text:
    Badger Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31109.
    Promulgated November 21, 1933.

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

      T. M. Mather, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has held that two monetary obligations of the petitioner operated to reduce its statutory invested capital for the tax period ended April 30, 1920. One of these was an item of $85,236.48, representing the dividend which the petitioner declared June 4, 1919, payable to stock owners of November 1, 1919. The other was the petitioner’s unpaid balance of $151,200 owing to Seibel for the purchase of his 185 shares of common stock.

Respecting the first of these items, the respondent concluded that petitioner’s act on June 28, 1919, in crediting its dividend account for the full amount of the dividends declared was an appropriation of such avails to the accounts of its stockholders, notwithstanding the terms of the corporate resolutions which fixed later dates for payment and restricted the same to legal stock owners as of November 1, 1919. In other words the respondent treated that book entry as tantamount to a payment of the dividends as of that date, which, being within sixty days of the end of the prior tax period, made them attributable to that period under article 858 of Regulations 45.

We think the respondent was wrong in such conclusion, since the proof is that, notwithstanding such book entry, no payments in fact were due or made until after November 1, 1919. Under the terms of the resolution the dividend was payable only to the legal stock owners as of November 1, 1919. That limitation made such date the effective date of the dividends and' in no event could they become a corporate obligation before that date. Richter & Co. v. Light Co., 116 Atl. 600; Cogswell v. Second Nat. Bank, 60 Atl. 1059; Second Church v. Church of Colegrove, 74 Conn. 79; Miller v. Andrews, 142 N.E. 67. The book entries were ineffective to constitute an appropriation in the absence of legal authority for them. Douglas v. Edwards, 298 Fed. 229.

The petitioner claims that in view of the respondent’s finding that it earned net income amounting to $489,808.24 in the period in review, it necessarily follows that it had on hand available earnings to discharge the dividend payments when they became due, and that in these circumstances, under article 858, supra, its invested capital was in no way affected.

The portion of the article relied upon by petitioner reads as follows:

* * * For the purpose of computing invested capital a dividend paid after the expiration of the first sixty days of the taxable year will be deemed to be paid out of the net income of the taxable year to the extent of the net income available for such purpose on the date when it is payable. ⅜ * *

In view of the income shown, the petitioner’s position would seem to be sound if, under the record, we may assume that it was earned and used to discharge the dividend obligations as they matured. Ordinarily it is assumed that dividends, when declared, relate to accumulated profits in being and not to anticipated earnings. Applying that rule to the facts shown, we must conclude that the profits which the petitioner’s board intended to distribute when it passed the resolution on June 4 had been earned or would be earned prior to the date of payment, although not necessarily available for immediate distribution. Under the terms of the resolution the payments were postponed to and after the first day of the following November. In their aggregate these dividends amounted to less than 25 percent of petitioner’s net income, and since only half of them were paid in November, and the balance in January and February 1919, we think it fair to assume, under the circumstances, that they were made from income that was available for such purpose at the payment dates and not from petitioner’s invested capital. Edwards v. Douglas, 269 U.S. 204 (sustaining in part 298 Fed. 229). Respecting this item the contentions of the petitioner are sustained.

The respondent further reduced the petitioner’s invested capital by this balance owing on the repurchase of its capital stock. The petitioner argues that this obligation should not be held, at least in its entirety, to effect its capital structure, for the reason (1) that at most it was made up of a series of installment debts maturing over a period of 88 months, (2) that the contract of sale was wholly executory, and (3) that the payments called for were, or could have been, made out of its current earnings.

We are unable to agree with these contentions. The whole sum of $222,000 became a liability upon which it paid interest on and from the date it purchased the stock from Seibel. After that date it was owner of the stock, payment was secured by collateral, and the contract was wholly executed. That the monthly payments might have been paid from the petitioner’s current income is of no importance in the absence of any proof to show that they were so paid. We, therefore, hold that the debt accrued by petitioner was a charge against capital and the determination of the respondent respecting it is sustained. American Cigar Co., 21 B.T.A. 464. Fairmount & Cleveland Coal Co., 12 B.T.A. 1296; National Tea Co., 17 B.T.A. 1222; Clearfield Lumber Co., 3 B.T.A. 1282.

Petitioner’s claim for special assessment under the provisions of section 327 of the Revenue Act of 1918 is denied in the absence of a showing to establish its right to the same under the statute. This claim is based wholly upon the argument.that, because of (1) borrowed capital used in its business in the period reviewed, (2) inadequate salaries paid to its officers, and (3) errors in its closing-inventories, abnormalities in income and invested capital warranted such relief.

On the element of borrowed capital evidence was introduced to show that petitioner carried a large volume of notes payable on its books during this period, but no proof whatsoever to show that they represented borrowed capital, or, if so, that such capital was used as an income-producing factor in the petitioner’s business. On the other hand, evidence from petitioner’s books indicated that it borrowed money for the use of its officials during this period and made investments for their use and benefit which in the aggregate exceeded the sums it claims to have borrowed during the period. United Shoe Store, 2 B.T.A. 73; Eagle Piece Dye Works, 10 B.T.A. 1360.

The petitioner’s proof to show that it underpaid its officers during this period failed to convince us that such salaries were inadequate, or that they were out of proportion to salaries paid by like business corporations for similar services performed. Low salaries per se do not create an abnormality. Chappelow Advertising Co., 13 B.T.A. 1090; Moody & Waters Co., 14 B.T.A. 290; Kossar & Co., 16 B.T.A. 952.

The overstated inventories, upon which the petitioner lays much stress, were only partly proved by the showing that in two of its fifty retail lumber yards the inventories were out of proportion to what they had been in prior years. Under such facts the most petitioner would be entitled to do would be to correct those inventories so as to make them reflect its true income, but this it has failed to do. The conditions shown in petitioner’s business structure within the period reviewed were all avoidable and susceptible of correction by it. At most, it has not been shown that they created any abnormalities which worked a hardship upon petitioner which would entitle it to special relief. Cohn Goldwater Co., 15 B.T.A. 970; Wright Lumber Co., 17 B.T.A. 814; Peck Coal Corp., 15 B.T.A. 189; Dibrell Bros., Inc., 18 B.T.A. 1046; Clark Brown Grain Co., 18 B.T.A. 937; Everett Toggery Co., 19 B.T.A. 1098.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Sternhagen:

license: Public Domain

text:
    The Baltimore and Ohio Railroad Company and Affiliated Corporations, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53702.
    Promulgated November 21, 1933.

      Hugh G. Bickford, Esq., and R. Kemp Slaughter, Esq., for the petitioner.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Sternhagen:

1. The petitioner claims three classes of deductions growing out of its issue of common shares in 1927: (a) $422,927.40, which it calls interest on prepaid stock subscriptions; (b) $1,422,-956.25 underwriting and service fees to the bankers, and (c) $17,-053.80 printing and listing costs. In our opinion, none of these amounts is a proper deduction under the statute, Revenue Act of 1926, section 234, and the decision as to each is governed by prior decisions.

