author: Van Fossan :

text:
    Newberry Lumber & Chemical Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68511.
    Promulgated October 3, 1935.

      William B. Bonthron, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Van Fossan :

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the period from June 1, to December 31,1929, in the sum of $58,498.32.

The petitioner alleges ths following errors:

(1) Failure of the respondent to hold that the formation of the petitioner corporation and the acquisition by it of properties of the Charcoal Iron Co. of America at a foreclosure sale on behalf of depositing bondholders of that company, constituted a reorganization as contemplated by sections 112, 113, and 115 of the Revenue Act of 1928.

(2) Refusal of the respondent to hold that the cost to the petitioner of the properties so acquired was their fair market value on June 1, 1929, rather than the relatively nominal sum paid for them by the bondholders’ protective committee.

(3) Improper valuation of inventories.

The facts were stipulated and so far as material to the issues are substantially as follows:

The petitioner is a corporation, organized on May 25, 1929, under the laws of the State of Delaware, with its principal place of business at Newberry, Michigan. Its business is the manufacture of pig iron, methanol, acetate of lime, and lumber.

The Charcoal Iron Co. of America, hereinafter called the Charcoal Co., had outstanding as at September 1, 1925, $3,298,500 face value first mortgage 8 percent gold bonds dated November 1, 1921, due November 1, 1931. On September 1, 1925, it issued a notice to the effect that it was in default with respect to the provisions of the trust mortgage indentare and that it would be unable to meet its bond interest indebtedness due on November 1, 1925, or redeem $100,000 face value bonds as required by the trust indenture.

At the request of various holders of first mortgage bonds of the Charcoal Co., a bondholders’ protective committee ivas organized for the purpose of protecting the interests of the bondholders and on September 1, 1925, this committee addressed a communication to the holders of first mortgage bonds which requested the deposit of their holdings under the terms of a bondholders’ protective agreement.

On March 10, 1926, by order of the United States District Court for the Western District of Michigan, Northern Division, the Charcoal Co. was placed in receivership and the receivers operated the business of the company from that date to May 31, 1929.

During the period from March 10,1926, to May 17,1929, certain of the more important properties of the receivership, such as pig iron furnaces and chemical plants at Ashland, Wisconsin, and Boyne City and Manistique, Michigan, a mine at Bessemer, Michigan, a steamer and a sawmill, were sold or disposed of by the receivers, and the proceeds thereof were properly accounted for to the court.

On April 10,1929, the bondholders’ protective committee published a “ Plan of Beorganization or Beadj ustment.”

The books of the receivership show that on March 1, 1926, the property account stood at $12,004,646.55, less depreciation and depletion reserve of $3,231,299.33, or a net of $8,773,347.22, while as of May 31, 1929, it had been reduced to $3,898,200.04 by sales and properly apportioned depreciation and depletion reserves. The assets were further increased by cash, investments, inventories, etc., so that the book deficit on March 1, 1926, was $2,578,890.34 and on May 31,1929, was $1,520,204.69. On the former date the capital stock was $4,056,600 and the first mortgage bonds $3,298,500, with accrued interest thereon of $223,418.40, together with other liabilities aggregating over $680,000. On the latter date the capital stock had been written down to $8,056.60, while the first mortgage bonds remained at $3,298,500 with $1,219,283.18 interest due thereon, and other liabilities listed at over $1,900,000.

On May 17, 1929, the court confirmed the sale of the remaining assets (principally represented by a pig iron furnace, chemical plant, and sawmill at Newberry, Michigan, and timber and timber-lands) in the receivership estate to the protective committee representing the depositing bondholders of the Charcoal Co. Those assets consisted of mortgaged property, such as plants and equipment, timber and timberlands purchased for $400,000, and unmortgaged property such as tools, supplies, and other personal property, including cash and inventories, purchased for $140,000.

Out of a total of $3,298,500 face value bonds of the Charcoal Co. outstanding there were deposited with the bondholders’ protective committee in pursuance of the “ Plan of Beorganization or Bead-justment ” bonds of a face value of $3,060,500, leaving nondepositing bondholders owning $238,000 face value of bonds.

Aside from the receivership expenses the claims against the receivership estate comprised open accounts aggregating $6,269.35 and' $3,298,500 face value of bonds outstanding plus accrued interest thereon to May 17, 1929.

