internal Revenue, Respondent. John G. Lippelman, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. N. Mitchell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fred A. Hellebush, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harry E. Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37032, 37823-37826, 37905.
    Promulgated November 5, 1931.

      Frank S. Bright, Esq., and J. D. Cloud, Esq., for the petitioners.

      M. J. CCormor, Esq., B. U. Steele, Esq., and E. L. üfdike, Esq., for the respondent.
   OPINION.

Black:

At the hearing a motion was made by respondent to dismiss proceeding Docket No. 37032 brought by Fred A. Hellebush and John G. Lippelman, designating themselves as trustees for the stockholders of the Blackburn Varnish Company, petitioners, on the ground that no deficiency had been determined against them as such trustees and that the Board was without jurisdiction.

The deficiency notice from which Fred A. Hellebush and John G. Lippelman appeal in Docket No. 37032 was not addressed to them as trustees, but was addressed to the Blackburn Varnish Company, in its corporate capacity. Their petition is captioned, “Appeal of Fred A. Hellebush and John G. Lippelman, Trustees for the stockholders of the Blackburn Varnish Co. (dissolved).” In their averment in the petition, seeking to show jurisdiction of the Board, petitioners say: “ The petitioners are trustees for the stockholders of the Blackburn Varnish Company which was an Ohio corporation with its principal offices at Cincinnati, Ohio, and which was dissolved in June 1927.” The deficiency notice was mailed to Blackburn Varnish Company on February 6, 1928, and the petition in Docket No. 37032 was filed with this Board April 5, 1928. The stockholders of a dissolved corporation can only be held liable for the tax of such corporation by reason of being transferees of its assets. Other dockets in this proceeding involve the liability of these stockholders, as transferees, but Docket No. 37032 has nothing to do with the question of transferees. Docket No. 87032 should, accordingly, be dismissed for lack of jurisdiction, and an order will be entered to that effect. Coca-Cola Bottling Co., 22 B. T. A. 686.

The Commissioner, in his deficiency letter to the corporation Blackburn Varnish Company, disallowed $5,000 of a deduction for legal fees which the corporation had taken on its return filed for the period January 1, 1927, to April 19, 1927. Petitioners admit that this action of the respondent was correct. Therefore, so much of the deficiency as results from respondent’s disallowance of this item of $5,000 is no longer in controversy and petitioners admit their liability therefor, as transferees.

The remaining question for us to decide is whether the transactions by which all the assets of the Blackburn Varnish Company, except only cash and accounts and bills receivable, were conveyed to the Cook Paint and Varnish Company, amounted to a sale by the corporation of its assets and therefore the gain therefrom should be taxed to it, or whether the transactions amounted to a distribution in kind by the corporation to its stockholders, resulting in no taxable gain to the corporation.

Respondent in the deficiency notice mailed to Blackburn Varnish Company, cites in support of his action article 548 of Regulations 69, which reads:

Art. 548. Gross income of corporation in liquidation. — When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. (See section 282 and articles 1293 and 1294.) Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind upon dissolution, however they may have appreciated or depreciated in value since their acquisition. (See further articles 622 and 1545.)

Article 547, Regulations 45 (Revenue Act of 1918), is identical with the above quoted regulation and was approved by the court as a reasonable regulation and one which should be given effect, in Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; certiorari denied, 283 U. S. 862; affirming the Board’s decision in Taylor Oil & Gas Co., 15 B. T. A. 609. Articles 548 of Regulations 62 (Revenue Act of 1921) and Regulations 65 (Revenue Act of 1924) are also identical with article 548 of Regulations 69. It seems to us that the facts in the instant case are so similar to the facts in Taylor Oil & Gas Co., supra, that we are controlled by .the decision of the Board and the court in that case. There, as here, the petitioners contended that by appropriate proceedings the legal title to all the corporation’s property had vested in trustees for the benefit of the creditors and the stockholders of the corporation, and that thereafter when these trustees conveyed the property to the buyer upon payment of the consideration which had been agreed upon, the transaction was a sale by the stockholders and not the corporation and that no taxable gain resulted therefrom to the corporation. The court, in passing upon this contention, said:

* * * Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation and the assessment of the taxes based thereon was valid.
We concur in the disposition of the case made by the Board of Tax Appeals.

A trustee derives his authority from the creator of his trust. This is as true of a trustee in liquidation appointed by the corporation as of any other trustee.

