author: HaRROn:

text:
    Haskelite Manufacturing Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100271.
    Promulgated June 5, 1941.

      John Harrington, Esq., for the petitioner.

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

HaRROn:

Petitioner was prohibited from paying dividends until an indebtedness of $200,000 contracted in 1934 was fully paid, under the written agreement which it executed in March of 1934. The question is whether the March 1934 agreement continued after May 1, 1936, and throughout 1937, or whether that agreement was terminated and a new agreement was made in January of 1937 when petitioner gave a new note for $200,000 to E. F. C. To obtain the credit claimed under section 26 (c) (1) the agreement which prohibited petitioner from paying dividends must be a written agreement executed prior to May 1, 1936.

Industrial appears to have had no other business than acting as an intermediary between E. F. C. and subborrowers at a time when E. F. C. made loans to private loan agencies for relending to individual concerns. When E. F. C. was enabled to make loans direct to such borrowers as petitioner, the intermediate loan corporation was dissolved and the obligations of the subborrowers were taken over absolutely by E. F. C. Industrial was dissolved in 1936 and E. F. O. took over petitioner’s note, mortgages, and agreements absolutely, having, however, held them as collateral for Industrial’s note at all times. When Industrial was dissolved, all that the subborrowers agreed was that the notes of Industrial to E. F. C. should be canceled. But neither the subborrowers nor E. F. C. agreed or intended that the obligations of the subborrowers should be canceled. Petitioner owed $200,000 on its 1934 note at the time Industrial was dissolved, which apparently was after June 8, 1936, and it had agreed in 1934 that it would not declare or pay any dividends until its indebtedness of $200,000 was paid in full. After Industrial was dissolved petitioner owed directly to E. F. C. $200,000 instead of owing it indirectly. For all practical purposes the indebtedness at all times was owing to E. F. C. for Industrial was no more than an intermediary. E. F. 0. could have extended the 1934 note of petitioner instead of taking a new note in the same amount upon the same conditions in January of 1937. The dissolution of Industrial and the steps taken by E. F. C. were outside of petitioner’s control. At no time, even momentarily, in spite of the dissolution of Industrial and the giving of a new note to E. F. 0., was petitioner relieved from the agreement it made in 1934 not to declare or pay dividends until its indebtedness of $200,000 was fully paid. Under such circumstances the substance of the steps taken in November of 1936 and January of 1937 should control here, and, in substance, the original loan to petitioner was extended in November of 1936 by E. F. C. in the same amount and upon the same terms. The fact that petitioner executed an application for a new loan and gave a new note in the same amount did not, in our opinion, operate to cut off the obligation upon petitioner not to pay dividends which it made in 1934. Eather, that obligation continued throughout. There is no showing that the 1934 dividend restriction agreement was returned to petitioner or in any way terminated in 1936.

It is held, accordingly, that in 1937 petitioner was prohibited from declaring or paying dividends by a written contract which expressly dealt with the payment of dividends which was executed prior to May 1,1936, and, accordingly, petitioner is entitled to a credit under section 26 (c) (1) of the Eevenue Act of 1936. See Sutcliffe Co., 41 B. T. A. 1009.

Decision will be- entered for the 'petitioner.

       SEC. 26. CREDITS OE CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * * ⅜ ⅜ * * ^
      (c) Contracts Restricting Payment of Dividends.—
      (1) Prohibition on payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corpoiation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


source: Caselaw Access Project

author: Keen :

license: Public Domain

text:
    Roquemore Gravel & Slag Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101756.
    Promulgated June 5, 1941.

      Robert A. Littleton, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Keen :

Petitioner contends that it executed prior to May 1, 1936, a written contract, a provision of which expressly dealt with the payment of dividends, and that, without violating that contract, it could not distribute any dividends in the taxable year. Respondent contends, however, that the contract did not prohibit petitioner from paying dividends until and unless the desired loan was obtained. We agree with respondent’s interpretation of the contract, and come to the conclusion that the written contract did not prohibit petitioner from distributing dividends until August 28, 1936. Prior to that date petitioner could have distributed dividends' at will without violating any provision of the written contract here in evidence. See Florence Cotton Mills, 44 B. T. A. 436.

< Petitioner’s single witness spoke of a prior agreement between John D. Roquemore and a committee representing bondholders of the old company which provided that the petitioner, when formed, should issue no dividends as long as it operated the old company’s property until the purchase price should be fully paid by petitioner. This agreement was not offered in evidence nor is there any indication that it was a written agreement. One thing, moreover, is certain; it was not executed by petitioner. Therefore, any such agreement is immaterial to our present discussion.

Having determined that the contract did not forbid the distribution of dividends until August 28, 1936, the day the loan was procured, there still remains for us the problem of whether petitioner is entitled to a credit for any part of the undistributed profits. Had it been shown that on August 28, 1936, petitioner had no earnings from which dividends could have been declared, it would be clear that any 1936 dividends would have to have been declared out of earnings of the petitioner acquired after the date of the loan. A distribution of these earnings was strictly forbidden by the contract here in evidence.

Such is not the case presented by the record before us, however, for petitioner has not raised this issue nor has it introduced any evidence tending to shed light on petitioner’s financial status at the date of the loan; and it is a well established rule that the determination of the Commissioner is entitled to a presumption of correctness. Wiget v. Becker, 84 Fed. (2d) 706. An application of that rule to our instant situation necessitates the presumption that petitioner’s undistributed profits as of August 28, 1936, amounted to no less a figure than at the end of that year, and that a distribution of dividends on August 27, 1936, could have been made in the full amount of $33,833.06, without violating a provision of any written contract executed by petitioner. Since the burden of coming forward with the proof rests with the petitioner in matters of this sort, United States v. Pulver, 54 Fed. (2d) 261, we must follow the above reasoning and sustain the respondent’s determination.

Decision will be entered for the respondent.


author: Kekn : Oppee,

text:
    Estate of Frank F. Tillotson, Isabelle I. Tillotson and Eugene Siegel, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100563.
    Promulgated June 5, 1941.

      Ralph W. Barbier, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Kekn :

Respondent relies upon article 16 of Regulations 80 in this proceeding as the basis for the inclusion of the various assets within decedent’s taxable estate. This Board and the courts have accorded to that article of the regulations the force and effect of law, with the result that any transfers made by a decedent within two years of his death without adequate consideration therefor are presumed to have been made in contemplation of death, and,¡ therefore, are includable within decedent’s gross estate pursuant to section 302 (c) of the Revenue Act of 1926. Therefore, respondent rests his case mainly on a legal presumption. There is, of course, another time-honored presumption working in the favor of the respondent, i. e., that the determination of the Commissioner is assumed to be correct. Wiget v. Becker, 84 Fed. (2d) 706. Both of these presumptions must be overcome before the taxpayer may prevail in this proceeding.

' A showing of facts to this Board sufficient to establish that the presumption established by article 16 of Regulations 80 has no application to the present situation would also overcome the presumption in favor of the correctness of the Commissioner’s determination. The respondent then would have the burden of coming forward with evidence sufficient to overcome any conclusions in petitioner’s favor which might be formed from the evidence already of record. Rankin v. Commissioner, 84 Fed. (2d) 551; United States v. Pulver, 54 Fed. (2d) 261.

Our first inquiry, therefore, is whether this petitioner has introduced evidence sufficient to overcome the presumption established by the regulations. We believe that the petitioner has done this. In the first place, the decedent had no knowledge of his ailment. This is nowhere contradicted in the evidence. On the contrary, the evidence discloses that the decedent was an active man, very proud of the health he. enjoyed at the age of seventy, and fully expected to live for another decade.

He was an elderly man who had devoted what may be termed the best part of his life to building up a business, raising a family, and providing for their economic security. In the early part of 1934 decedent resigned as president of the Federal Discount Corporation, a position which he had held since 1919. His son succeeded him and decedent, became chairman of the board of directors. He resigned this latter position, however, before the close of the year and went home to his farm in the country to relax and enjoy the fruits of his labors. There is nothing unusual about such conduct. Business men do not retire merely because they feel death is “just around the corner.”' The most usual reason is a desire to shed all financial cares and thus enjoy more fully the remaining years of life and make those remaining years more in number. This, we are convinced, was the decedent’s reason for retiring.