(a) Despite the petitioner’s characterization in the notice to shareholders of the subscription price as the full price less interest, this seems to us to be merely a mathematical method of arriving at the actual price to be paid under each of the two elective methods of payment. There was no “ interest paid or accrued within the taxable year on its indebtedness.” What the petitioner did, apparently, was to figure out a price which would embody the fair consideration at the dates of payment and the time of issuance in relation to. a basic figure of $107.50 a share — for full cash before July 21, $106.83, and for part cash and part deferred, $106.85. That this may have been arrived at by using a mental concept of interest, or that mathematically the figures are the same as if par of $100 (not the assumed base figure of $107.50) were paid and interest thereon paid before delivery of the shares, is not determinative. The statute requires that there should be an indebtedness, that there should be interest upon it, and that it should be paid or accrued within the taxable year. A formula is not enough. Commissioner v. Old Colony R.R. Co., 284 U.S. 552; Henrietta Mills, Inc. v. Commissioner, 52 Fed. (2d) 931; 20 B.T.A. 651; Daniel Bros. Co. v. Commissioner, 28 Fed. (2d) 761; 7 B.T.A. 1086; Carl Lang, 3 B.T.A. 417; Marsh & Marsh, Inc., 5 B.T.A. 902; Anderson & Co., 6 B.T.A. 713. In Eastern Bolling Mill Co., 5 B.T.A. 663, payments were actually made by the taxpayer which, the Commissioner conceded were interest on advance payments for stock and deductible. It was held that the amount was not part of invested capital. Paramount Knitting Mills, 17 B.T.A. 91, involved the deductibility of accrued interest on subsisting notes. Neither of these decisions cited by petitioner supports its claim.

(b) and (c). It is the petitioner’s claim that both the amounts paid to the bankers and the costs of printing and listing, all of which were incidents of the issuance of common shares, are deductible. Many decisions have held to the contrary. Simmons Co. v. Commissioner, 33 Fed. (2d) 75; certiorari denied, 280 U.S. 577; Corning Glass Works v. Lucas, 37 Fed. (2d) 798; certiorari denied, 281 U.S. 742; Continental Pipe Mfg. Co. v. Poe, 59 Fed. (2d) 694; Surety Finance Co. of Tacoma, 27 B.T.A. 616. Cf. Hershey Mfg. Co. v. Commissioner, 43 Fed. (2d) 298. But the petitioner insists that such decisions are wrong, and that the law should now be brought back to its proper course. We adhere to the rule. We say only, in respect of the petitioner’s argument, that the deduction depends upon whether the outlay is an “ ordinary and necessary expense of carrying on trade or business ” and not upon whether it is a so-called capital item. It is quite possible that a given item eludes definition or clear accounting classification and hence can not be called either an expense or a capital expenditure. Cf. Commissioner v. Field, 42 Fed. (2d) 820. But its deductibility is not proven by showing that it results in no capital addition or investment or that a conservative accounting policy would require that it be written off.

2. The petitioner claims that the respondent’s determination of the fair market value on March 1,1913, of the lands on Staten Island was too low, with a resulting overstatement of gain realized by the award. The issue was tried entirely by the use of expert witnesses for both sides, whose opinions differed widely and whose methods of appraisal varied as to the factors of value regarded as significant and the emphasis placed upon them. It is said, for instance, by one, that the Brooklyn water front is an important factor and that there is a natural and recognized relation in the values on both sides of the channel, while another denies this and says that in long experience he never heard of the use of such a relation. The relative importance of transactions in the vicinity as indices of value is fraught with detailed dispute, the merits of which it would serve no useful purpose to discuss. All of the evidence, consisting both of facts and opinions, has been given careful study and full consideration. Petitioner is apprehensive that a finding may be arrived at by splitting the difference between the opposing sides. The fear is unjustified. There has been no inclination to avoid the thought which the helpful briefs of counsel have provoked, and the findings represent our conclusions from the evidence. The value results from the use of 48 cents a square foot for the disputed portion of parcels 1 and 2 which is not in the area of projected streets, and 56 cents a square foot for parcels 17, 18, 20, and 21.

3. The constitutional validity of the tax upon the award and interest has been sustained by earlier decisions in which the subject has been adequately discussed. United States Trust Co. of New York v. Anderson, 65 Fed. (2d) 575; John J. Bliss, 27 B.T.A. 803, and cases there cited. There was no error in respondent’s inclusion of the gain and interest in petitioner’s taxable income. Likewise, we think the entire amount of interest received in 1927 should be included. Its accrual goes along with the award itself, which occurred in 1927 when the decree became final and the principal and interest were fixed and received.

Judgment 'will Be entered under Rule BO.


author: Arundell :

text:
    Provident Trust Company of Philadelphia, Executor of the Estate of Owen Osborne, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59957.
    Promulgated November 21, 1933.

      Albert S. Lisenby, Esq., for the petitioner.

      William E. Davis, Esq., and Paul Waring, Esq., for the respondent.
   OPINION.

Arundell :

The respondent determined a deficiency in income tax of the decedent for the period in 1929 from' January 1 to November 18, the date of death, in the amount of $52 788.71. The deficiency arises out of respondent’s application of section 44 (d) of the Revenue Act of 1928 to installment obligations owned by the decedent at the time of death. That is, he determined that gain resulted from the transmission of the installment obligations upon the death of decedent.

We adopt as our findings of fact the stipulation filed by the parties. The stipulation shows that subsequent to March 1, 1913, but more than two years prior to January 1, 1927, the decedent, Owen Osborne, purchased four tracts of land at a total cost of $212,929. He sold one tract in 1927 and the other three in 1928. In each case the initial payment was less than 40 percent of the selling price, and for the balance he received installment obligations of the purchasers. At the time of Osborne’s death the face amount of such obligations was $612,000 and their fair market value was $391,680. For estate tax purposes the obligations were reported at their fair market value. The respondent, in computing the deficiency in income' tax in dispute here, determined that the fair market value of the installment obligations was equal to their face value, $612,000. Error is now confessed in the use of this figure, the correct figure being as stipulated, $391,680.

All of the four tracts of land were “ capital assets ” within the purview of section 101 (c) (8) of the Revenue Act of 1928. The respondent’s computation of tax was made at capital gain rates, By amended answer it is alleged that this was erroneous and that the gain should be taxed at ordinary rates. An increase in the deficiency is requested based on the use of ordinary rates. It is stipulated that, in respect of the parcel of real estate sold in 1927, the installment obligations of the face value of $91,000 — and fair market value of $58,240 — were acquired by Osborne on August 27, 1927, and were owned continuously by him until his death on November 18, 1929; that he was not a dealer in such obligations and he did not hold them primarily for sale in the course of his trade or business.

The questions raised by the original pleadings have to do with the application of section 44 (d), petitioner contending that there was no transmission or disposition during the taxable period; that even if there were, no income was thereby realized by decedent and consequently there was nothing subject to the tax; and that section 44 (d) is invalid in attempting to impose a tax where there is no income. These contentions have been disposed of adversely to the petitioner in Estate of Erskine M. Ross, 29 B.T.A. 227, and on the authority of that case we hold the decedent realized income which was subject to tax.

The other question is whether the income was subject to tax at normal and surtax rates under sections 11 and 12 of the Revenue Act of 1928, or at the capital gain rate under section 101 (a) of that act.

The parties have stipulated that all four tracts of land were capital assets within the meaning of section 101 (c) (8) of the Revenue Act of 1928. This being so, the gain arising from the sale of that land would be subject to tax at the capital gain rate. The respond- ' ent’s argument is that this question is governed by the decision in John H. Watson, Jr., 27 B.T.A. 463, which holds that payment of Liberty bonds at maturity is not a sale or exchange within the capital gain and loss provisions of the statute. Stated otherwise, his position is that gain taxable under section 44 (d) arises from the installment obligations themselves, entirely separate and apart from the original installment sale in which the obligations were received. We do not view the matter in this way. The report of the Senate Committee on Finance in explanation of the purposes of section 44 (d), which was quoted at length in the Ross case, supra, reads in part as follows:

The installment basis accords the taxpayer the privilege of deferring the reporting at the time of sale of the gain realized, until such time as the deferred cash payments are made. To prevent the evasion the subsection terminates the privilege of longer deferring the profit if the seller at any time transmits, distributes, or disposes of the installment obligations and compels the seller at that time to report the deferred profits

In the light of this declared purpose in enacting the statute it is our view that the gain subject to tax on the death of the owner of installment obligations is the gain realized on the sale of the property in connection with which the installment obligations were received, and the taxation of which was merely deferred under the installment sales provisions of the taxing statute. Consequently, if the property sold was a capital asset, as is the case here, the gain is subject to tax at the capital gain rate. The respondent’s request to have the gain computed at ordinary rates is accordingly denied.