The petitioners in this proceeding admit that their authority as trustees was by reason of a corporate resolution adopted at a corporate meeting of the stockholders held on April 20, 1927. This resolution must have been a corporate act to effect a legal transfer of the corporate property to the trustees and this establishes the fact that the corporation was the creator of the trust. The action taken at the stockholders’ meeting April 20, 1927, appointing Hellebush and Lip-pelman as trustees and conveying to them the corporate property, was a corporate action, and being the act of the corporation, the trustees would necessarily be responsible to and acting for the creator of the trust, even though the stockholders were beneficially interested in the property. The trust was closed when the property was sold, the debts owing the corporation were collected, the debts of the corporation paid, and the money distributed to the stockholders. It was then that the stockholders came into the possession of the proceeds of the property. It is true, of course, that if a corporation really makes distribution of its property in kind to its stockholders, no gain or loss therefrom results to the corporation. If, thereafter, the stockholders sell the property which they have received as a distribution in kind, any gain or loss resulting from such sale would be taxable to them and not to the corporation. But that, in our judgment, is not the situation which we have before us in this proceeding. On the authority of Taylor Oil & Gas Co. v. Commissioner, supra, we affirm the action of the Commissioner on this issue. Cf. Southern Ice & Fuel Co., 10 B. T. A. 1213; James Duggan, 18 B. T. A. 608; George M. Brady, 22 B. T. A. 596.

We are aware that the decision we have reached in this proceeding appears to be in conflict with our decision in Lexington Ice & Coal Co., 23 B. T. A. 463. We think onr decision in that case was wrong and should not be followed in the future.

Reviewed by the Board.

In Docket No. §7032 an order of dismissal will be entered for lack of jurisdiction. In Docket Nos. 37823, 37824, 37825, 37826, and 37905, decision will be entered for the respondent.

Tkammell,

dissenting: On the facts, I am unable to agree.

Goodeich,

dissenting: It must be recognized that there are legal and proper means by which the accrual of a tax liability upon the disposition of its assets by a corporation may be avoided. Attempts to adopt such devices must be adjudged strictly upon the facts in each case. I think the facts in this case disclose that petitioners successfully availed themselves of such a method and that, therefore, Taylor Oil & Gas Co., supra, need not control our decision here. And because of a divergence of the facts in the Taylor case, the case of Lexington Ice & Coal Co., supra, and the case at bar, it is my opinion that the Lexington case is not in conflict with these other cases, and need not be overruled.

Seawell agrees with this dissent.


author: Aeundell : Seawell, Love:

text:
    William Huggett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45831.
    Promulgated November 6, 1931.

      James G. Peacock, Esq., for the petitioner.

      Eldon McFarland, Esq., Artlvwr Glark, Esq., and W. H. Trigg, Esq., for the respondent.
   OPINION.

Aeundell :

Muriel D. Huggett, wife of the petitioner, was named as a remainderman in the will of her grandmother, who died in 1912, subject to a life estate in Mrs. Huggett’s mother. On the termination of the life estate in 1924, securities forming a part of the original estate were distributed to Mrs. Huggett as remainderman in accordance with the will. These same securities (disregarding change in form following reorganization) were sold by Mrs. Huggett in 1925 and 1926 for more than their March 1, 1913, value and more than their value at the time of distribution in 1924. Petitioner concedes that, for the purposes of this case, the conversion of the original stock into new preferred and common stock may be disregarded.

Section 204 of the Revenue Act of 1926 provides that the basis for determining gain or loss on the sale of property acquired by bequest, devise, or inheritance shall be the fair market value at the time of acquisition, or, if acquired before March 1, 1913, the value at acquisition or March 1, 1913, value, whichever is greater.

Petitioner claims that the date of acquisition is the date of termination of the life estate when the remainder ripened into a fee, at which time, as stipulated, the stock subsequently sold was worth $1,065.59 per share. Bespondent originally held that the basic value was the March 1, 1918, value of the stock, namely, $465.90 per share. By amended answer respondent now claims that the proper basis is the March 1, 1913, value of Mrs. Huggett’s vested remainder, which, translated into stock value, amounts to $195.45 per share.

The facts in this proceeding are on all fours with those in Rodman E. Griscom, 22 B. T. A. 979. In that case we held as set forth in the syllabus that:

The basis to be employed in determining gain or loss on the sales was the fair market value of the shares on March 1, 1913.