In the year prior to this retirement he had set the stage for such a move. In November 1933 he surrendered his life insurance policies and with the cash obtained purchased annuities, the total benefits from which amounted to far less than the beneficiary would have received on his death had he kept the life insurance in effect. This transaction points undeniably to the fact that decedent anticipated life, not death, and wanted security for his own protection so that he could live the rest of his life in comfort. His reason for buying additional annuities for his wife further bears out this conclusion. As we have indicated in our findings of fact, supra, the gift of these annuities to the wife was not in contemplation of death. On the contrary, it was in contemplation of his living at least ten years more and because of his concern that he might outlive his wife.

The transaction whereby the wife acquired sole ownership of the realty formerly held by the decedent and his wife as tenants by the entirety was not carried out by him in contemplation of death. United States v. Wells, 283 U. S. 102; United States Trust Co. of New York, Executor, 14 B. T. A. 312. At this stage of decedent’s retirement he had manifested certain desires, the foremost being a desire to be freed from any financial worries and be left to enjoy life in peace and a second desire, almost a resignation, to conduct himself according to the wishes of his family. Perhaps this latter desire can be said to modify the former, the idea being to avoid arguments. If an issue arose, the decedent seems to have willingly ceded in favor of his family’s wishes just to maintain harmony and quiet. Under the power of attorney, the wife gave decedent what amounted to subsistence money. Her motives in doing this probably were based on her notion that the decedent was not capable mentally of managing his financial affiairs. This notion was a mistaken one, according to che diagnosis of the alienist. But the decedent’s motive in allowing himself to be put on an allowance was nothing more than we have shown above. The evidence discloses that he at first resented her action, but, when he saw that she was insistent, gave in.

When the wife suggested that it would make her and the children happier if he made a present to the children so that they could have more security, he again ceded to her wishes. After all, he and his wife had their annuities and the farm, so it could not affect his retirement.

From the evidentiary facts present in the record and adduced by petitioner, we must conclude that the decedent, having arranged upon retirement for a competence for the rest of his life, made the transfers in question for the purpose of ridding himself of financial cares and worries, for the purpose of pleasing his family, and for the purpose of retaining domestic tranquility—all purposes connected with life, not death. We further conclude that the decedent, at the time of the transfers, did not contemplate death within the meaning of the revenue act.

The respondent has introduced no direct evidence to overcome the conclusion thus reached, and we, therefore, find that any presumption in favor of the respondent has been successfully overcome.

The attorneys’ fees which will apparently have to be paid should be allowed as a deduction. Estate of John E. Cain, Sr., 43 B. T. A. 1133.

Reviewed by the Board.

Decision will be entered for the petitioner.

Oppee,

dissenting: Although normally a question of fact, see United States v. Wells, 283 U. S. 102, about which it would be difficult to disagree on a point of principle, here I am unable to reach the Board’s conclusion that the gifts of the house, the debentures and other securities, and the bonds were not made in contemplation of death.

Petitioners labor under á twofold burden of proof. They must show that the “impelling” motive of decedent himself was connected with aspects of life and not of death, United States v. Wells, supra; and, of course, in order to do so they must disclose to our satisfaction what decedent’s motive was. McCaughn v. Real Estate Land Title & Trust Co., 297 U. S. 606.

I agree that decedent’s motive for the transfers to his wife of the means to purchase annuities has been shown by petitioners; and I agree further that that motive'indicates decedent’s preoccupation with considerations ■ having to do with life rather than death. But I can not reach the judgment that this record contains any evidence of decedent’s own motive with respect to the other transfers, made a year later, nor that it can be supplied by the Board’s unfounded speculations as to what that motive might have been. This seems to me reversible error, even though the issue is one of fact, and even though, were there evidence to support it, the Board’s decision would be beyond overthrow on review. See McCaughn v. Real Estate Land Title & Trust Co., supra.

The view that there is no evidence of decedent’s own motive is, of course, founded upon the lack of any testimony, not only of what was in the decedent’s mind, but of what was upon his lips so far as the reason for the transfers is concerned. And that, of course—“the transferor’s motive”—United States v. Wells, supra, is the only issue. We know why decedent’s family suggested the transfers, but on their own version of the facts their true reasons were withheld from decedent. We know that the reasons they gave him were not the reasons upon which he could have acted, for he made the transfers differently than it is claimed they were suggested. Thus the family lawyer urged that decedent’s securities, being liquid, should be transferred to the wife to make it easier for her to collect the family income. The son says he gave this to his father as a reason for the transfer. But the securities were not transferred to the wife. They were given to the sons and daughters-in-law. Although one of the sons testified that he was in no need of financial assistance, decedent’s wife says she approached decedent with the question whether “it would not be well to make gifts to the boys * * * at the time when they needed it.” She says that in answer “he made no particular objection. He seemed to be perfectly willing to do so if I thought best.” And her reason for suggesting that gifts be made to the daughters-in-law was “just because I [sic] wanted to help them. That was all.”

Everything given as a ground for the Board’s assumption that decedent did not make the transfers as “substitutes for testamentary dispositions”, United States v. Wells, supra, is at least equally cogent in the opposite direction. The arrangement of his affairs and retirement, culminating in a virtual abandonment of all his disposable assets, is very near to that process of “putting his house in order” described in Updike v. Commissioner (C. C. A., 8th Cir.), 88 Fed. (2d) 807; certiorari denied, 301 U. S. 708. Although he may not have been told expressly of the critical nature of his illness, it would be strange if a condition so evident to his family went unperceived by the decedent himself. Since the first of a series of bad falls apparently connected with the illness had already occurred, “while he might not have known that the disease would cause his death, he must have fully realized its seriousness.” Travelers Bank & Trust Co., Executor, 29 B. T. A. 88, 94. It may even be that decedent’s gifts were part of his plan for disposition of the entire estate, for we are not advised when, under what circumstances, or in what manner, his will was fashioned. Cf. Igleheart v. Commissioner (C. C. A., 5th Cir.), 77 Fed. (2d) 704. But we do know that the gifts went to the natural objects of his bounty. Myers v. United States, 2 Fed. Supp. 1000, 1012; certiorari denied, 292 U. S. 629; McClure v. Commissioner (C. C. A., 5th Cir.), 56 Fed. (2d) 548; certiorari denied, 287 U. S. 669. And, finally, the “desire, almost a resignation, to conduct himself according to the wishes of his family” which the majority opinion finds to be decedent’s motive is certainly, if a motive at all, and if justified by any affirmative evidence, at least as consistent with knowledge that death was near, “that the donor is about to reach the moment of inevitable surrender of ownership”, United States v. Wells, supra, as with plans for the future.

While at times such evidence as the foregoing has been considered sufficient to warrant a conclusion that transfers were in contemplation of death, even with the burden upon respondent, e. g., Travelers Bank & Trust Co., Executor, supra, or where there was some actual evidence of other motives, e. g., Igleheart v. Commissioner, supra, here it is found to perform the function of evidence favorable to petitioners ; to sustain petitioners’ burden; to demonstrate the decedent’s impelling motive; and to justify the ultimate finding that that motive was not testamentary in nature. I am unable to concur.

Smith and Turner agree with this dissent.

      * # ⅜ * ⅞ m m

      Any transfer without an adequate and full consideration in money or money’s worth, made by the decedent within two years of his death, of a material part of his property in the nature of a final disposition or distribution thereof, is, unless shown to the contrary, deemed to have been made in contemplation of death. * * *


author: HaüROn :

text:
    Inland Investors, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100784.
    Promulgated June 5, 1941.

      I. W. Sharp, Esq., for the petitioner.

      Thomas F. Callahan, Esq., for the respondent.
   OPINION.

HaüROn :

The question arises under section 27 (h) of the Revenue Act of 1936. The problem arises in the following way: There is no issue raised as to whether or not under the statute petitioner had a surplus or accumulated earnings and profits at the beginning of 1936. The earned surplus account, computed on the basis of the results of operations and dividend payments since petitioner’s organization, without credit for paid-in surplus or capital surplus and without debits for book write-downs from cost of securities still held, shows a deficit of $1,918,966.95 at the end of 1935 in the earned surplus account. The parties have so stipulated. It appears that the stipulation is made with cognizance of applicable law. See F. J. Young Corporation, 35 B. T. A. 860; affd., 103 Fed. (2d) 137. As of the beginning of 1936 petitioner had a substantial deficit in its earned surplus account and thus had no earnings or profits accumulated after February 28,1913.