Decision will be entered under Rule 50.


author: Matthews :

text:
    Kanawha Banking & Trust Company, a Corporation, and Arthur M. Hill, Executors of the Estate of Frederick M. Staunton, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45710.
    Promulgated November 21, 1933.

      J. D. Altizer, Esq., E. D. Battle, Esq., and T. B. Price, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   OPINION..

Matthews :

With respect to the shares of stock in the Kanawha City Co., the only issue raised is the value at which they should be included in decedent’s gross estate. With respect to the land owned by decedent in West Virginia, there are two issues: (1) Whether this land could properly be included as part of the estate under West Virginia law, under the doctrine of Crooks v. Harrelson, 282 U.S. 55; and (2) if so, its value on the basic date. The parties stipulated that the 1,000 shares of common stock of the Kanawha Land Co. held by decedent at his death had a value for estate tax purposes of $50 a share, or altogether $50,000, and effect will be given thereto in the computation under Rule 50.

1. The value of the stock of the Kanawha City Co. is a question of fact, to be determined from the evidence. As the stock of the Kanawha City Co. was closely held by a few stockholders, and as the sales nearest the basic date were two sales of small blocks at $100 a share made in 1920, we have considered the underlying assets, the record of earnings of the company, the facts and circumstances which would affect the future earnings of the company and the value of the stock, and opinion evidence as to the value of the stock on the basic date. Aside from evidence as to the past sales, earnings, carrying charges, and dividends paid by the company, the petitioner offered the oral testimony of a number of witnesses. These witnesses testified as to the value of the lots and hill lands, the state of the real estate market at the date of decedent’s death, the situation as to the bridge, and the prospects of the company; taking these factors into consideration, as well as the value of the bridge and the value of current assets, which were stipulated, and the past earnings of the company, these witnesses testified as to the fair market value of the stock at date of decedent’s death.

The petitioner’s witnesses were eminently qualified to give fair and unprejudiced opinions on the value of the tangible assets underlying the stock, the circumstances affecting the prospects of the company, and the fair market value of the stock. The witness, H. D. Smarr, had been an appraiser of Staunton’s estate. He had been for many years a dealer in real estate, coal, oil, gas, and timber lands in Charleston, Kanawha County, and the vicinity; and he had been for some years before 1926 in close touch with decedent and the Kanawha City Co.’s business. He controlled a company which was buying and selling lots in the same region. He had bought lots in Charleston, Kanawha City, and other suburbs. Charles K. Payne was and had been for many years vice president and director of the Charleston National Bank and had also been president of a large wholesale shoe company. He owned a great deal of local real estate, had dealt in real estate, and was familiar with local conditions. He had known the Kanawha City subdivision since its inception in the ’nineties. H. C. Capito was a local ice manufacturer, with a good knowledge of local conditions. He likewise had known the Kanawha City subdivision since 1893. Harrison B. Smith had lived in Charleston all his life, was president of the Kanawha Banking & Trust Co., chairman of the board of the Charleston Trust Co., president of the George Washington Life Insurance Co., and, at the time of the hearing, president of the Kanawha City Co. He had been a stockholder in the company for a number of years. He succeeded his brother as president of the company, his brother having succeeded the decedent. Mr. Smith had handled quite a good bit of land company stock. J ohn L. Dickinson was president of the Kanawha Valley Bank, of the Central Trust Co., and of the Dickinson Co., which had substantial land holdings around Charleston. Isaac Loewenstein was president of the Charleston National Bank and of the Loewenstein Realty Co., with large holdings. He had known the Kanawha City subdivision since 1900. These witnesses were among the leading business men in Charleston, had dealt in real estate on their own account, and had a full knowledge of conditions affecting the values of the land and of the stock. In view of the general character of petitioner’s witnesses and the full opportunity they had to inform themselves upon local conditions and factors of value at the basic date, their testimony as to the value of the stock deserves most careful consideration.

In general, the testimony of each of petitioner’s witnesses, while not identical with that of the other witnesses, corroborated the testimony of the others. The majority of the witnesses placed the fair market value of the stock at $150 a share. Some of them expressed doubt as to whether it could have been sold for that much, but were positive that it could not have been sold for more than that. One witness placed the value of the stock at from $150 to $200, and another from $130 to $175.

Respondent’s sole witness, D. E. Good, had lived in Charleston 25 years, was in the insurance, real estate, and mortgage loan business, and had often made appraisals of real estate. He testified as to the value of the underlying assets and based his valuation of the stock at $627 a share, solely on the value of the underlying assets, on a supposed valuation of the bridge of $500,000. Reducing this value of the bridge to $300,000, his value of the stock would be $497’ a share. He did not take into consideration the past earnings of the company, the market condition which might affect the sale of the real estate by the company, or the- fact that the earnings from the bridge would shortly cease. We do not consider Good’s testimony, sufficient to overcome that of the petitioner’s witnesses.

A glance at the sales of lots during the period 1914 to the basic date, and at the net income of the Kanawha City Co. for the same period, clearly shows that the prospective earnings of the company could not be gauged by the average earnings for the five years preceding the basic date. The consolidated net income for the entire twelve-year period, after payment of dividends on preferred stock, was $300,422.29, or an annual average of $25,035.19. In our opinion, the average earnings of the whole period would, under the circumstances of this case, more nearly indicate the earnings to come than the average of the five years preceding 1926. If, therefore, we test the value placed on the stock by petitioner’s ■ witnesses with the value obtained by capitalizing the average earnings of the entire period at 6 percent, we obtain $411,253 as the valuation of the 3,000 shares, or $139 a share. This indicates that the value of $150 is not too low. On the evidence, therefore, we have found that the stock had a value of $150 a share.

We come now to the value of the decedent’s one-fourth undivided interest in 210½ lots, 5,928 front feet, in Kanawha City. They were on an average better situated than the Kanawha City Co.’s lots, were considerably fewer in number and therefore more easily disposed of. and got the benefit, without added expense, of the company’s general improvements. The decedent’s interest was valued by respondent at $43,253.75; by the petitioner at $29,640, or at $20 a front foot. A number of petitioner’s witnesses quite familiar with local conditions sustained by their evidence petitioner’s valuation of $20 a front foot on these lots held by the decedent in trust, and this valuation has not been seriously challenged by the respondent. As these lots were few and reasonably salable, we have fixed that value accordingly:

Was this land situated in West Virginia includable at all in the decedent’s gross estate? This is the final question at issue.' Petitioner contends that under the rule of Crooks v. Harrelson, 282 U.S. 55, neither the lots just mentioned, nor lands owned by the decedent in Boone County, West Virginia, and included in the gross estate at a valuation .of $1,600, are properly includable in the decedent’s gross estate. The relevant section of the Revenue Act of 1924, here applicable, is set out in the margin. The Supreme Court in the Harrelson case, construing section 402 of the Revenue Act of 1918 identical with section 302 (a) of the 1924 Act, held, following United States v. Field, 255 U.S. 257, that the phrases, “ the charges against his estate ” and “ the expenses of its administration,” were conjunctive as to each other and as to the concluding clause, “ is subject to distribution as part of his estate.” For property of the decedent to be subject to the estate tax, therefore, it must comply with all three conditions. Since in Missouri the common law rule that real estate cannot be sold to pay expenses of administration prevailed and was unmodified by statute, it followed that decedent’s real property situate in that state was not includable in the decedent’s gross estate. The Court considered and expressly rejected the argument that this construction of the statute, although concededly incongruous in its result, was so absurd as to require its rejection.