Petitioner in the present case asks that we reconsider our holdings in the Grisoom case, one of the grounds being that Brewster v. Gage, 280 U. S. 327, which we relied on as a precedent, is inapplicable, because in the Brewster case there was no intervening life estate.

The parties are agreed that upon the death of the testatrix Mrs. Huggett acquired a vested remainder. This seems to be in accordance with the law of Pennsylvania. In re Bache’s Estate, 246 Pa. 276; 92 Atl. 304; In re Walker’s Estate, 277 Pa. 444; 121 Atl. 318; Houston’s Estate, 276 Pa. 330. Mrs. Huggett’s title therefore relates back to the date of death of the testatrix. This principle of law, applicable alike to this case and the Brewster case, was a major premise in the decision of the latter. While it is pointed out that there is a difference between the passing of real estate and personalty, the conclusion is reached that despite the difference “the legal title ” to the personalty “ relates back to the date of death ” as in the case of real estate. It is then pointed out that in the case of real estate and specific bequests of personal property undoubtedly the basis * * * is its value at the time of decedent’s death.” Upon these premises the court holds that the same basis should apply alike to real estate, specific bequests of personal property and other property. The same analogy may be made in the present case with the same result. The fact of an intervening life estate does not destroy or even change the source of the remainder-man’s title. The doctrine of relation back holds good whether or not there is an intervening estate. Coolidge v. Long, 282 U. S. 582, involved trust deeds under which income from the trust property was reserved to the settlors for life, and upon the death of the survivor of the settlors the principal was to be divided among their sons. On the death of the survivor the State attempted to impose a succession tax under a statute enacted after the execution of the trust deeds. The Supreme Court held that the gift to the sons was completed by the trust deeds prior to the enactment of the taxing statute, saying in part:

By the deed of each grantor one-fifth of the remainder was immediately vested in each of the sons subject to be divested only by his death before the death of the survivor of the settlors. It was a gift in praesenti to be possessed and enjoyed by the sons upon the death of such survivor. * * * The provision for the payment of income to the settlors during their lives did not operate to postpone the vesting in the sons of the right of possession or enjoyment.
*******
The rights of the remaindermen, including possession and enjoyment upon the termination of the trusts, were derived solely from the deeds. The situation would have been precisely the same if the possibility of divestment had been made to depend upon the death of a third person instead of upon the death of the survivor of the settlors.
*******
The fact that each son was liable to be divested of the remainder by his own death before that of the survivor of the grantors does not render the succession incomplete. The vesting of actual possession and enjoyment depended upon an event which must inevitably happen by the efflux of time, and nothing but his failure to survive the settlors could prevent it. * * * Succession is effected as completely by a transfer of a life estate to one and remainder to another as by a transfer in fee.

Another objection made by petitioner to following Brewster v. Gage, is that inequalities in taxation may result where, for example, blocks of stock having widely different values at the date of testator’s death are of equal value at the time the remaindermen come into possession. We find, upon examination of the taxpayer’s brief filed in the Supreme Court in Brewster v. Gage, that much the same argument was presented there. It was apparently thought by the court that the suggested inequalities were not a sufficient reason for disturbing the basis long used by the Commissioner.

It was also argued by petitioner that in cases of this kind there has been no long established ruling of the Commissioner’s office. We find, however, that in Solicitor’s Opinion 35 (C. B. 3, p. 50) the rule is laid down with respect to real estate that the basis is the fair market value of the rights of the remaindermen at the time they vested, or March 1, 1913, value, if they vested prior thereto. That ruling was promulgated in 1920 and as far as we know it has been the rule of the Commissioner’s office all during the intervening eleven years. While that ruling purported to apply only to real estate, it has not been brought to our attention that any contrary ruling prevailed with respect to personalty. Since the promulgation of I. T. 1622 (C. B. II-1, p. 135) in 1923 the same ruling as in Sol. Op. 35 has been applied to personal property.

We accordingly hold, as in the Griscom case, that March 1, 1913, is the basic date.

The respondent contends that we erred in the Griscom case in holding that the basic value is that of the stock rather than the remainderman’s interest in the property. The petitioner claims that what was sold was stock, hence the stock itself must be valued. Bespondent’s argument is that it was an interest in property that was acquired by will and an interest in property that was sold and that, therefore, it is the interest that must be valued and used as a basis.