The respondent has determined that petitioner’s earnings and profits for the taxable year were $80,751.64 and has held that the distributions which were made in excess of that amount constituted a partial return of capital to petitioner’s stockholders. The excess of $44,248.36 has been determined by respondent to be a nontaxable distribution in the hands of petitioner’s stockholders and, therefore, he has disallowed a dividends paid credit with respect to that amount of the distributions under section 27 (h). Petitioner does not contend that part of the distributions were not nontaxable and in the petition to this Board petitioner states its claim to be that “it should not be subject to a surtax on undistributed profits even though a part of the amount distributed was not taxable to the stockholders as dividends.” It thus appears that petitioner is unable to overcome, and has not overcome, the determination of the respondent that a part of the distributions made in 1936 was nontaxable in the hands of its stockholders. Upon this state of the pleadings and the record there can not be any other holding than that no dividends paid credit is allowable under section 27 (h) with respect to the distributions amounting to $44,248.36, and respondent must be sustained.

It would appear that no discussion of the problem is required, but petitioner’s broad claim is that the result, which appears to be dictated by the fact that part of the distribution was a nontaxable distribution, is contrary to the seeming purpose of the undistributed profits tax, which petitioner believes is to bring about distribution within a taxable year of all of the income for the year as the term income is commonly understood. And, petitioner argues, since it distributed all of its income and profits it should not be subject to any of the tax called “surtax on undistributed profits.” However, Congress has not provided that a dividends paid credit shall be allowed under sections 14 and 27 for the entire amount of every distribution to stockholders. Section 27 (h) clearly excludes from an allowable dividends paid credit that part of a distribution which is nontaxable in the hands of the stockholders. The only question at issue here is whether or not respondent has properly determined the amount of the distribution which was nontaxable, petitioner apparently conceding that part of the distribution was nontaxable.

First, an explanation should be made of the way in which respondent has determined the amount of the allowable dividends paid credit. That determination appears to have been made correctly and the explanation thereof in itself determines the issue. In our opinion the term “dividends” used in section 27 can not have a different meaning from the term “dividends” as defined in section 115 (a). Petitioner had no earnings or profits accumulated after February 28, 1913. This leaves for consideration the question whether petitioner’s “earnings or profits of the taxable year” were in the sum of $125,000 or were in some other sum. Petitioner could not distribute out of “earnings or profits”, as that phrase is construed for income tax purposes, an amount in excess thereof. What, then, was the amount of petitioner’s “earnings or profits of the taxable year”?

It seems unnecessary to point out that “taxable net income” is not equivalent to “earnings or profits of the taxable year.” See Charles F. Ayer, 12 B. T. A. 284; R. M. Weyerhaeuser, 33 B. T. A. 594. Petitioner’s taxable net income was $124,934.58. In order to arrive at the amount of petitioner’s “earnings or profits of the taxable year”, to determine whether or not the entire amount of petitioner’s distributions was made out of “earnings or profits of the taxable year” within section 115 (a) (2), respondent took into consideration the amount of petitioner’s nondeductible net capital losses, $43,541.42, and the amount of petitioner’s normal tax liability, $641.52, and he deducted the total, $44,182.94, from taxable net income, $124,934.58. lie held that the remainder, $80,751.64, was the amount of petitioner’s “earnings or profits of the taxable year.”

Respondent’s determination is correct because, under the ordinary method of accounting, in the computation of petitioner’s “earnings or profits of the taxable year” it is necessary to give effect to the amount of its net capital losses sustained in the taxable year and disallowed as a deduction under section 117 (d) and the amount of its liability for normal tax, even though these amounts are not deductible in the computation of its taxable net income. Commissioner v. James, 49 Fed. (2d) 707; Dorothy Whitney Elmhirst, 41 B. T. A. 348, 354; I. T. 3253, C. B. 1939-1, p. 178. Accordingly, the distributions made by petitioner in 1936 were “dividends” within the definition of section 115 (a) only to the extent of $80,751.64. In allowing petitioner a dividends paid credit under sections 14 and 27 in that amount, respondent has allowed a credit to petitioner on the basis of its having distributed all of its “earnings or profits of the taxable year.”

There is no evidence in the record to show that the part of the distributions which exceeded $80,751.64 was a distribution in partial liquidation, as suggested by petitioner in its brief (see section 115 (i) of the Revenue Act of 1936) ; and even if that were true, which it is not, it is clear that the part of the distributions which exceeded $80,751.64 was not “properly chargeable to the earnings or profits accumulated after February 28, 1913” and thus in any event could not be a “taxable dividend” within the meaning of section 27 (f) of the Revenue Act of 1936. Cf. Credit Alliance Corporation, 42 B. T. A. 1020; Crown Zellerbach Corporation, 43 B. T. A. 541. The con-elusion is inescapable that the part of the distributions made by petitioner to its stockholders which exceeded $80,751.64 constituted a partial return to the stockholders of their capital investment and thus was not a taxable dividend in their hands. Petitioner recognizes that this is correct under the statute. See section 115 (d) of the Revenue Act of 1936.

Since under section 115 (a) petitioner’s distributions in 1936 constituted taxable dividends only to the extent of $80,751.64, and since the balance of the distributions, $44,248.36, did not constitute taxable dividends in the hands of the distributees, no dividends paid credit is allowable for the latter amount under section 27 (h). Respondent is sustained.

While it is not necessary to extend the discussion further, answer should be given to petitioner’s main argument, which is that it is not subject to the so-called “undistributed profits” surtax because the total amount of the distributions made by it to its stockholders ($125,000) exceeded the amount of its taxable net income ($124,934.58) and the amount of its profits ($80,751.64). It argues that it was not the legislative intent to subject a corporation which has distributed all its profits to the so-called “undistributed profits” surtax. (Petitioner uses the term “profits” in some other sense than the term means in section 115 (a).)

Section 14, the pertinent provisions of which are set forth in the margin, in very plain language states that the surtax is to be imposed on “net income.” In its context the section refers repeatedly to “net income”, “adjusted net income”, and “undistributed net income.” The ordinary and plain meaning of net income for tax purposes is quite different from the ordinary and plain meaning of profits; and in a given year a corporation may have profits in a lesser or greater amount than its net income for tax purposes. Commissioner v. James, supra; Charles F. Ayer, supra; R. M. Weyerhaeuser, supra. It is true that section 14 is entitled “Surtax on Undistributed Profits.” However, the title can not limit the plain meaning of the context of the statute. Strathearn Steamship Co. v. Dillon, 252 U. S. 348; Lapina v. Williams, 232 U. S. 78; Cornell v. Coyne, 192 U. S. 418; Patterson v. Bark Eudora, 190 U. S. 169. Also, undistributed net income, on which the surtax is based, is purely a statutory concept. It is computed by subtracting from net income and adjusted net income certain special tax exemptions in the form of deductions or credits. The special tax exemptions are enumerated very clearly and carefully in section 14. It is clear that Congress has not provided any special tax exemption which affords petitioner full relief from the surtax under present circumstances.

Congress could have provided for full relief under the present circumstances by allowing in the computation of “adjusted net income” under section 14 a deduction from net income in the amount of the net capital losses disallowed as a deduction by section 117 (d). For example, in the Eevenue Act of 1936 Congress allowed a deduction from net income in the amount of net capital losses disallowed as a deduction by section 117 (d) both in the computation of “special adjusted net income” under section 102 (surtax on corporations improperly accumulating surplus) and in the computation of “adjusted net income” under section 351 (surtax on personal holding companies). The deduction for disallowed net capital losses under section 351 appears in the 1934 Act as well as in the 1936 Act. But the deduction for disallowed net capital losses under section 102 appears for the first time in the 1936 Act. In all, section 102 provides for deductions from net income of five specific items, including disallowed net capital losses, and section 14 provides for deductions from net income of four specific items. The last two items allowed as deductions from net income under section 102 are identical with the last two items allowed as deductions from net income under section 14. All of such deductions from net income under section 102 and section 14 appear for the first time in the 1936 Act. Section 14 expressly states, under subsection (f), “For surtax on personal holding companies, see section 351”, and under subsection (g), £iFor surtax on corporations which accumulate surplus to avoid surtax on stockholders, see section 102.” Such considerations compel the conclusion that the failure of Congress to allow in the computation of “adjusted net income” under section 14 a deduction from net income in the amount of disallowed net capital losses was intentional.