The court decree and order of sale dated May 8, 1928, as amended by a supplemental order dated April 2, 1929, provided that the payment for the unmortgaged property would be required to be satisfied by a cash payment sufficient to cover specified costs and expenses and as to the balance the purchaser had the option of paying either cash or depositing bonds • of the Charcoal Co. at such price or value as should be equivalent to the sums which would be payable thereon out of the proceeds of the sale.

The terms of the foreclosure sale as confirmed by the United States District Court provided that the bid of $100,000 could be satisfied by the delivery of at least $2,993,500 face value bonds of the Charcoal Co., except that a cash payment, subsequently determined to be $36,986.13, would be required for distribution to the holders of undeposited bonds and that the bid of $140,000 for the unmortgaged property was to be paid in cash in accordance with the terms of the bid.

After payment of legal fees arising out of the receivership, the settlement of unsecured creditors’ claims of $6,269.35 for $232.24 and the proportionate payment to the bondholders who did not deposit their bonds under the reorganization agreement, there was left $275,764.60 which accrued to the depositing bondholders and was paid over to the Newberry Lumber & Chemical Co.

The bondholders’ protective committee, having purchased the aforesaid properties at the foreclosure sale on May 17, 1929, and having organized the petitioner corporation on May 25, 1929, caused the properties to be transferred by deeds of conveyance and bills of sale on May 29, 1929, directly to the petitioner, which thereupon issued to the bondholders’ committee its demand note for $3,287,000 dated June 1, 1929, and 13,000 shares of no par value common stock.

On June 22, 1929, the bondholders’ protective committee amended the Plan of Reorganization or Readjustment ” dated April 10,1929, so as to change the capital structure of the petitioner by providing for the issue of first mortgage bonds and preferred and common stock, all of which were turned over to the bondholders’ protective committee in exchange for the stock and demand note of the petitioner held by the committee, and the bonds and stock were thereafter distributed to the depositors of the old bonds of the Charcoal Co. in proportion to their respective interests.

The assets acquired by the petitioner in exchange for its bonds and stock issues, when it commenced business as of June 1, 1929, were entered on its books at values determined as follows:

The plant properties were valued as to the buildings and equipment and sawmill at Newberry, Michigan, at appraised cost of reproduction as at December 28, 1926, plus subsequent additions at cost, less an allowance for depreciation. The appraisal was made by independent appraisers, and the aggregate amount thereof was $1,373,930.58.

The timber properties were valued at $1,045,263.52 by applying a unit rate, representing the March 1, 1913, value of timber, to estimated reserves of timber as at June 1, 1929. The estimated reserves as at June 1, 1929, were computed by subtracting from estimated reserves as at August 1928, based on a cruise made at that time, the amount cut from the properties during the intervening period.

The inventories were entered on the books at the lower of estimated cost of production or market value and aggregated $475,885.17.

Remaining current assets were valued at estimated realizable values. The entire assets of the petitioner were valued on the books at $3,293,989.41, computed as above set forth.

The debts assumed under the decree of foreclosure were entered on the books at the full amount thereof, and totaled $135,948.90.

The inventories of the Newberry Lumber & Chemical Co. as at June 1, 1929, and December 31, 1929, were valued by the company for financial purposes and for the purpose of determining its taxable income in its tax return as filed for that taxable period, at the lower of cost of production or market values, while the respondent has used as at June 1, 1929, a valuation based upon the relation of the bid-in price to the book value adopted, representing 16.39 percent of the initial value set up.

The petitioner contends that (1) a reorganization was effected through the purchase of the Charcoal Co.’s assets at a foreclosure sale and their transfer to the petitioner for its entire issue of stock and bonds, (2) the fair market value of such assets is the true measure of their cost to the petitioner, and (3) that, hence, inventories were erroneously valued by the respondent and depletion and depreciation on the capital assets were wrongly computed by him.

The respondent’s position is that there was no reorganization as claimed by the petitioner; that the correct basis to the petitioner of the assets acquired by it is their cost to the petitioner’s transferor, the bondholders’ protective committee; and that the cost to that transferor is the purchase price named as the consideration of the sale and paid in cash and bonds of the Charcoal Co.