It is, of course, well established that a remainderman under a will has the right to any increment in value that may inure to the corpus during the existence of the life estate. Gibbons v. Mahon, 136 U. S. 549. Such increment when realized is subject to tax as income. Had the trustee sold at a profit the gain realized would be subject to tax in his hands. And there is nothing in the revenue act that exempts a gain merely because its realization is postponed from the trustee to the remainderman. Only the gift itself is exempt (sec. 213 (b) (3), Bevenue Act of 1926), and this is the property acquired at the death of the testator. It is, we think, also evident that the sale of a remainder interest for more than its value at testator’s death would give rise to gain taxable to the remainderman. Suppose that, in the case of a tenancy for years with remainder over, the remainderman sells on the last day of the intervening estate when his remainder is worth as much as the fee. In such case there would be a taxable gain of the difference between the value of the remainder at the testator’s death and the selling price. But if, in such a case, he sold on the following day, when his remainder had ripened into a fee, under petitioner’s theory there would be no taxable gain because the property was not “ acquired ” by the remain-derman until the termination of the preceding estate. Plainly such an incongruous result can not be the intent of the revenue act. In the opinion of the Circuit Court of Appeals in Brewster v. Gage, 30 Fed. (2d) 605, it is said:

It surely was not the intent of Congress that the acquisition of a mere legal title should completely wipe out and render untaxable the gain which had been acquired by the equitable ownership, and which was, in fact, realized upon the sale made when the date of distribution arrived.

As above pointed out and as held in the Griscom and Brewster cases, the time of acquisition within the meaning of the taxing act is the date- of the testator’s death. A property right was then acquired by the remainderman which was as perfect at that time as at the termination of the life tenancy. Nichols v. Levy, 5 Wall. 433. When the sales were made in the taxable years the remainderman thereby parted with the identical rights vested in her by the will of the testatrix. Nowhere along the line was there any conversion of property rights which permits of a revaluation or new basis for gain or loss purposes.

Section 204 of tbe 1926 Act provides throughout that in determining gain or loss on-the sale of property the basis shall be the cost or fair market value of such property. Upon this is predicated the argument that the thing sold in the taxable year was not the same thing acquired by bequest in 1912. But the same objection could be made in a case where the taxpayer purchased the remainder interest and sold the property after the life estate fell in. In such a case cost would clearly be the basis. The only cost that could be used is the cost of the remainder. We would' not say that that cost should be increased by reason of the change wrought by the efflux of time, namely, the conversion of the remainder into a fee.

We think there is no merit to the claim that the rule announced herein is a harsh rule merely because the tax is higher than under the method advocated by petitioner. In another case the property might be sold at a loss and the same rule would work in the taxpayer’s favor.

Neither do we think it proper to test the soundness of the rule by saying that the effect of postponing the vesting in possession is to increase the tax. It so happens in this case that the tax is increased by reason of the continued rise in the value of the property. On the other hand, had the property consisted of wasting assets, for example, mines or patents, the value would have diminished, and the taxes consequently decreased with .each year that the remainder-man was kept out of possession. .

As we construe the stipulated facts, the parties have agreed that the fair market value of the remainder interest adjusted to a per share value of the stock was $195.45 on March 1, 1913. We may assume that in reaching this agreed figure the parties have started with an accepted value for the stock of $465.90 on March 1, 1913, and have determined the value of the remainder interest by reducing the fair market value of the stock to the extent of the life tenant’s interest, based on a life expectancy of 22.36 years. This method of determining value by the use of mortality tables has been sanctioned in Simpson v. United States, 252 U. S. 547, and Ithaca Trust Co. v. United States, 279 U. S. 151. In the latter case the court points out that as the gifts to the remaindermen “ were subject to the life estate of the widow, of course their value was diminshed by -the postponement that would last while the widow lived.” It has been suggested that in reaching our conclusion two dates of acquisition were used, namely, March 1, 1913, and the date of death of the life tenant, and that the value on both occasions entered into the computation. We think there is-no merit in this criticism. The effective date was March 1, 1913, and only the factors present as of that date were used.

Viewing the case in this way, we now think that we erred in the Griscom case in taking as the basic value the value of the stock itself, and that the correct value is the value of the taxpayer’s interest therein at the basic date, which in this case is stipulated to be $195.45 per share.