By way of illustrating the above possible relief which Congress could have given, but did not, reference is made to Form 1120 “Corporation Income and Excess-Profits Tax Return”, lines 23 to 29, inclusive. In the situation presented here, if petitioner’s “adjusted net income”, as defined in section 14 (a) (1) (A), $124,293.06 ($124,-934.58—$641.52, normal tax), could have been reduced by the amount of the disallowed net capital loss, $43,541.42, the “adjusted net income” would have been $80,751.64. Then the allowable dividends paid credit of $80,751.64, deducted from “adjusted net income” would have left no “undistributed net income”, and there would be no surtax.

Petitioner contends also that section 14 and related sections are unconstitutional if construed to subject it to the so-called “undistributed profits” surtax under present circumstances. The constitutionality of section 14 and related sections is attacked on two grounds. Petitioner argues that the surtax is “not a tax on incomes within the meaning of the Sixteenth Amendment to the Constitution and therefore is unconstitutional because not apportioned among the states according to population as required by Article 1, section 2 and section 9 of the Constitution”; and that the surtax violates “the due process requirement of the Fifth Amendment and would take property of petitioner without due process of law.”

Neither of these contentions is valid. The surtax imposed under section 14 on petitioner’s “net income” less certain specified deductions and credits is clearly “a true tax on income within the meaning of the Sixteenth Amendment.” Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane-Johnson Co. v. Helvering, 311 U. S. 54. And the imposition of the surtax under the present circumstances, if arbitrary or discriminatory, appears to be no more so than the imposition of the surtax under the circumstances involved in the Northwest Steel Rolling Mills, Inc., and Crane-Johnson Co. cases. In our opinion, it does not appear clearly that section 14 and related sections are unconstitutional if construed to subject petitioner to surtax under present circumstances. See Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046; affd., 60 Fed. (2d) 235; certiorari denied, 288 U. S. 605.

Reviewed by the Board.

Decision will be entered under Rule 50.

Ofpee concurs only in the result.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      (a) Dividends Paid Credit in Generad.—For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.

        *******

      (h) Nontaxable Distributions.—If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.

       SEC. 1X5. DISTRIBUTIONS BT CORPORATIONS.
      (a) Definition of Dividends.—The term “dividend” when used in this title (except in section 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

       SEC. 14. SURTAX ON UNDISTRIBUTED PROFITS.
      (a) Definitions.—-As used in this title—
      (1) The term “adjusted net income” means the net income minus the sum of—■
      (A) The normal tax imposed by section 13.
      (B) The credit provided in section 26 (a), relating to interest on certain obligations of the United States and Government corporations.
      (C) In the case of a holding company affiliate (as defined in section 2 of the Banking Act of 1933), the amount allowed as a credit under section 26 (d).
      (D) In the ease of a national mortgage association created under Title III of the National Housing Act, the amount allowed as a credit under section 26 (e).
      (2) The term “undistributed net income” means the adjusted net income minus the sum of the dividends paid credit provided in section 27 and the credit provided in section 26 (c), relating to contracts restricting dividends.
      (b) Imposition of Tax.—There shall be levied, collected, and paid for each taxable year upon the net income of every corporation a surtax equal to the sum of the following, subject to the application of the specific credit as provided in subsection (c) :
      7 per centum of the portion of the undistributed net income which is not in excess of 10 per centum of the adjusted net income.

       In its report on the Revenue Bill of 1936 the Ways and Means Subcommittee recognized that circumstances might arise substantially similar to the present circumstances and recommended that certain relief be provided for under such circumstances. Report of the Subcommittee of the Committee on Ways and Means, March 26, 1936, 74th Cong., 2d sess., pp. 6-7. However the Subcommittee did not recommend full relief through the allowance of a deduction from net income in the amount of the net capital losses disallowed as a deduction by section 117 (d). The Subcommittee recommended only partial relief through the imposition of a fiat rate surtax on “the excess of the adjusted net income over the accumulated earnings and profits as of the close of the taxable year.” As it passed the House, the Revenue Bill of 1936 embodied in section 14 the recommendations of the Subcommittee. The Senate struck out section 14, and no provisions affording even partial relief under present circumstances were restored. The vital fact is that, even if the recommendations of the Subcommittee had been embodied in the Revenue Act of 1936, petitioner would have remained subject to surtax under present circumstances although at a different rate.

       Section 102 (c) (1) (C) and section 351 (b) (3) (C) both provide for the following deduction from net income: “Losses from sales or exchanges of capital assets which are disallowed as a deduction by section 117 (d).”

       Section 102 (c) (1) (D) and section 14 (a) (1) (C) both provide lor the following deduction from net income :
      “In the case of a holding company affiliate (as defined in section 2 of the Banking Act of 1933) the amount allowed as a credit under section 26 (d).”
      Section 102 (e) (1) (E) and section 14 (a) (1) (D) both provide for the following deduction from net income :
      “In the case of a national mortgage association created under Title III of the National Housing Act, the amount allowed as a credit under section 26 (e).”


author: Tyson :

text:
    Central West Coal Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101491.
    Promulgated June 5, 1941.

      Irving A. PucTmer, Esq., for the petitioner.

      Gerald W. Broohts, Esq., for the respondent.
   OPINION.

Tyson :

The petitioner alleges error in the disallowance of the credits claimed in the amount of $30,000 for each of the two taxable years; and asserts further that it has made overpayments of surtax in the respective amounts of $1,917.82 and $1,579.90 shown to be due on the returns for those years because it was entitled to other credits not claimed in its returns.

Section 14 of the Bevenue Act of 1936 imposes a surtax upon the undistributed net income of every corporation. It defines “undistributed net income”, and, in so far as here material, that term means the net income minus the normal tax imposed by section 13 (i. e., the adjusted net income) and minus the credit provided in section 26 (c) (1). The amount of the adjusted net income is not in dispute. The sole question is whether the claimed credits are allowable under section 26(c) (1), supra. The credit there authorized is:

An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *

The petitioner rests its claim for the credits upon alleged restrictions contained (1) in the deed of trust securing its bonds, and (2) in the preferred stock certificates and the resolution of 1921 providing for the issuance of those certificates.

Under section 26 (c) (1), supra, it is essential to the allowance of credits of the claimed nature of those here involved that the written contract by reason of which the credits are claimed should operate as a legal restriction upon the corporation as to amounts which it can distribute within the taxable year as dividends. Honokaa, Sugar Co., 43 B. T. A. 151, 157.

The mortgage underlying the bonds is a written contract executed by the petitioner prior to May 1, 1936. It expressly deals with the payment of dividends in that it provides that, after three years from date, the petitioner “will not pay any dividend upon its common capital stock until the principal of said bonds then maturing and interest on all outstanding bonds * * * shall have been provided for.” The payment of dividends is conditioned upon the principal of the then maturing bonds and interest on all outstanding bonds first being provided for and, since the record shows that the petitioner paid such obligations up to and including the times in the taxable years when they fell due (the last of such obligations in each taxable year falling due on August 1 of such year), we think the condition of providing for the payment of the bonds and interest was thus met. It seems obvious, therefore, that, the restrictive provision against the payment of dividends having been thus removed within each of the taxable years and nine months before the ends of such years, the petitioner was free to pay dividends upon its common stock in each of those years.

However, the petitioner contends that the language of the deed as contained in paragraph 3 of article II, section 11, is ambiguous in that it does not specify the source from which the maturities and interest on the bonds shall be “provided for”, and that such language should be construed as meaning that no dividends may be paid from any source other than earnings and not until such time as its earnings shall exceed the amounts paid for bond retirements and interest. Based upon this premise, that paragraph 3 is ambiguous and should be construed to have the meaning contended for, petitioner then contends further that under such construction no earnings existed during the taxable years which could be distributed as dividends because the total disbursements for bond maturities and interest amounted in the case of bond maturities alone to $220,000 from May 1, 1930, up to April 30,1937, and to $250,000 from May 1, 1930, to April 30, 1938. It has produced testimony by the trustee in the mortgage and by a witness who for several years had been engaged in the securities investment business which, it claims, shows that such construction had been adopted by the parties and is also the one generally applied to similar provisions in handling mortgages in the investment business.