The petitioner contends that the statutes of West Virginia have not so far altered the common law rule as toi subject the decedent’s land in West Virginia to the expense of administration of his estate, and, concededly, if this is the case, we are governed by the case of Crooks v. Harrelson, and must exclude decedent’s land from his gross estate.

It was made clear by that case that the power of an administrator to sell the decedent’s land to pay his debts was not in question, and that a commission allowed the administrator on such sale was not an expense of administration, but an expense incidental to the sale of the land. The Court also rejected the further contention that if all the personalty had been used to pay administration expenses, and a sale of the realty was consequently necessary toi pay debts and legacies, the land was in effect sold to pay administration expenses; saying that the cause of the sale must not be confused with its purpose. We confine ourselves, then, to the question whether real property in West Virginia may be sold to pay the expenses of administration. That administration expenses are not “ debts ” is settled in most common law jurisdictions. Crooks v. Harrelson, supra; Carr v. Hull, 65 Ohio St. 394; 62 N.E. 439; Safe Deposit & Trust Co. v. Tait, 54 Fed. (2d) 387. Cf. Woerner on Administration (3d ed.), §469.

The common law, except in so far as modified by the statutes of Virginia before West Virginia’s separation therefrom, and by the statute of West Virginia, is expressly declared to be in force in West Virginia (Code 1923, ch. 13, §5). Land descends to the heir at law under the statutes of distribution (Code 1923, ch. 78, §1 et seq.), while personalty, “ after payment of funeral expenses, charges of administration and debts ”, is to be distributed to the same persons as are heirs, with certain specified exceptions.

The West Virginia Code (Barnes’ Code, Ann., 1923) provides for the marshaling of debts of the decedent (ch. 85, §25) :

§26, Priorities of claims. — Where the assets of the decedent in the hands of his personal representative, after the payment of funeral expenses and charges of administration, are not sufficient for the satisfaction of all demands against him, they shall be applied, (1) to debts due the United States; (2) taxes and levies assessed upon the decedent previous to his death; (3) debts due as personal representative, guardian or committee, where the qualification was in this state, in which debts shall be included a debt for money received by a husband acting as such fiduciary in right of his wife; (4) all other demands ratably, except those in the next class; (6) voluntary obligations. (Acts 1872-3, c. 122.)

By section 26, all payments are required to be made in full to one class before to the next succeeding class.

The provision, the interpretation of which is here in question, is as follows (ch. 86, §3):

§3. Liability of estate for debts. — All real estate of any person who may hereafter die, as to which he may die intestate, or which, though he die testate, shall not by his will be charged with or devised subject to the payment of his debts, or which may remain after satisfying the debts with which it may be so charged, or subject to which it may be so devised, shall be assets for the payment of the decedent’s debts and all laxoful demands against his estate, in the order in which the personal estate of a decedent is directed to be applied. (Acts, 1882, c. 69.) [Italics ours.]

Section 4 of the same chapter provides- that such assets may be administered by the court in whose clerk’s office there is a report of the representative’s accounts and “ the debts and demands against decedent’s estate,” or by a court of equity. Section 5 provides that any heir or devisee who shall sell and convey any real estate, which by this chapter is made assets, shall be liable to those “ entitled to be paid out of the said assets.” Section 6 makes the heir or devisee liable only in equity to any creditor of decedent “ to whom a debt is due,” with respect to the estate descended. Section 7 provides the machinery for subjecting the real estate to payment, the opening words of this section being, “ When the personal estate of a decedent is insufficient for the payment of his debts, his executor or administrator may commence and prosecute a suit in equity to subject his real estate to the payment thereof.” Section 8 forbids a decree of distribution of the real estate to “ creditors ” without publication of notice. Section 9, referring to the same decree, speaks of distribution of the proceeds of the realty “ among such of the creditors of the deceased ” as are entitled.

It will be observed that there is no provision of the West Virginia law which subjects the decedent’s realty to expenses of administration in so many words. We are left, therefore, without further aid from the other provisions regulating payment of decedent’s debts and expenses, to construe tbe phrase contained in chapter 86, §3, “ decedent’s debts and all lawful demands against his estate.” Counsel for neither party has cited us, nor have we found, any decisions of the Supreme Court of West Virginia construing this phrase. We are left to infer its meaning from its context. As we have already said, administration expenses, under West Virginia law as under the law of other common law jurisdictions, are not to be comprehended under “ debts.” This leaves only the phrase, “ all lawful demands.”

The petitioner argues, in this state of uncertainty as to the true intent of the statutes, that we must be .governed by the intent of the legislature, and develops an elaborate historical argument beginning with the Code of Virginia of 1849, which is said to contain the first statute subjecting real estate to the payment of debts. The same clause, “ shall be assets for the payment of the decedent’s debts and all lawful demands against his estate,” is still contained in the Virginia law, Code, 1924, §5395, and appears to have been first used in the Act of March, 1842, which, altered by the omission of the proviso that the debt be evidenced by writing, was incorporated in the Code of 1849, Acts 1841-1842, p. 55 ; Code 1849, ch. 13, §3; cf. Alexander v. Byrd, 85 Va. 690; 8 S.E. 577; and it came into West Virginia law on the separation of that territory from Virginia and the institution of the State of West Virginia in 1863. See Virginia v. West Virginia, 206 U.S. 290. The report of the revisers of the Virginia Code of 1849, p. 675, as quoted by petitioner’s counsel in his brief, indicates that the intention of the amendment was to prevent a circuitous subjection of the realty to parol contract creditors by marshaling of the assets and to substitute instead a direct method, one consideration for the change being the allowance of claims of those parol creditors who had contracted with the decedent in the last year of his life. It is also said that the words, “ all other debts and demands except those in the next class,” as used in chapter 130, §25, Code 1849, with regard to the order in which debts and expenses must be paid, could refer only to debts incurred by the decedent during life. The argument is also made that since expenses of administration are ordinarily preferred to any other class of obligation, the use of “ debts and lawful demands ” to designate obligations which are not to be paid until debts to the United States, taxes assessed before death, fiduciary debts and judgments in Virginia have been satisfied, must show that “ debts and demands ” could not possibly refer to expenses of administration. We find this argument to some extent persuasive but by no means conclusive.

If we now return to the present code of West Virginia, we find in the provisions dealing with administration of the personal estate of the decedent express mention of “ charges of administration.” The personal representative, “ unless it be necessary for tbe payment of funeral expenses, charges of administration or debts,” shall not sell the estate which the will directs not to be sold (Code 1923, ch. 85, §15); and if the goods sold are insufficient to pay “ the funeral expenses, charges of administration, debts, and legacies,” the personal representative is authorized to sell more to this end (Code 1923, ch. 85, §17). From the-express mention of “ charges of administration ” in connection with the decedent’s personal property and absence of any reference to them in words in connection with his real property, it is argued that “ lawful demands ” must necessarily exclude charges of administration.

The above mentioned sections dealing with the sale of personalty for debts no doubt contemplate the payment of administration charges from the personalty. As such charges are preferred to all others, it would in fact be very unlikely that resort would have to be had to the real estate. The Supreme Court of West Virginia has held that under §3, ch. 86, making realty assets for “ debts and all lawful demands,” both personalty and realty are assets for payment of debts, but the personalty is primarily' liable therefor. Crawford v. Turner, 58 W.Va. 600; 52 S.E. 716; American Bank & Trust Co. v. Douglass, 75 W.Va. 207; 83 S.E. 920. But to say that personalty is primarily liable is very far from saying that when the unlikely occasion arises of an unsatisfied claim for administration expenses being made against realty, realty is not liable to any extent for such charges!”