Eeviewed by the Board.

Decision will be entered under Bule 50.

Matthews dissents.

Smith dissents on the second point.

Seawell,

dissenting: In the Rodman E. Griscom case (22 B. T. A. 979) it was held that the basis for determining gain or loss on the sales of property made by a remainderman who had received such property upon the death of the life tenant was the fair market value of the property on March 1, 1913, the ancestor having died prior to that date. By the majority opinion in this case, which overrules the Griscom case and is upon comparable facts, it is held that the basis is not the value of the property on March 1, 1913, but the present worth on that date of the property which was to be received by the remainderman at the time of the death of the life tenant.

I dissented in the Griscom case for reasons there set down. The objections urged to the conclusions there reached appear to me to be applicable here. In addition to what was there said, I feel constrained to say here that the present decision seems further from the correct solution of the problem presented than the decision in the Griscom case. The present worth on March 1, 1913, of property which was to be received on May 15, 1924, is, of course, less than the value of that property on March 1, 1913. The smaller the basis on March 1, 1913, the larger the gain and, accordingly, the larger the tax when the sale is made (sometime after May 15, 1924). By putting into effect here the doctrine of the present worth of property to be received at a subsequent date, the taxes of the remainderman are increased far beyond what they would have been if the property had been bequeathed directly to her without the intervention of any life estate. Upon what theory of law or logic can one be taxed for having the possession of her legacies delayed and withheld from her for 10 or 12 years? The error in this determination lies in the failure to recognize the fact that what this taxpayer sold in 1925 and 1926 contained something (the fee simple) which she did not have in 1913; or in the effort to circumvent that fact by the application of a rule of law, good in settling estates, but incongruous and grotesque in a matter like that involved here, producing exactly the reverse of what is or should be intended. Congress, it must be assumed, never intended such a result, and the logic that would lead to it must be operating in reverse and under some rule of anticlimax.

Moreover, the statute fixes the time of acquisition of the property as the time when the fair market value of the property is to be ascertained. The main opinion seems to hold that the acquisition of the property in this case was not made on one date, but on two dates, namely: (1) on (or prior to) March 1, 1913, and (2) on May 15, 1924, when the life tenant died; else why are these two dates used in arriving at the “ present worth ” value of the property bequeathed? One date or the other is the date of acquisition, not both. On (or prior to) March 1, 1913, an inchoate title (which in time would ripen into full title and permit acquisition of the property) was made; and on May 15, 1924, at the death of the life tenant, that inchoate title ripened into full title and then the property was permitted by it for the first time to be acquired by the taxpayer.

But if the acquisition was made on the one or the other date, or, if possible, as the main opinion suggests, on both dates combined, nowhere does the statute authorize the “ fair market value of the property ” to be reduced by the application of the principle of the “ present worth ” value of future acquisition. If the “ present worth ” doctrine applies, then the “ property ” (as distinguished from the inchoate title) had not then been acquired. When the “ property ” has been acquired, then the doctrine can have no application, for it is the “ fair market value of the property ” at the time of its acquisition that the statute makes the basis for determining gain or loss.

Trammell dissents for reasons substantially as set forth above.

Love:

I agree with the foregoing written dissent and desire to supplement the same in as brief a statement of my theory as I am able to express in words.

In my judgment the error in the prevailing opinion in this case is brought about by confusion of terms.

In dealing with property rights, there are at least three terms that must be dealt with, viz., property, estate, title.

Property is the subject matter dealt with; it may consist of realty, personalty, choses in action, or what is known as intangibles.

Estate is the quantum of interest owned or held in the property. The estate may be fee simple, life estate, or for a term of years; it may be a freehold or less than freehold.

Title is the kind or nature of the claim which the claimant asserts to the estate; it may be a legal title, an equitable title, or merely a record title; it may be a perfect title, or a defective title.

To illustrate: Suppose that A owned some property, and held a fee simple title thereto; then suppose that A transferred either by deed or by will, that property to B to be held by B during B’s life, and further stipulated that upon B’s death the property should go to and be held by C in fee simple-.