We find no merit in petitioner’s contention that paragraph 3 is ambiguous and should be construed as contended by it. The elementary rule for interpreting written contracts is that their meaning must be gathered from the provisions of the instrument as a whole and from the words used according to their natural and ordinary signification, if they be clear and unambiguous. United States v. Choctaw &c. Nations, 179 U. S. 494, 531. The provisions of paragraph 3 are clear and unambiguous, and are not rendered less so when read in connection with other provisions of the contract. The obligation of the petitioner imposed thereby is to pay the principal of the bonds as they matured annually, together with the interest thereon. The obligation is absolute and unqualified, and nowhere in the deed do we find any provision, express or through necessary implication,, for the payment of the obligation to be made from earnings or from any other particular source. The limitation applying to the payment of dividends during the taxable years is that such dividends shall not be paid until the principal of bonds then maturing and interest on all outstanding bonds “shall have been provided for.” “Provide”, in its ordinary sense, means to procure beforehand; to look out for in advance; to procure means in advance; to take measures in view of an expected or possible need. Webster’s New International Dictionary. The word is sufficiently comprehensive to include procurement from any available source, and to say that earnings alone were intended, as urged by petitioner, would be tantamount to writing a new contract for the parties. We think that when the petitioner periodically used its working capital, reserves, proceeds from sales of its physical assets, and its earnings, as it did, to pay the maturities and interest on the bonds, it “provided for” those obligations within the meaning of the contract; and, petitioner having complied regularly and punctually with the sole condition of paying the interest and principal of the bonds up to and including the whole of the taxable years, the clause containing the quoted words did not have the legal effect of prohibiting payment, within the taxable years, of dividends on the common stock.

The meaning of paragraph 3 being clear and unambiguous, there is no occasion to consider the understanding of its meaning between the trustee and the president of petitioner or the opinion of the witness engaged in the securities investment business as to that meaning; such understanding and opinion being immediately hereinafter set out. 3 Williston on Contracts (R. Ed.), § 623; Insurance Companies v. Wright, 1 Wall. 456, 471; Transatlantic Shipping Co., v. St. Paul Fire & Marine Ins. Co., 9 Fed. (2d) 720; National Surety Co. v. McGreevy, 64 Fed. (2d) 899.

But even if we should be inclined to regard paragraph 3 as ambiguous, neither the testimony of the trustee as to the understanding between himself and the president of petitioner of the meaning of that paragraph nor the testimony of the witness engaged in the securities investment business as to. his opinion of the meaning of that paragraph establishes that the parties adopted the construction contended for in carrying out the contract, or that the words “provided for” have a special and limited meaning in the investment world as contended by petitioner. The trustee admitted that the understanding which he and the president of petitioner had as to the meaning of that paragraph was not had because of any attempt of the latter to declare and pay dividends over his objection as trustee; and the record shows that such understanding of that meaning was not adopted by the petitioner in carrying out the contract, since the bonds and interest were paid as they accrued only in part out of earnings and in other part out of its working capital, reserves, and proceeds from the sale of capital assets. The witness in the investment business who testified as to the meaning of paragraph 3 was a layman and often sought the opinions of attorneys in construing trust deeds, and we doubt that he was qualified to testify here as to a trade or business meaning of such a paragraph; but, however this may be, the other deeds examined by him in the course of his investment business and on comparison of which with the paragraph here involved he based his opinion, were said by him to be “similar in principle”, but not “similar in language” to the one here involved. ISTone of the other deeds examined by him was shown to have contained the words, “shall have been provided for”, and his testimony falls far short of proving that those words mean “provided for out of earnings” in the investment business even though the meaning of those words was subject to oral proof.

Having concluded that the language of the deed of trust is unambiguous and that paragraph 8 does not mean that the funds to be used by petitioner in paying its bonds and interest thereon are to be “provided for” only out of earnings, as contended by petitioner, it would seem to be unnecessary to consider petitioner’s further contention that no earnings existed during the taxable years which could have been distributed as dividends in those years. However, even if we have erred in reaching this conclusion and if the contention to the contrary by petitioner ought to be sustained, it is our opinion that the petitioner would nevertheless not be entitled to the claimed credits of $30,000 each under the facts shown. Petitioner’s earned surplus in the taxable year 1937 was $126,022.05 and its earned surplus in the taxable year 1938 was $158,810.25, and such earned surplus in each of those taxable years far exceeded the amounts necessary in each of such years to make payments of principal and interest on petitioner’s bonds as such principal and interest accrued in those respective years, the principal of the bonds maturing in each taxable year being $30,000 and the interest becoming due on the bonds in 1937 being approximately $12,600 and interest due on the bonds in 1938 being approximately $10,800. Petitioner, in support of its contention that no earnings existed during the taxable years which-could have been distributed as dividends in those years, says, in effect, that payments on the bonds in the principal amount of $220,000 from May 1,1930, up to April 30,1937, and in the principal amount of $250,000 from May 1, 1930, up to April 30, 1938, together with interest paid through those periods, should be now considered as chargeable to the earned surplus as it existed in the taxable years; that there would thereby result a deficit in those years in the earned surplus; and that consequently there would have been nothing left in earnings in those years from which to have made the payments on the bonds and interest which were made during those taxable years. But the conclusive answer to this is that the payments of $30,000 principal plus interest made in each of the taxable years on the bonds were actually made only in part from earnings and in other part from other funds such as working capital, reserves, and proceeds from the sale of physical assets; and what part was paid from any or each of these sources is not disclosed. Even if petitioner’s contention that the deed of trust means that payment of the bonds and interest thereon was to be “provided for” only out of earnings, it could not now be heard to say that its account of earned surplus, which was kept continuously through a period of many years and did not, as so kept, show what part, if any, of the amounts paid on bonds and interest was charged to such account, should now, in effect, be changed so as to charge all bond payments and interest made throughout all years against that account.

A further question presented is whether any credit should be allowed by virtue of the provisions of the resolution of 1921 and the preferred stock certificates issued, namely, that dividends on the preferred stock shall be cumulative and “shall be paid or a sufficient sum for the payment thereof [shall be] set apart and appropriated to such payment before any dividends shall be declared or paid for any other stock.” The petitioner contends that, as preferred stock dividends had accumulated since 1933 and remained, unpaid to the extent of $15,702.75 on April 15, 1937, and $13,994.75 on April 15, 1938, it was prohibited from paying any dividends on the common stock in the taxable years.

Even if the above quoted provision from the resolution of 1921 and from the preferred stock certificates renders section 26 (c) (1), supra, applicable, a question we do not decide, Airtherm Manufacturing Co., 43 B. T. A. 736, 738, we do not think that Congress intended to grant any relief under that statute in a situation where, as here, the corporation had a large earned surplus and large cash balances on hand in each of the taxable years, and was financially abundantly able to satisfy the contract obligation and remove the restriction. See I. T. 3130, C. B. 1937-2, pp. 107, 109; Auto Interurban Co., 40 B. T. A. 161.

Furthermore, the restriction could have been removed by the petitioner either by payment of the accrued dividends or by setting aside a fund for the payment thereof as provided in the preferred stock certificates and the resolution. The petitioner has proved accrual and nonpayment, but the record is silent as to whether or not any funds were set apart for the payment of the preferred stock dividends. The petitioner has therefore failed to prove that the provisions of the preferred stock certificates and the resolution had the legal effect of prohibiting payment of dividends on common stock within the taxable years. Honakaa Sugar Co., supra.

There is further reason for disallowing any credit whatever to the petitioner. Section 26 (c) (1), swpra, allows a credit equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of' the written contract, et cetera. The record shows that no such excess existed in either of the taxable years. The undisputed adjusted net income is $48,079.36 for 1937 and $43,618.25 for 1938. The earnings accumulated up to the beginning of the taxable year 1937 amounted to $97,802.89 and the earnings of that year amounted to $28,219.16. Even if the petitioner was required by the preferred stock certificates to pay or set apart during that year $15,702.75 for the payment of accumulated dividends, and by the trust deed to pay $30,000 for that current year’s bond retirements, and $12,600 for the interest on the outstanding bonds, it would nevertheless have available for distribution on its common stock the amount of $67,719.30. Since the adjusted net income is only $46,079.36, it is obvious that the petitioner is entitled to no credit under section 26 (c) (1), supra. A similar computation for the year 1938, made on the basis of the earned surplus at the beginning of that year of $126,022.05 and earnings during the year of $32,788.20, and the deduction therefrom of accumulated dividends on preferred stock in the amount of $13,994.75, and bond retirements of $30,000 and interest thereon of $10,800, results in an amount available in 1938 for distribution on the common stock of $104,015.50, which is in excess of the adjusted net income of $43,618.25. The use of the earnings accumulated from prior years in making the computation under the statute is proper, since the statute does not restrict “amounts which can be distributed” to income of the taxable year. Monroe Abstract Corporation, 41 B. T. A. 5.