We have carefully considered the case of Safe Deposit & Trust Co. v. Tait, 54 Fed. (2d) 387 (U.S. Dist. Ct., Md.), cited us by the petitioner, as well as certain other Federal court decisions on the present issue raised in other states. In the Safe Deposit case the court held realty in Maryland not liable for administration charges. The Maryland statute, the court thought, was sufficiently similar to the Missouri statute considered in the Earrelson case to bring it within the same rule. The Missouri statute provided that if the personal estate was insufficient, realty might be sold to pay “ debts and legacies.” Code 1919, ch. 1, art. 6, §141. This language is unambiguous. The Maryland statute provided that if the personalty was insufficient to pay debts and costs of administration, realty might be sold to pay “ debts ”, funeral expenses to the extent of $300 being specifically made a “ debt.” The court pointed out that sale of realty was to be made only for the payment of “ debts ”, and argued that the specific inclusion of funeral expenses, ordinarily an expense of administration, as a “ debt ” precluded the possibility that any other expenses of administration were included in the class of “ debts.”

Another recent case is Continental Illinois Bank & Trust Co. v. United States, 60 Fed. (2d) 1063 (U.S. Dist. Ct., Ill.), involving interpretation of the Illinois law. The Illinois statute was clear, expressly including the expenses of administration with decedent’s debts as proper cause for sale of the decedent’s realty, if his personalty should prove insufficient. The statute’s construction, therefore, throws no light on the instant case. Cf. Marble’s Executors v. Commissioner, 64 Fed. (2d) 745, also involving the Illinois statute. In First Trust Co. of Omaha v. Allen, 60 Fed. (2d) 812, affirming the district court’s decision in 51 Fed. (2d) 1069, the circuit court had to construe both the Nebraska and the Iowa statutes. The Nebraska statute expressly included administration expenses as a reason for the sale of realty. The Iowa statute was not so explicit. No Iowa cases had directly passed upon the meaning of the statute, which in § 11933 (Code of 1924) provided, “ If the personal effects are found inadequate to satisfy the debts and charges, a sufficient portion of the real estate may be ordered sold or mortgaged for that purpose * * The court, at page 816, said:

The meaning of the word “ charges ” in section 11933 is of vital importance. This word is used in contradistinction to the word “ debts ”; and has a different and a broader meaning than the same word “ charges ” where it occurs in section 402 (a) of the Revenue Act of 1921. In the latter statute, the word is used in contradistinction to “expenses of administration.” We think the word “ charges ” in the Iowa statute includes expenses of administration, and also other expenditures properly made by the administrator though not strictly expenses of administration, such as funeral expenses. Such broader meaning of the word “ charges ” is not unknown in probate law.

The court then proceeded to cite cases from other jurisdictions interpreting the word charges ” in support of its view that the term embraced administration expenses.

In the code of West Virginia, chapter 86, § 3, provides that all real estate ” of the decedent shall be assets for the payment of the decedent’s debts and all lawful demands against his estate, in the order in which the personal estate of a decedent is directed to be applied.” While, as we have pointed out, personalty must be used first, realty is still assets for debts and “ all lawful demands.” It would be difficult to "find more general language, and we are of the opinion that “ all lawful demands ” was intended to include expenses of administration.

“ Demand ” is defined by Bouvier, 1 Law Dict., sub nom. “ demand ”; as “A claim; a legal obligation. Demand is a term of art of an extent greater in its signification than any other word except claim. Co. Litt. 291 * * *.” See also Words and Phrases, vol. 1, 2d ser.; vol. 2, 3d ser. The word “ demand ” has been used in the statutes of some states and construed by their courts to include expenses of administration. United States Fidelity & Trust Co. v. People, 44 Colo. 557; 98 Pac. 828; State ex rel Temple v. Garesche, 198 Mo. App. 457; 200 S.W. 735. We are unable to find any authority to indicate that “ demands ” as used in the West Virginia statute has any narrower or more restricted sense than “ charges ” as used in the Iowa statute construed in the First Trust Co. of Omaha case, supra.

We are of the opinion, therefore, that real estate in West Virginia is subject to the payment of charges and expenses of administration of the decedent’s estate, within the meaning of section 302 (a) of the Revenue Act of 1924, and consequently does not fail within the rule of Crooks v. Harrelson, supra.

The interest of the decedent, Staunton, in the lots held by him as trustee should, therefore, be included in his gross estate at the value we have determined, together with the lands held by him at death in Boone County, West Virginia, at the value determined by respondent.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Goodrich took no part in the consideration of or decision in this report.

TRammell dissents.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      (a) To tlic extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate.


author: Lansdon :

text:
    Coosa Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49470, 51250, 63121.
    Promulgated November 23, 1933.

      W. 8. Pritchard, Esq., for the petitioner.

      Hartford Allen, Esq., and De Witt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent determined income tax deficiencies against the petitioner, as shown below, which are disputed in these consolidated appeals. In amended answers the respondent now asks that two of these deficiencies be increased. The cases by docket number, with years to which they relate, and amounts in dispute, are as follows:

Prior to March 1,1913, the petitioner acquired stock in a Canadian holding corporation, which was subsequently taken over by the Southeastern Power & Light Co. In that process the petitioner received the latter company’s stock in exchange for his original stock, and sold it during 1926 and 1927. The cost to petitioner of the shares sold is an issue common to those years. Other issues involve petitioner’s claims for (1) a credit on 1926 tax for an over assessment made in 1925, (2) for the right to deduct from 1927 gross income $104,886.31 representing loss on investments in the Atlas Fertilizer Co., (3) the right to have eliminated from 1929 income the sum of $1,314.36, which the respondent has held was realized profit to it from the sale of lots at Gadsden, Alabama, and (4) the right to deduct sundry expenses and salary items amounting to $7,289 from its 1929 income.

An additional deduction claimed for 1927, amounting to $37,-734.83, has been conceded by the respondent in his brief filed since the hearing and accordingly is allowed.

Respecting the issues involved in the sales of the Southeastern Power & Light Co. stock, the parties have stipulated that the petitioner in 1926 sold 3,235 of such shares for the sum of $94,810.98, and in 1927, 6,465 shares for the sum of $198,764.15. The parties have also agreed that the record in the appeal of First National Bank of Birmingham, Trustee, E. T. Schuler Fund, now pending before this Board at Docket Nos. 54372 and 63374, for decision upon the cost of the identical stocks, may be used as our basis for determining that issue in these proceedings. The material parts of that record are made a part of this record by reference.

The petitioner is a close family corporation, which, since its organization in 1908, has functioned principally as a holding company for investments made and property bought in its name by its business manager and president, E. T. Schuler. But few business meetings have been held since its organization. No formal dividends have been declared or corporate profits disbursed among its stockholders.