Pretermitting some differences in procedure when the transfer is made by deed and when made by will, B acquires that property, which is the subject matter of the estate, and to which the title applies, immediately. B gets a- life estate and C gets a fee simple estate. Both B and C get a legal title, both of which originate in the same instrument, and both are of the same date. C, however, does not acquire the property, which is the subject matter of the several estates and to which the title applies, until B’s life estate falls in. Such fall-in may occur by reason of the death of B, or by the purchase by C from B, at which time he acquires the property and holds under the title which he got from A. .To, hold that the acquisition of the title to the fee simple estate is acquisition of the property is, in my judgment, carrying the accrual idea or theory to an irrational extent.

The applicable statute involved in the instant case is section 204 (a) (5) of the Revenue Act of 1924, which stipulates the basic date as the time of the acquisition of the property. Section 204 deals with the disposition of property by sale or otherwise, and points out and provides for thirteen separate and distinct methods of transfer of property, in several of which a property interest as distinguished from property, eo nomine, is recognized.

I assume, and feel that I must assume, that Congress knew the difference and distinction between the acquisition of title to property, and the acquisition of the property itself. In the instant case, the remainderman did not acquire the property (although she did acquire a “ property interest ”) until twelve years after she acquired title to that property.

The facts disclosed by the record are that petitioner’s wife’s grandmother bequeathed to her a fee simple title to certain property, and a life estate to another.

As I view the situation, Mrs. Huggett did not acquire the property which was the subject matter of the estate which she held, and to which her title applied, until after the life estate fell in. It may be true that by the will she acquired certain property, or property interest, if in this connection we may term the holding of an interest or a claim to property, as property, but, as before said, in dealing with property rights we must differentiate between property, estate, and title — and what she got by the will of her grandmother was the title to a certain estate, and she did not acquire the property which she, a number of years afterwards, sold, until after the intervening estate fell in, and that estate did not fall in -until twelve years after the grandmother’s death, and nearly twelve years after the basic date as determined in the prevailing opinion. The statute designates the basic date as the date of acquisition of the ‘property.

I am not seriously concerned about the incongruities wrought as a result of the prevailing opinion. My concern is to determine what the statute means. Congress had the constitutional right to prescribe, as the basic date, the date of acquisition of the title if it so desired, regardless of such incongruities. If Congress intended to do that, it could easily and explicitly have said so. It did not so prescribe, but explicitly prescribed the basic date as the date of the acquisition of the property, and I must assume that Congress understood the legal purport of its own language, and meant what it said.


author: Lansdon :

text:
    Carnie-Goudie Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 20074, 27095.
    Promulgated November 6, 1931.

      Phil D. Moreloeh, Esg., for the petitioner.

      L. A. Luee, Esg., for the respondent.
   OPINION.

Lansdon :

Having previously decided issues one, two and three of this proceeding as originally filed, and the motion for vacation and rehearing applying only to issue four, tax liability as to the first three issues will be recomputed in conformity with our report promulgated on January 21, 1930.

The petitioner contends that the retail store was a mere branch or department of its operations and that its own tax liability can be determined only by combining the accounts of the main store with the alleged outlet establishment. Apparently the respondent relies on the presumption that by their acts and representations to the public the three Goudie Brothers became partners by operation of law, and that the partnership so created operated the store at 804-806 Walnut Street. This position is not well supported by the established rules of partnership law.

A partnership between or among two or more individuals is a contractual relation, thus defined by Justice Story:

A voluntary contract between two or more competent persons to place tbeir money, effects, labo* and skill or some or all of them in lawful commerce or business with the understanding that there shall he a communion of the profits thereof between them.

Chancellor Kent sets out an almost identical definition, but adds that the contract should provide for sharing losses as well as profits. Every definition of a partnership and all decisions in respect thereof are predicated upon these principles and based upon an implied or expressed agreement of the parties.

It is now generally held that a partnership can not be formed solely by operation of law. Alger Melton, 7 B. T. A. 717. In Citizens National Bank of Chickasaw, 24 Okla. 408; 103 Pac. 720, the Supreme Court of Oklahoma said:

A partnership exists as a result of a voluntary contract between the parties, and never solely by operation of law. Causler v. Wharton, 62 Ala. 358; Cowles v. Garrett, 30 Ala. 341; Haycock v. Williams, 54 Ark. 384, 16 S. W. 3; Einstein v. Gourdin, 4 Woods, 415, 8 Fed. Cas. No. 4, 320; 22 Am. & Eng. Ency. of Law (2d Ed) p. 14, foot note 3. It is a relation arising out of a contract to do certain things, and exists 'only where the parties intend to enter into a contract of partnership, and, unless they have estopped themselves by holding themselves out to the world as partners, their intention as derived from the contract is decisive of the question.