In view of our conclusion that the petitioner is not entitled to any credit whatever, either on account of the alleged restrictions in the deed of trust, or on account of those in the preferred stock certificates, it follows that the respondent’s determination of deficiencies for the respective taxable years is approved, and further that there have been no overpayments by petitioner in either one of those taxable years.

Decision will be entered for the respondent.


author: Disney:

text:
    Pietro Crespi, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103132.
    Promulgated June 6, 1941.

      Robert Ash, Esq., for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves a deficiency in income tax for the year 1938. The respondent determined a deficiency in the amount of $837.30, all of which is in issue. The only question for our determination is whether petitioner is domiciled in the State of Texas, and entitled to report his income on a community property basis. The Commissioner determined that he was not domiciled in Texas. The petitioner filed his return for the year 1938 with the collector of internal revenue for the second district of Texas.

The petitioner is the son of Pio Crespi, the president and principal stockholder of Crespi & Co. the predecessor of which was organized in 1908, and has since that time been engaged in the business of buying and selling cotton, with its principal office at Dallas, Texas. The head office has always been in Texas, which is the largest cotton-producing state. In 1938 the approximate gross volume of business done by Crespi & Co. was $15,000,000. It sells cotton for its own account, including sales to the textile mills in South Carolina, North Carolina, and Georgia, and to foreign countries, including England, France, Belgium, Holland, Germany, Norway, Sweden, Switzerland, and Japan. Charlotte, North Carolina, is the center of the domestic textile industry in the United States. The head office of the company and the financial end of the business originates in Dallas, Texas. It owns a warehouse in Galveston, Texas, which is the principal concentrating point for its cotton, and controls a warehouse in Greenville, South Carolina. Practically 75 percent of the textile business of the United States is conducted in the South at this time.

Petitioner was born in Waco, Texas, in 1909, and attended the public schools there. He started to work in Dallas in 1928 with Crespi & Co. Since that time he has worked for the company in Corpus Christi, Texas; Memphis, Tennessee; Atlanta, Georgia; Le Havre, France; and Bremen, Germany, and is now and was in 1938 in Charlotte, North Carolina. In all of these places, he has been buying and selling cotton. Generally when he is in the eastern states, he is trying to sell cotton; when in Texas, he generally is buying cotton. The war has caused the company’s export business to fall off a great deal, and when the war is over the company should have a large export business. If so, petitioner will probably be in Europe trying to get some of that business. •

Petitioner is the only child of 'Pio Crespi, and he and Pio Crespi control Crespi & Co. He expects eventually to succeed his father as head of the business. The idea behind his going all over the world, getting schooling in the cotton business, is so that he can take his father’s place. After the war is over, petitioner expects to run both the export and the domestic phases of the company’s business, and to take charge of Crespi & Co.

Petitioner now resides in Charlotte, North Carolina. He went to Charlotte about September 1935, although prior to that time, while working in Dallas, he was accustomed to stopping at the office in Charlotte every year to talk to the agents and salesmen which the company had in the Carolinas. He went to the Carolinas to learn the domestic mill business, after having been on the European end of the business. About a year later he went to Atlanta, Georgia, stayed about a year, and then went back to Charlotte, North Carolina. When he first went to Charlotte, he lived in a furnished apartment. He now lives in a home which he rents, and has been renting since July 1940. He does not own any real property in North Carolina, although he has accumulated some furniture and owns most of the furniture in his home. Part of the furniture came from Dallas, from his father. He does not pay any taxes in North Carolina, and did not file a North Carolina income tax return for last year. He was married in 1935 at Corpus Christi, Texas, to a girl from Dallas, Texas. He has no family portraits or other possessions. He has no banking account at Charlotte, but has one in Dallas, Texas, and one in a bank in New York. He votes at Dallas, Texas, and pays poll tax there. He registered for the draft at Dallas, owns real estate, that is, oil property, in Texas, as a member of the partnership, and owns stocks or securities and keeps the certificates representing them at Dallas in the Crespi & Co. offices. The address in which his securities are registered and to which dividends come is Dallas, Texas. He keeps his personal books at Dallas. In market transactions on cotton futures, for instance, he uses Dallas, Texas, as his address. He is a member of the country club at Charlotte, North Carolina, for purposes of entertaining mill men, and is at that place interested in, and in 1938 realized about $8,700 from, the cotton merchant business of Crespi, Baker & Co., which he and his father control. He carries on his automobile a North Carolina license, but gives Dallas, Texas, as his address in that connection. He feels that Dallas is his home to which he will come back eventually.

Petitioner intends to reside where he can be of the greatest service to Crespi & Co., whether it be Dallas, Charlotte, Atlanta, or any other place. He went to Charlotte, North Carolina, because Charlotte and vicinity is the center of the domestic textile industry in this country. He handles the domestic end of the business and the export trade is handled through the Dallas office. The petitioner determines Crespi & Co. policies regarding domestic business, but that is not true as to export business. His job at this time is building up a domestic mill business. He has been going around calling on the cotton mills. All cotton shippers travel a great deal during their spare time. When petitioner gets to know the cotton millers, he can talk to them over a long distance telephone from Dallas, if he desires. After a while it will not be necessary for him to remain in the vicinity of the Carolinas. He intends to stay in North Carolina so long as it is necessary to build up the good will of the officials of the textile industry to the extent that he can be able effectively to perform the duties involved in the domestic trade from the Dallas office, and then his present plans are to return to Dallas and conduct' the business from the Dallas office. He thinks he has such a good will of the mill men pretty well built up now. As soon as the export business picks up, he expects to return to Dallas.

During the past two years petitioner has been in Dallas three or four times a year. He was there three times between Christmas 1940 and the time of hearing on February 19, 1941. He usually stays from a week to ten days, and stays in his father’s home. His wife sometimes returns with him.

About July 1939 petitioner’s father wrote to him about coming back to Dallas and his letter in response, in pertinent part, stated:

* * * I know you are anxious for me to return to Dallas and kelp you in tke main office, particularly in tke event of war, as I remember your recent comment tkat you carried tke wkole burden of business through one war and would dread going it alone through the next one.
But here is tke other side of the picture, I feel that my work in the Eastern belt has not yet been completed. I feel that I am really accomplishing something in the selling end, our sales have increased tremendously since I have been here, and there have been no more “Crawley affairs.” With me over here we have given a looser rein in the selling and are well lined up for big business. Despite this I don’t feel that we can give Wilson a free hand in operating the warehouse, with so much Crespi & Co. cotton going thru there, unless I am here to keep a check on him. Also you know the friction, professional jealousy or whatever you care to call it between Greenville and Charlotte, well I am acting as a buffer between the two and the results can be seen in the increase in sales and harmony that now exists, which after all should qualify me as an ambassador, however I know it would go back to the old status should I leave too soon.
Naturally I would prefer to be home, but I don’t feel that my work has been completed here, however I will abide by your decision as to which is the better course. Please let me know your decision at an early date so I can arrange my affairs here accordingly.

The petitioner is a member of the cotton exchanges at Dallas, New York, and New Orleans, and is a director of the cotton exchange at New Orleans.

Where was the petitioner’s domicile in 1938? He was born and educated in Texas and for several years thereafter worked in, or in connection with, his father’s office in Dallas, and still returns frequently to that office. That his domicile originally was in Texas can not be doubted. That he now i-esides, ■ and in 1938. resided, in North Carolina is equally plain, and he stated in effect that he expected to reside wherever the business of Crespi & Co. required. The crux of the question here is, therefore, whether by such residence his domicile was changed to North Carolina. There is a presumption of the correctness of the Commissioner’s determination that the petitioner was not during 1938 domiciled in Texas, within the purview of section 53 (b) (1) of the Revenue Act of 1938. Though the statute uses the expression “legal residence”, the cases consider the matter as one of domicile. Samuel W. Weis, 30 B. T. A. 478; L. B. Peeples, 27 B. T. A. 879.