In the trial of First National Bank, Trustee, supra, the parties agreed that the stock in issue on March 1, 1913, had no market value either in the United States or Canada. 'A witness for that petitioner, however, testified that on or about March 1, 1913, some 500 shares of it were sold on the London market at $40 per share. An attempt was made to establish a valuation basis for the stock by showing the underlying values of the original company’s assets on March 1, 1913, but the evidence tendered was too remote in time and speculative in substance to be of value for that purpose, and no attempt was made to show the corporation’s offsetting liabilities or the number of shares issued. In lieu of better evidence, we held in that case that the price paid in London, although somewhat remote and by no means ideal for the purpose, was evidence of what some buyer was willing to pay for the stock on the basic date in that market, and, therefore, must be accepted as the only price established by the evidence in any jurisdiction. Accordingly, we fixed the cost in that case at $40 per share. Consistent with that holding, we now find, for the purpose of this decision, that the stock of the Alabama Traction, Power & Light Co. had a cost to petitioner on March 1, 1913, of $40 per share. The parties being in accord that the cost of each share sold may be represented in the quotient of whatever sum we may find was the March 1, 1913, value of the original stock divided by 10, we now find that cost for determining-petitioner’s gain or loss to be $4 per share.

The petitioner alleges that the respondent erred in failing to allow the benefit of an overassessment for the year 1925 as a credit against the proposed deficiency for 1926, and in holding that the overassessment was barred by the statute of limitations. The overassessment contended for was determined by the Commissioner of Internal Eevenue in his final audit of petitioner’s income tax returns for 1925, and is shown in the deficiency letter dated May 8, 1930, proposing the 1926 deficiency from which the appeal is here taken.

The allowance of credits of the elass here in controversy is governed by the provisions of section 284 (a) and (b) (1) of the Eev-enue Act of 1926, which limits any such to three years from the time the tax was paid, unless and except, in cases where the taxpayer has filed claims for refunds prior to the expiration of the three-year period.

This determination was made by the respondent on May 8, 1930, and there is no showing in the record that the petitioner kept alive its right to the credit it now seeks by the filing of a claim for refund within the statutory period provided for in the cited provisions. In the absence of such claim or claims, it is obvious that the respondent was without legal power to give the credit claimed at the time of his audit; and his action in not doing so must, therefore, be approved. Shafpa Realty Corp., 8 B.T.A. 283; F. Kieser & Son Co., 15 B.T.A. 359.

The petitioner contends that it should bo entitled to a deduction from its gross income for 1927 of an “ actual loss ” amounting to $104,886.31, that being the alleged difference between the cost and sale price of certain properties known as the Atlas Fertilizing Co. property.

The only evidence bearing on this claim is found in the testimony of petitioner’s president, E. T. Schuler, supplemented by a record book and several bundles of bank checks, which he put in the record in verification of his statements. The chronological history of the Atlas Fertilizer investment, according to Schuler, began in 1919 with the organization of the Peerless Chemical Co., of which he was an officer. Schuler stated that he invested approximately $252,840.08 of the petitioner’s funds in the Peerless Co. That company failed, and in 1923 Schuler and H. A. Webster took over its assets in court proceedings which completely wound up its affairs. The purchase price which he and Webster paid into court for the assets of the Peerless Co. was a vendor’s lien note, of the face value of $50,000, against that company, and $15,000 in cash. Later they were obliged to expend some eight or nine thousand dollars to purchase outstanding obligations of the Peerless Co., in virtue of which they acquired title to some four miles of railroad trackage valued at $106,000 when constructed. In 1925 the Atlas Co. was organized and these properties were turned in to it for 49,000 shares of its capital stock having a par value of $49,000. The Atlas Fertilizer Co. never functioned after 1925, and in 1927 the petitioner sold the stock it owned in that company for $45,000.

Although much time was devoted at the hearing by petitioner to show the amount of its original investment in the Peerless Co., in the view we take of the facts which must control our decision, that showing is of no importance to the case. The record shows, that the Peerless Co. was completely liquidated in 1923 and all of its assets sold; also, that the petitioner was allowed a loss amounting to $134,765.22 by the Commissioner of Internal Revenue on such account, which loss was carried through as a net loss to and into 1925. At the court sale the petitioner, through Schuler and Webster, made an unqualified purchase of the Peerless Co.’s assets for the price of $65,000. No stock liabilities were assumed and there is no evidence to show that petitioner’s original investment in any way figured in that purchase price or was considered in the transaction. In these circumstances there was no continuity of the petitioner’s investment in the property sold and whatever it had at stake in the defunct company was lost to it when the sale of the Peerless Co.’s assets became final. Olean Sand & Gravel Corp., 24 B.T.A. 324; Joslyn Mfg. & Supply Co., 6 B.T.A. 749; Petrel v. United States, 34 Fed. (2d) 563; affd., 41 Fed. (2d) 517.

The petitioner sold the assets of the former Peerless Co. to the Atlas Fertilizer Co. for 49,000 shares of the latter company’s stock; and it sold the Atlas Co. stock in 1927 for $45,000. The petitioner’s loss, if any, is the difference between that selling price and the cost to it of the shares. That cost was in its aggregate some $24,000 in cash, and whatever fair market value we may find the vendor’s lien notes for $50,000 had at the time of the purchase in 1923. The record is devoid of any proof tending to show what the cash or fair market value of the lien notes involved in the purchase of the assets of the Peerless Co. were on the date of that sale. In lieu of such proof we are unable to determine what that value was or to say that the respondent erred in his computation of the cost. We, therefore, must sustain the determination of the respondent upon this issue. W. Oscar Williams, 16 B.T.A. 109.

The only issue respecting the 1929 tax dispute upon which the petitioner introduced proof at the hearing was that involved in its claim of the right to deduct the sum of $4,500 from that year’s gross income as a payment made to M. D. Payne for services rendered. The facts connected, with this claim were stipulated and show that in that year petitioner was the principal stockholder of the Alabama Lime & Stone Corporation, which had suspended operations; that in order to protect its interest in that corporation it employed one M. D. Payne as a watchman and custodian of the company’s properties and paid him for his services thus rendered by giving him one of that corporation’s bonds, which cost petitioner the sum of $5,000 at the time of acquisition. The bond had a fair market value of $4,500 at the date it was paid to Payne. The petitioner claims this latter sum as a business expense, deductible from its gross income in 1929.

Respecting this claim, we think it is only necessary to say that it was a business charge of the Alabama Lime & Stone Corporation and not an ordinary and necessary expense of the petitioner’s business. (See sec. 23 (f) and (g), 1928 Act.) The petitioner was only a stockholder of the Alabama Lime & Stone Corporation. The duty of protecting a corporation’s property belongs to it and not to the-stockholders. The expenditure thus made must be regarded either as a loan to the Alabama Lime & Stone Corporation, or as a capital investment to be added to the cost of petitioner’s stock in that company. Harry E. Lutz, 2 B.T.A. 484; John G. Paxton, 7 B.T.A. 92; Warren E. Burns, 11 B.T.A. 524; B. Estes Vaughn, 17 B.T.A. 620; Snider B. Ward, 18 B.T.A. 326; W. F. Bavinger, 22 B.T.A. 1239; Burns v. Commissioner, 31 Fed. (2d) 399; 280 U.S. 564.

Even if such payment could be properly attributed to the petitioner’s regular business, we could not allow it upon the proof offered, for the reason that there is none in the record from which we may valúate the services rendered by Payne, or tell whether or not the payment made was reasonable compensation for them. McMillan Metal Co., 2 B.T.A. 797; General Water Heater Co., 14 B.T.A. 4; Atlas Plaster & Fuel Co., 18 B.T.A. 1123; Brown & Haley, 21 B.T.A. 752; Barto Co., 21 B.T.A. 1197; Gray & Co. v. United States, 35 Fed. (2d) 968.

The determinations of the respondent for the year 1929 are approved. The respondent, in his brief filed since the trial, has announced his abandonment of his claims for increased deficiencies for 1926 and 1927 except in so far as the facts stipulated may show an increase is warranted on account of additional profit from the sale of corporation stock, and as thus modified the respondent’s prayer for affirmative relief will be allowed.