To the same effect is the opinion of the Board in Roe Stephens Manufacturing Co., 12 B. T. A. 1254, in which we say:

Viewing the facts in the record in their most favorable light, we are of the opinion that they fall far short of establishing the existence of a partnership during the taxable years. * * It is one of the chief characteristics of the partnership relation that it is created only 6y the voluntary contract of the parties, and that as between the parties it does not arise in any case by operation of law. Persons can not become partners except by agreement, expressed or implied. Unable, as we are, to find that there was an express agreement, and that facts of record not evidencing an implied agreement, we can not find error in the respondent’s action in taxing the petitioner as a corporation during the taxable years in question. [Italics supplied.]

The evidence is clear that in 1920, prior to the taxable years, this petitioner represented that the retail store in question was a partnership. Its operations were accounted for in part, at least, in a separate set of books. The earnings for the first short fiscal period were reported to the respondent on a partnership return and the small profits were distributed on the books to the several alleged partners. An insurance policy was written for the store as a partnership, and a suit to recover losses from underwriters was instituted and won upon pleadings and proceedings in which it was so designated. These facts, all admitted by the petitioner, are the basis of the respondent’s determination that the retail store was not operated by the petitioner. In general, a partner must contribute capital or services, one or both, to the partnership business and agree to share in losses as well as profits, Meehan v. Valentine, 145 U. S. 711; Ward v. Thompson, 22 How. 330; Evans v. Warner, 47 N. Y. S. 16. The record is clear that neither of the Goudies ever contributed a dollar of capital to the retail store, nor, except as a stockholder of the petitioner, shared in any of the losses.

All of the merchandise offered for sale at 804-806 Walnut Street was either purchased by the petitioner or transferred directly from its own warehouses. There is no record of any accounting, payment or transfer that vested title in all or any one of the Goudie brothers to the merchandise sold through the retail store, which, in our opinion, was, at all times, the property of the petitioner. Goods were freely and often transferred and retransferred from one place of business to another. Such tranfers had no more effect on title than results from moving merchandise from one shelf to another in the same building. There is no evidence that the petitioner ever divested itself either of title to the merchandise sold through Goudie Brothers or of its rights to receive the profit from such sales. Upon this record we conclude that the retail store was operated by the petitioner, which leased the business premises, paid the rent therefor, furnished all the operating capital, supplied the stock in trade, and paid all the expenses and absorbed all the losses. It is clear that any income derived from profits so realized would be taxable to the petitioner and we think any losses resulting from such transactions are its losses. See George M. Cohan, 11 B. T. A. 743. In our opinion the retail store was a mere branch of the petitioner’s business operation.

The respondent put the petitioner’s articles of incorporation in evidence and, on the basis of the paragraph thereof set out above, argues that the operation of a retail store was ultra vires. Careful study of the cited section of the articles of incorporation fails to support this view. In our opinion the purposes therein enumerated are sufficiently broad to include the operation of a retail store.

In the light of all the evidence and of the law as interpreted by the courts and this Board, we are of the opinion that the true tax liability of the petitioner for the years under review can be determined only on the basis of the consolidated accounts of the main and branch stores which it operated. The gains or losses of the business at 804-806 Walnut Street were the gains or losses of this petitioner. It follows, therefore, that the respondent erroneously added the amounts of $68,310.38, $43,638.17 and $10,088.08 to the petitioner’s income for the respective taxable years. Our opinion on this issue promulgated January 21,1930, is reversed.

Decision will loe entered under Bule 50.


author: Smith :

text:
    Small’s, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent. Abelson Realty Company, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent. Abelson’s, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53791, 53792, 53793.
    Promulgated November 9, 1931.

      A. E. James, Esq., for the petitioners.

      F. B. Sehlosser, Esq., for the respondent.
   opinion.

Smith :

The respondent has asserted deficiencies in the petitioners’ income tax for 1928 in the following amounts:

.Abelson’s; Incorporated (New Jersey)___$373.45
Abelson Realty Company, Incorporated_ 48.02
Small’s, Incorporated (Obio)- 83.25

The several proceedings, involving a single common issue, were consolidated. The material facts as alleged in the amended petition filed in Abelson’s, Incorporated (New Jersey), Docket No. 53793, are admitted by the respondent.