The petitioner in effect contends that he has from birth been domiciled in Texas, that he has always since starting work been a part of the extensive cotton business of his father, which has its center in Dallas, Texas, that as his father’s only heir he expects to succeed him as head of that business, and that the evidence shows the temporary character of and reasons for his absence from Texas, involved in his business connections, indicating no change of domicile. The respondent urges in substance that domicile requires residence, that petitioner had no residence in Texas, and therefore no domicile, and that mere intent is not sufficient either to establish or retain domicile.

A domicile once acquired is presumed to continue until it is shown to have changed. Mitchell v. United States, 21 Wall. 350. Mere absence from a fixed home, however long continued, can not work the change. Sun Printing & Publishing Association v. Edwards, 194 U. S. 377. However, “residence elsewhere repels the presumption, and casts upon him who denies it to be a domicil of choice, the burden of disproving it.” Ennis v. Smith, 55 U. S. 399. Actual residence is only one circumstance, and the presumption raised thereby is not conclusive. Thayer v. Boston, 124 Mass. 132. “But mere residence elsewhere will not rebut the presumption as to continuance, unless it is inconsistent with an intent to return to the original domicile.” 19 C. J. 433.

We think the residence in North Carolina is not inconsistent with intent to return to Dallas, and that we should not, under all of the facts herein present, give to actual residence the weight desired by respondent in his contention that the petitioner had in 1938 no actual residence in Texas, and his citation of Texas v. Florida, 306 U. S. 398, and Pecos & N. T. Railway Co. v. Thompson, 167 S. W. 801 (the latter case involving residence for purposes of venue). It is true that taking up a domicile requires taking up residence, yet actual residence is not necessary to retain a domicile once established. “Actual residence is not necessary to retain a domicile once acquired.” 19 O. J. 424. It is obvious that under the facts here involved Texas was the domicile of origin of the petitioner. He was born there. It is also clear that there was no such abandonment of domicile as in Texas v. Florida, supra, where it is said of Green, “After that [i. e., after 1911, twenty-five years before his death, in 1936, the date as to which the question of domicile ai'ose] he was never identified in fact with any place of residence in Texas and there was nothing in his life to connect him with a Texas home other than his frequent statements that his legal residence was in Texas.” Here the petitioner continued at all times to be identified with Dallas as his former place of residence, and statements alone are not relied upon, but much corroborative evidence is adduced. We think it unnecessary to repeat the many facts set forth above, which identify the petitioner at all times with Texas and Dallas. Plainly there is scant, if any, evidence here of animus manendi as to North Carolina, but practically everything negatives such intent. Temporary residence merely for the purpose of transacting business is not sufficient to constitute a domicile. 19 C. J. 408.

In Williamson v. Osenton, 232 U. S. 619, it is saidl:

The essential fact that raises a change of abode to a change of domicil is the absence of any intention to live elsewhere, Story on Conflict of Laws, § 43— or, as Mr. Dicey puts it in his admirable book, “the absence of any present intention of not residing permanently or indefinitely in” the new abode. Conflict of Laws, 2d ed. 111. * * *

Here, however, we find no absence of present intention of not residing permanently or indefinitely in North Carolina. It is affirmatively shown that though the exact time necessary to complete the object in mind in North Carolina was not known, there was definite present intention not to remain there, but to return to Dallas. This is shown, we think, by the whole tenor of the evidence, including a letter written in 1939, rather plainly in due course of business and having no appearance of self-service, which letter states that “I would prefer to be home, but I don’t feel that my work has been completed here.” That Charlotte was the second important place next to Dallas in the business of Crespi & Co., except in the export business, is hot of weight, since both export and import business, headed at Dallas, were the future concern of the petitioner, nor is the fact that at Charlotte the petitioner drew a considerable salary. It was from a company controlled by the petitioner’s father and by him, and obviously a connection of the Dallas organization.

The respondent argues that mere indefinite intention can not retain domicile, and cites Rosenberg v. Commissioner, 37 Fed. (2d) 808. Therein the facts disclose that the state of new abode was “the permanent center of practically all of his personal activities”; while herein it is equally plain that Dallas, Texas, the place of former abode, was such permanent center of activity. Indefinite intent, often called “floating” intention to return to former domicile, without more, of course is not sufficient to establish or retain domicile, but we can not agree that this is a case of such mere “floating” or vague indefinite intention. Nothing in the matter seems more certain than that the petitioner expects to assume the management of the business of which his father is the head, and the constant connection kept by the petitioner with that business and with Dallas, by voting, frequent business trips, paying poll taxes, registering for the draft, keeping a personal bank account (whereas he kept none in Charlotte), indicate to us that there was substantiated intent to maintain the domicile of origin. “A change of abode with present intent to return to the former abode upon the contemplated happening of an event in the indefinite future, as business dispatched, health recovered, employment ended, employer’s recall, is not a change of residence or domicile.” United States v. Knight, 291 U. S. 129; affd., 299 Fed. 571. The object in living ⅛ Charlotte has largely been accomplished, and as soon as the export business picks up, the petitioner testified, “I am on my way back here.” The intent to return is definite, the time not greatly indefinite. This shows, in our opinion, the necessary retention of domicile in Dallas.

Rogers Hornsby, 26 B. T. A. 591, in our opinion does not indicate a different answer here. The petitioner there owned no property in Texas and did in the taxable years own real estate elsewhere, and he lived, at the time of the trial, on a valuable farm outside St. Louis which he had purchased in the year following the taxable years. He paid no taxes on property in Texas, but paid taxes in Missouri. He apparently had not voted in Texas for seven or eight years prior to the taxable years, though he had- not voted elsewhere. He had conveyed his Texas home to a divorced wife, and remarried to a resident of St. Louis. Each case depends on facts and intent. They differ here vitally, we think, from those in the Hornsby case.

We conclude and hold that the domicile of the petitioner in 1938 was Dallas, Texas.

Decision will be entered wider Rule 50.

       SEO. 53. TIME AND PLACE FOR FILING RETURNS.
      * ***** *

      (b) To Whom Return Made.—
      (1) Individuals.—Returns (other than corporation returns) shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or, if he has no legal residence or principal place of business in the United States, then to the collector at Baltimore, Maryland.


author: Opper :

text:
    Estate of Cassius E. Wakefield, Detroit Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Josephine O. Wakefield, Detroit Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101065, 101066.
    Promulgated June 6, 1941.

      Frank E. Boos, Esq., and Boioe A. Baimer, Esq., for the petitioners.

      DeWitt M. Evans, Esq., and Homer J. Fisher, Esq., for the respondent.
   OPINION.

Opper :

If the trust property passed by virtue of the exercise of a testamentary general power of appointment in Cassius, the value thereof is includible in his estate. We think the decree of the State Chancery Court, to which the trustee and executor resorted for instructions, establishes that it did and that such an adjudication forecloses the question here. Estate of Mary Adele Morris, 38 B. T. A. 408.

In a proceeding to which all those interested were apparently made parties, it was assarted:

* * * tliat under tbe Declaration of Trust above-described, which is now terminated, the net corpus of said trust and all accumulated and undisbursed net income of said corpus since the date of her death will likewise pass through tlie estate of Cassius E. Wakefield to the residuary legatees of the said Cassius E. Wakefield aforedescribed except such part thereof as may be necessary to pay and discharge such legacies under the Last Will and Testament of Cassius E. Wakefield (other than his residuary legacy) as may not have been paid in full, in order to complete the payment thereof. * * *

and the court accordingly directed:

* * * that the trustee under the said Declaration shall proceed to pay from the corpus of said trust the legacies under the will of Cassius E. Wakefield in the order in which said legacies appear in the will of Cassius E. Wakefield, any residue of the trust estate remaining to pass under the residuary clause of the will of Cassius E. Wakefield.

This result was possible only on the assumption that a valid.power was effectively exercised by Cassius’ will; for otherwise the terms of the trust required that the property pass to his heirs at law, a totally different legal concept than his legatees, though by coincidence some might chance to be the same individuals. We think this disposition is conclusive. Sharp v. Commissioner, 303 U. S. 624, reversing (C. C. A., 3d Cir.), 91 Fed. (2d) 802.