A goodly portion of the printed record in these proceedings is devoted to the petitioner’s efforts to establish claims for losses and expenditures that have not been made the subject of any assignments of error and over which, therefore, we have no legal jurisdiction. Because of the importance given to them in the record and in petitioner’s brief, we indicate those claims below, as designated by petitioner in its brief, as follows:

Bo-We-Go_“ Loss ” 1925— $65,293.18
Peerless Chemical Company- “ 1925— 274,836. 31
Thornton Addition Lots- “ 1926— 66, 386.10
Edgerton Salt Brick Company- “ 1926— 13, 277.22
Anderson Brass Works- “ 1927— 25, 998. 80
Any expenditures- 1926— 2,322.40

Petitioner’s failure to make issue on the above claims by reference to them in its petition, or in amendments to the pleadings at or subsequent to the trial, precludes our considering them in a decision of the tax issues here involved. They are, therefore, disregarded. Dixie Mfg. Co., 1 B.T.A. 641; W. P. Weaver, 2 B.T.A. 709; H. D. & J. K. Crosswell, Inc., 6 B.T.A. 1315; James B. Lowell, 9 B.T.A. 62; D. N. & E. Walter & Co., 10 B.T.A. 620; David B. Roberts, 19 B.T.A. 351; Dawkins Lumber Co. v. Row, 276 S.W. 493; Duncan v. Gage, 250 S.W. 647; Boggs & Buhl v. Commissioner, 34 Fed. (2d) 859.

Decision will be entered u/nder Rule 50.

       Sec. 284. (a) Where there has been an overpayment of any Income, war-profits, or excess-profits tax imposed by this Act, the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, the Act entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” approved October 3, 1913, the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any such Act as amended, the amount of such overpayment shall, except as provided in subdivision (d), be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer, and any balance of such excess shall be refunded immediately to the taxpayer.
      (b) Except as provided in subdivisions (c), (d), (e), and (g) of this section—
      (1) No such credit or refund shall be allowed or made after three years from the time the tax was paid in the case of a tax imposed by this Act, nor after four years from the time the tax was paid in the case of a tax imposed by any prior Act, unless before the expiration of such period a claim therefor is filed by the taxpayer * * *.


author: Murdock :

text:
    Manhattan General Equipment Company et ali, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51345-51861, 51363-51370, 51372-51380.
    Promulgated November 23, 1933.

      Laurence Graves, Esq., and A. M. Kracke, Esq., for the petitioners.

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

       Proceedings of the following petitioners are consolidated and decided herewith: Southern Advertising Agency, Inc.; Neighborhood Stores Display Service, Inc.; Artemas Ward, Inc.; Luna Amusement Co.; Harum Scarum Amusement Corporation; The Stearn Advertising Company; Motor Coach Advertising Service, Inc.; Philadelphia Advertising Company ; Bluff City Paint Company (formerly DeSoto Paint Manufacturing Company) ; Parker, Griesar & Savel, Inc.; Inland Advertising Agency ; Western Advertising Company ; Collier Advertising Service, Inc. (formerly Artemas Ward, Inc.) ; Barron G. Collier, Inc., of Texas; Iroquois Advertising Co.; Helter Skelter Slide Corporation; Chicago Elevated Advertising Company; The Tabard Press ; Empire State Advertising Company ; Oceanview Realty Operating Company, Inc.; The Stearn Advertising Company of New York; Barron G. Collier, Inc.; A. H. Armstrong Company; Mark D. Batchelder Company ; Collier Service Corporation (formerly Broadway Subway Advertising Co., Inc.) ; Alexander, Ramsey & Kerr, Inc.; Middle States Publicity Company, Inc.; American Ammone Company; Pacific Railways Advertising Company; Street Railways Advertising Company; Manhattan Mercantile Corporation; United Stores Land & Improvement Company; Island Investment Company.

   OPINION.

Murdock :

The taxes in controversy are income taxes for the years 1925 and 1926. The proceedings have been consolidated. The parties filed a stipulation of facts in which the affiliated status of the various petitioners and other pertinent facts are shown. There was no testimony or other evidence except a copy of a notice of deficiency.

The only issue, in so far as the year 1925 is concerned, is whether or not the basis for gain or loss to Artemas Ward, Inc., a corporation of New York, upon the cancellation of a certain contract, should be reduced by deductions for depreciation or exhaustion of the contract allowable to Artemas Ward, an individual, during the period of his ownership of the contract. The contract in question was between the Interborough Rapid Transit Co., a corporation engaged in business in New York City, and Artemas Ward, an individual, whereby the former granted to the latter exclusive advertising, vending, and news-selling privileges in the cars and stations of the Transit Co. and its affiliated companies. The contract provided that it should continue until December 31, 1928. It was acquired by Artemas Ward prior to March 1, 1913, and the parties have stipulated that its fair market value on March 1,1913, was $3,028,096.42.

Artemas Ward, Inc., one of the petitioners herein, was organized under the laws of the State of New York on or about December 30, 1921. On March 13, 1922, Artemas Ward transferred the contract in question to this corporation in exchange for all of its stock. The Transit Commission of the State of New York terminated the contract on November 1, 1925. The parties agree that the transaction whereby Artemas Ward transferred the contract to Artemas Ward, Inc., was one in which no gain or loss was recognized (section 202 (c) of the Revenue Act of 1921), and, therefore, the basis for gain or loss to the corporation on this contract, under the applicable provisions of the Revenue Act of 1926, is the same as the basis would be if the contract had remained in the hands of Artemas Ward. See section 204 of the Revenue Act of 1926. They also agree that this basis is the fair market value of the contract on March 1,1913, to wit, $3,028,096.42. Furthermore, there is no difference between the parties as to the amount of the deductions allowable under the various revenue acts to Artemas Ward, the individual, and to Artemas Ward, Inc.

The Commissioner has actually allowed deductions on account of the exhaustion of this contract in excess of the amount allowable. The petitioners concede that total deductions on account of the exhaustion of this contract, equal to the fair market value of the contract on March 1,1913, have been properly allowed for periods prior to January 1, 1925. This rather unusual situation, where the entire basis has been deducted prior to the actual exhaustion of the contract, is explained by the fact that for a part of the year 1922, and for all of the year 1923, deductions were allowed to the corporation based upon the cost of the contract to the corporation, as provided by the Revenue Act of 1921. The corporation issued its stock for the contract. The value of the stock was the same as the value of the contract. At that time the contract was apparently much more valuable than it was on March 1, 1918, and for each of those two periods the deduction allowed and allowable far exceeded the annual deduction allowed for other years under the other revenue acts which provided that the basis for depreciation was the March 1, 1913, value.

The corporation claims that it sustained a deductible loss in 1925 on account of the termination of the contract, and it now contends that this loss is measured by the difference between the March 1, 1913, value of the contract and $1,730,578.36, the deductions for exhaustion of the contract allowable to Artemas Ward, Inc. The Commissioner has allowed no loss. He contends that the basis of the March 1, 1913, value should be reduced, not only by the deductions for exhaustion of the contract allowance to Artemas Ward, Inc., but also by the deductions for exhaustion of the contract allowable to Artemas Ward, the individual. Thus reduced, the basis disappears and there is nothing left to be deducted as a loss. This is the sole difference between the parties which we are asked to consider for the year 1925.