For thé taxable year 1928, the petitioners, together with Abelson’s, Incorporated (New York), Small’s, Incorporated (New York), and Bernz, Incorporated (Wisconsin), filed a consolidated return, being afliliated corporations within the purview of section 142 of the Revenue Act of 1928, upon which the respondent computed a net income of $11,840.53. The affiliated companies were assessed and duly paid a tax of $473.15, apportioned among them according to their respective net incomes. All of these corporations, except Abelson’s, Incorporated (New Jersey), and Small’s, Incorporated (Ohio), which were organized December 31, 1927, were affiliated in 1927 and filed a consolidated return for that year, upon which the respondent computed a net loss of $4,623.36.

The net income or loss of each of the several corporations for 1927 and 1928 was as follows:

In his determination of the deficiencies herein the respondent has allowed, as a deduction from the net income of the Abelson Realty Company for 1928, the amount of $691.63 representing that company’s pro rata share of the total net loss sustained by the affiliated group in 1927. He did not allow any deduction for the net losses sustained by Small’s, Inc. (New York), and Bernz, Inc. (Wisconsin), since those companies sustained net losses again in 1928.

The only assignment of error appearing in the amended petition filed in Abelson’s, Inc. (New Jersey), the parent company, the petition upon which the parties have agreed to submit these proceedings, is that “ the Commissioner has denied to petitioner and its affiliated companies the deduction of net losses sustained in the year 1927 in the amounts hereinafter set forth.”

A further assignment of error relating to the respondent’s denial to the Abelson Realty Company of a deduction for an allowance for exhaustion appears in the original petitions filed by each of the petitioners, but the allegation of error being denied by the respondent in his answers and no evidence in support thereof being adduced, the issue will be considered abandoned.

The net losses for 1927 and 1928, as shown above, represent the excess of the deductions allowed over the gross income. The companies did not receive any dividends or interest free from tax. All of the income received by the companies was derived from the operation of the trade or business regularly carried on by them. No deductions for depletion were made in the computations.

The question of whether the losses sustained in the prior year by the companies having no income in the succeeding year may be carried forward has been decided adversely to the respondent’s contention in numerous cases. See Moore Cotton Mills Co., 17 B. T. A. 662; affd., Commissioner v. Moore Gotton Mills Co., 49 Fed. (2d) 59; Alabama By-Products Corporation, 18 B. T. A. 919; Ben Ginsberg Co., 19 B. T. A. 81; Buckie Printers’ Ink Co., 19 B. T. A. 943; Pittsburgh, Gasoline Co., 21 B. T. A. 297; General Box Corporation, 22 B. T. A. 725; Arrow Coal & Ice Co., 22 B. T. A. 1341. See also National Slag Co. v. Commissioner, 47 Fed. (2d) 846, where the Circuit Court of Appeals for the Third Circuit reversed the Board in an earlier case already overruled in Alabama By-Products Corporation, supra; and Hoffman v. United States, 52 Fed. (2d) 269.

It is to be noted that a seemingly contrary position has been taken by some of the courts. In Planters Oil Co. v. Hopkins, 47 Fed. (2d) 659, it was held by the United States District Court for the Northern District of Texas that the - prior losses are limited “ to the use and benefit of the taxable unit [that is, the individual unit rather than the affiliated unit] which actually made such losses, if and when there is no excess of a net loss over a net income for the subsequent year.” See also Woolford Realty Co. v. Rose, 44 Fed. (2d) 856, in the United States District Court for the Northern District of Georgia.

We are of the opinion, however, that the rule to which the Board has committed itself in the cases cited above properly applies in the instant proceedings.

We have further held that under the provisions of section 206 (b) of the Revenue Act of 1926, which is identical with section 117 (b) of the 1928 Act, the amount of the net loss to be carried forward in the consolidated return is such portion of the net loss of each company as was not availed of in the prior year by the affiliated group; that the statute does not permit of a double deduction of any portion of the net losses; Pittsburgh Gasoline Co., supra; Kaiwiki Sugar Co., Ltd., 21 B. T. A. 997. The amount of the net loss of 1927 to be carried forward in computing the petitioners’ consolidated net income of 1928 is $4,623.36.

The petitioners’ tax liability for 1928 should be recomputed accordingly.

Judgment will be entered under Rule 50.