While this should suffice to dispose of the elaborate arguments advanced by petitioner to demonstrate that there was no power and that none was exercised, it might be well to add that no specific mention of the power was necessary in Cassius’ will, since it is clear from the terms of the trust that any will would inevitably exercise it, as Cassius must have known, Title Guarantee & Trust Co. v. Ebaugh, 184 N. Y. S. 351; Boyes v. Cook, 14 Ch. Div. 53; Osgood v. Bliss, 141 Mass. 474; 6 N. E. 527; see Agnes Davis Exton et al., Executors, 33 B. T. A. 215 ; that provisions of Michigan law confined to trusts of personalty, even if otherwise applicable, need not detain us since at the time of the request for judicial construction the trust covered realty as well; and see Hutton v. Benkard, 92 N. Y. 295, 304, construing the New York Eevised Statutes from which the Michigan law was admittedly derived; that authorities establishing that a power can not be exercised before the donor’s death are, by their reasoning, confined to those cases where the power is given by a will, which of course is ambulatory and does not speak until death, and can not apply to a trust or other inter vivos estate completely and irrevocably created before the exercise of the power, Osgood v. Bliss, supra; Title Guarantee & Trust Co. v. Ebaugh, supra; Agnes Davis Exton, supra; and finally, that the doctrine of Helvering v. Grinnell, 294 U. S. 153, is inapplicable since here, by their answers to the bill of complaint in the chancery proceeding, the beneficiaries must be regarded as having elected to claim under the power, and thus to preclude the result that nothing passed thereunder. Mary Adele Morris, supra.

Since respondent has made it clear that if one of the petitioner estates is charged with the. property the other should be released, we need not consider the tax liability of the Josephine Wakefield estate, nor determine whether her apparent desire to relieve herself of the care of her property during life is not a sufficient motive to dispose of the charge that the gift was made in contemplation of death, Estate of Caroline Foerderer Artman, 38 B. T. A. 1020, even though incidentally an ultimate disposition after death is also involved. See Thomas C. Boswell et al., Executors, 37 B. T. A. 970.

Decision will he entered under Bule SO.


author: Oppek:

text:
    Francis Shelton Farr and Louise Arnold Farr, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101144.
    Promulgated June 6, 1941.

      W. Montague Geer, Jr., Esq., and Walter G. Elliott, Esq., for the petitioners.

      F. 8. Gettle, Esq., for the respondent.
   OPINION;.

Oppek:

We are of the opinion that this case is controlled by O. L. Burnett, 40 B. T. A. 605; affirmed on this issue (C. C. A., 5th Cir.), 118 Fed. (2d) 659. Petitioner’s contrary contentions are susceptible of division into three parts: First, that the Burnett case is wrong and “we think should be overruled by this Board”; second, that the case is distinguishable; and, third, that if the rule there followed is applied to petitioner, it places an unwarrantable construction upon section 117 of the Revenue Act of 1936, from the standpoint of constitutionality.

We think the Burnett case was properly decided and should be followed. And we do not think that it is distinguishable. The differ-. enees in the present facts petitioner asserts to be that here petitioner’s firm was a stock exchange member, and always paid fully for the property bought, and sold the listed stocks by its own firm members to purchasers there, whereas in the Burnett case petitioner bought and sold through brokers and on margin; that here the partnership agreement authorized buying and selling securities for profit as a business; that there was a large business investment and continuing overhead and the devotion to the business of a large amount of time, attention, and experience by firm members; and that petitioner’s firm had over 600 customers, to some of whom it at times sold stocks purchased for its own account.

To the extent that these facts form the basis for petitioner’s contention that the firm was carrying on a trade or business of buying and selling securities for profit on its own account they are persuasive, and we have made a finding of fact to this effect. That, however, does not constitute a distinction from the Burnett case, for similar facts and the same finding may be found there. They do not demonstrate that the Burnett case is inapplicable. The Board there said that, under the corresponding section of the 1934 Act, “any property is a ‘capital asset’ unless it may properly be included in an inventory or is held for sale to customers.” If petitioner was a trader and not a 'dealer, it was not entitled to use inventories. O. L. Burnett, supra. The mere fact that it was a stock exchange firm and had customers as a broker neither entitled it to do that nor to claim that securities traded in for its own account were intended for sale to customers. In Vaughan v. Commissioner, 85 Fed. (2d) 497, 499; certiorari denied, 299 U. S. 606, the Second Circuit Court of Appeals came to the conclusion that the stock brokerage firm there involved was to be considered a dealer with respect to stocks in which they were “specialists”, adding:

* * ⅜ But we can not see that they were “dealers” within the meaning of the regulations in the other securities, which were held and traded in in relatively small quantities and had no necessary connection with their business except for speculation. We do not think it possible that they purchased or carried such stocks as a supply for customers.

To the same effect is Schafer v. Helvering, 299 U. S. 171. There is no claim here that petitioners were specialists or that for any other reason the stocks bought for their own account were “a purchase to create a stock of securities to take care of future buying orders in excess of selling orders.” Schafer v. Helvering, supra. We think, therefore, that there is no ground for the assertion that the present facts distinguish this proceeding from O. L. Burnett, supra.

On the constitutional point, petitioners contend, in effect, first that the respondent’s position prevents them from deducting the cost of goods sold in arriving at their gross income, and, second, that the emphasis placed upon sales to customers creates a “whimsical”, arbitrary and unreasonable classification. The first contention was disposed of unfavorably to petitioner’s position in Edward J. White, 37 B. T. A. 1106, dealing with the provisions of section 23 (r) of the Revenue Act of 1932. As to the second, we can not be unmindful that we are dealing here with a matter of deductions which “may be allowed or not in the sound discretion of Congress; the only restriction being that it does not act arbitrarily so as to set up in effect a classification for taxation so unreasonable as to be a violation of the fifth amendment.” Davis v. United States (C. C. A., 2d Cir.), 87 Fed. (2d) 323, 325; certiorari denied, 301 U. S. 704.

We think it apparent that, in describing the excepted class by reference to the term “customers”, Congress was characterizing not the vendee but the type of business. This was entirely in accordance with precedent. As has been suggested, the use of inventories was restricted by regulation and decision to dealers, who in turn were to be distinguished from traders by reference to whether their sales were made to customers in the ordinary course of their business. That Congress had this analogy in mind in enacting 117 (b) is evident from the reference to inventories in the same sentence. Again, in the 1928 Act (sec. 118), the “wash sales” provision is declared not to be aimed at a corporation which is “a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business.” This required a definition of dealer, which, as accepted, contained reference to “resale to customers.” Donander Co., 29 B. T. A. 312, 314. In the 1932 Act there was a limitation upon losses from sales or exchanges of stocks and bonds even though not capital assets as there defined, meaning those held for two years or more, which, however, was inapplicable “to a dealer in securities (as to stocks and bonds acquired for resale to customers) in respect of transactions in the ordinary course of his business.” Sec. 23 (r).

In 1934, as petitioner points out, the change consisted of a “slightly revised” treatment. Capital assets were defined to include property even though connected with a trade or business, and without regard to any holding period, and the reference.to “customers” was moved from section 23: (r) to section 117 (b). The effect, however, seems to us to have been, first, to create a classification intended, as theretofore, to apply only to a dealer in securities, “i. e., a merchant of securities * * * with an established place of business regularly engaged in the purchase of securities at wholesale and their resale to customers”; and, second, to make it clear that the classification separating a dealer, on the one hand, from a trader, on the other, is not only sanctioned by repeated precedent, but based upon a real distinction between such a merchant and “traders or other taxpayers who buy and sell securities for investment or speculation, whether or not on their own account, and irrespective of whether such buying and selling constitutes the carrying on of a trade or business.” We do not think it possible to say that such a classification is whimsical or arbitrary.

Decision 'will he entered for the respondent.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      *******
      (b) Definition of Capital Assets.—For the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
      * * * * * * *
      (d) Limitation on Capital Losses.—Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the united States or of any State or Territory, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale (except such portion of the loss as does not exceed the amount, if any, by which the adjusted basis of such instrument exceeds the par or face value thereof) shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.

       H. R. 708, 72d Cong., 1st sess., p. 18, referring to Revenue Act of 1932, section '23 (r).

         Ilid.