Congress has permitted deductions to be taken for losses under certain circumstances. But one claiming such a deduction must have sustained a loss, (Cf. United States v. Flannery, 268 U.S. 98), and must be able to point to some specific provision allowing the deduction. The Revenue Act of 1926, which is applicable to the calendar year 1925, provides in section 202 that the loss shall be the excess of the basis over the amount realized after the basis has been “ diminished by the amount of the deductions'for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property under this Act or prior income tax laws * * Section 202 (b) (2). The contract in question was apparently canceled without any recourse on the part of the corporation. The petitioners argue that the words “ since the acquisition of the property ” mean since the acquisition of the property by the one claiming the loss. Thus they would not diminish the basis by the deductions for exhaustion which were allowable in respect of the property during the time that it was owned by Artemas Ward. The respondent contends that the diminution of the basis is not so limited. The case of Barnett Anchor Oil Co., 25 B.T.A. 746, relied upon by the petitioners, is not in point. There may be room for argument that this particular provision of the statute is not entirely clear, but we think that the intention of Congress is clear when the various provisions of the statute relating to this subject are. considered together.

Normally, under the income tax acts gain or loss from an exchange of property for stock is recognized, the property in the hands of the new owner has a new basis for gain or loss, and deductions for exhaustion of the property are computed upon that same basis. The new basis is cost to the new owner. The present question would not arise were it not for exceptions to these general rules. Congress made an exception where an owner of property transferred it to a corporation for stock of that corporation and immediately after the transfer controlled the corporation. It said that under such circumstances no gain or loss to the transferor would be recognized. But it did not stop there. It made other special provisions so that neither the Government nor the taxpayers would be hurt as a result of the nonrecognition of gain or loss. These provisions in eifect put the transferee in the transferor’s place for tax purposes in so far as that particular property was concerned. Congress provided that the old basis for gain or loss on the property should persist and apply to the property in the hands of the new owner. It also provided, in acts after the 1921 Act, that depreciation should be computed upon this same basis. The relationship between the old owner and the new was close and it was because of that fact that no gain or loss was recognized upon the transfer. The provisions protected both the Government and the taxpayers. The combination of trans-feror and transferee was to have neither greater nor less tax benefit from the exhaustion in use or from the disposition of the property than the return through tax free income of the transferor’s basis. If the petitioners’ contention were correct, the Government would be the loser in every case through a duplication of deductions on the same asset. There would be no point in using the March 1, 1913, value as the basis for gain or loss and reducing it by less than the entire amount recovered through deductions for depreciation since March 1, 1913.

The Supreme Court of the United States has said that the amount of the allowance for dej)reciation is the sum which should be sqt aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost.” United States v. Ludey, 274 U.S. 295. The whole purpose of the deductions for depreciation and of the offset against the amount realized upon disposition of an asset, is to provide, from untaxed income, an amount equal to the basis. Where the basis has once been recovered through such annual deductions, there is no portion of the basis left with which to offset the amount realized from the disposition of the property. If anything is recovered from the disposition of the property or from the use of the property over and above the basis, that amount is income. Likewise, where there has been a full recovery through annual deductions for exhaustion, there can be no loss thereafter if the property is taken away from the owner or its usefulness is otherwise terminated. The above statements are certainly true when applied to property continuously owned by the same taxpayer. Graves, Cox & Co., 27 B.T.A. 546; Elliott-Granite Linen Corp., 26 B.T.A. 936; Proximity Mfg. Co., 18 B.T.A. 691, 698, 699; Gardner Printing Co., 4 B.T.A. 37; Even Realty Co., 1 B.T.A. 355. In our opinion Congress intended to provide and did provide in the Revenue Act of 1926, where an asset is transferred by an individual to a corporation for the stock of the latter, and no gain or loss is recognized, that the two combined are entitled to olfset against income the total basis of the transferor and no more. Any further allowance would result in a duplication of deductions for the same capital asset, and any less would not permit the taxpayer to recover the full basis tax free. The petitioners are not entitled to any deduction for 1925 representing loss upon the cancellation of this contract, for there was no loss based upon March 1, 1913, value. Cf. United States v. Flannery, supra.

The only issue touching the year 1926 relates to the method of computation of gain to the United Brokerage Co. upon the sale by it of the capital stock of Artemas Ward, Inc., a New York corporation. On June 30, 1925, the United Brokerage Co., of the affiliated group which is before us, acquired all of the outstanding capital stock of Artemas Ward, Inc., consisting of 4,964 shares of no par value common stock, at a cost of $3,414,345.63. On December 31, 1925, Artemas Ward, Inc., pursuant to a plan of reorganization, transferred all of its assets, except cash and accounts receivable aggregating $284,967.21, subject to all of its liabilities, to another corporation of the same name, organized under the laws of the State of Delaware, in exchange for all of the latter’s stock, consisting of 100 shares of no par value common. The net Avalué of the assets of the New York corporation on December 31, 1925, was $1,246,920.07. On the same day, but after the transfer, the New Y ork corporation, pursuant to the plan of reorganization, distributed the 100 shares of stock in the Delaware corporation and accounts receivable aggregating $234,967.21 to its sole stockholder, the United Brokerage Co., without the surrender by the latter of its stock in the New York corporation. After this transfer, the New York corporation had no liabilities and its only asset was $50,000 in cash. In December 1926, the United Brokerage Co. sold all of the stock of Artemas Ward, Inc., the New York corporation, 4,964 shares, to an outside party for a total consideration of $49,640. The United Brokerage Co. filed a consolidated return for 1926 in which it claimed a deduction of $3,062,314.54 as a loss resulting from the sale of the stock of the New York corporation. In computing this loss it apportioned the original cost of the stock of the New York corporation between 4,964 shares of the stock of the New York corporation and 100 shares of the stock of the Delaware corporation in proportion to the number of shares of each which it held. It thus allocated to the 100 shares of stock of the Delaware corporation $61,423.88 as a basis for gain or loss and it allocated to the 4,964 shares of the stock of the New York corporation $3,346,921.75 as a basis for gain or loss. It then reduced the basis attributable to the shares of the New York corporation by $234,967.21, representing the value of accounts receivable of that corporation distributed to the United Brokerage Co. in December 1925. The Commissioner, in determining the deficiencies for 1926, has allowed a loss of $495,-696.76, which he computed in accordance with Treasury Decision 4274, which was promulgated on November 13, 1929, to amend article 1599 of Regulations 69. C.B. VIII-2, p. 240. The difference between his method of computation and that used by the taxpayer is that the respondent divided the original cost of the 4,964 shares of stock in the New York corporation between that stock and the stock of the Delaware corporation in proportion to the value of each stock at the date of reorganization and distribution, December 31, 1925. In this way he determined that the basis for gain or loss on the 4,964 shares of stock of the New York corporation was $780,303.97. He reduced this basis by $234,967.21, the value of the accounts receivable distributed to the United Brokerage Co., and then subtracted the total sale price of the shares, to wit, $49,640, which gave a loss on the sale of $495,696.76.

Although this case arises under an earlier revenue act and an earlier regulation is relied upon by the petitioners than was the case in Bertha G. Bamberger, 27 B.T.A. 785, nevertheless .the question here is the same as that decided by the Board in the Bctoriberger case. The petitioners apparently contend that the loss as computed on the consolidated return was in accordance with paragraph 1 of article 1599 of Regulations 69 as originally promulgated. It is to be regretted that such a regulation was published and allowed to stand for so many years, but, if the petitioners’ contention is correct, the case demonstrates the unreasonableness of that regulation. All of the assets of the New York corporation were taken from it with the exception of $50,000 in cash, so that the 4,964 shares were backed by nothing more than $50,000 in cash. The 100 shares of Delaware corporation stock were backed by practically all of the remaining assets which had formerly belonged to the New York corporation. The net value of these assets was almost a million dollars, yet, under the petitioners’ method, $3,111,954.54 of the original basis would be attributed to the New York stock and only $67,423.88 of the basis would be allocated to the Delaware stock. Following our decision in the Bamberger case, we hold for the respondent on this point.

Decision will be entered under Rule 50.