We agree with the respondent that there was no reorganization. The continuity of interest required to support the petitioner’s contention was not present. The stockholders of the Charcoal Co. were eliminated entirely and new interests, namely, the bondholders, acting through their representative, the protective committee, took possession and control of the assets of the old company. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599; Suncrest Lumber Co., 25 B. T. A. 375. We also are in accord with the respondent’s position that the basis to the petitioner for gain or loss and depreciation and depletion is the cost to its transferor, the bondholders’ protective committee. We do not concur in the respondent’s contention that under the facts in this case the price bid and paid by the committee for the property fixed its cost for all purposes beyond the right of the taxpayer to question the same. In Suncrest Lumber Co., supra, a case bearing much similarity to the present case, it was specifically held that it was open to either party to submit evidence to demonstrate that this figure did not represent true cost. In the Suncrest case both parties availed themselves of this opportunity and submitted additional evidence. In the instant case, the record before us does not justify us in finding any figure in excess of the sale price of $540,000 as the total value of the assets except as to the inventories of current assets. The stipulated facts do, however, justify a holding that the Commissioner erred in his treatment of the inventories. It is stipulated that the inventories were valued and entered on petitioner’s books at cost of production, or market value, whichever was lower. The inventories so valued amounted to $415,885.17. In our opinion this figure is adequately established by the stipulation as the true value and should have been used by respondent as the inventory value on June 1, 1929. In the recomputation of the deficiency, if any, this figure should be so used.

Decision will be entered under Bule 50.


source: Caselaw Access Project

author: Seaweil:

license: Public Domain

text:
    W. H. Holderness, Administrator, Estate of Emelia S. Sternberger, Successor to Lucian I. Strauss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67945.
    Promulgated October 8, 1935.

      L. P. McLendon, Esq., A. L. Brooks, Esq., and J. L. Elliot, C. P. A., for the petitioner.

      William E. Dams, Esq., and Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Seaweil:

This proceeding involves the redetermination of a deficiency of $340,083.66 in estate tax. All of the facts were stipulated. The stipulation disposes of all of the issues except one, which relates to the inclusion in gross estate of the corpus of property held in trust.

The petitioner was duly appointed administrator of the estate of Emelia S. Sternberger, deceased, by the Superior Court of Guil-ford County, North Carolina.

In December 1926 the decedent executed a trust instrument, under the terms of which she deposited the sum of $1,364,000 with the Central Union Trust Co., a New York corporation, in trust, with directions to invest the cash in income-producing securities. The trust was to continue until the death of the survivor of Edward B. Benjamin, Jr., and William M. S. Benjamin, then living children of Mrs. Edward B. Benjamin, a sister of the grantor. During the life of the grantor the income from the trusteed property was to be distributed to her or to other specified persons, as the trustee might be requested in writing. She also made provision for the distribution of the income in the event of her death prior to the termination of the trust.

The grantor reserved the right to withdraw from the trust at any time after one year from the date of its creation securities of a market value of $400,000 at the time of the withdrawal. She also reserved the right to dispose of 25 percent of the corpus by her last will and testament. The estate was to be distributed in accordance with the following provisions of the trust instrument:

(a) One-third to any surviving husband of the decedent;
(b) Two-thirds equally between any then surviving children of the decedent and the representatives of any deceased child;
(c) In the event the grantor dies leaving no surviving husband, but leaving a child, children or representatives thereof, the whole of the estate shall be divided among such children and their representatives;
(d) In case the grantor dies without leaving surviving her a husband, child or children or representatives of any deceased child, the entire estate shall go to Mrs. Edward B. Benjamin;
(e) In case the grantor dies leaving a surviving husband, but no child, children or representatives of a deceased child, one-third of the estate is to go to tire surviving husband and the remainder to Mrs. Edward B. Benjamin, if living at that time;
(f) If upon the termination of the trust Mrs. Edward B. Benjamin should be dead, leaving surviving children or representatives of deceased children, the portion of the estate she would have taken if living upon the termination of the trust shall be divided equally among her children and representatives of deceased children;
(g) If upon the termination of the trust the grantor should be living the whole of the trust estate shall be distributed to the grantor.

The trust instrument further provides as follows:

It is distinctly understood and agreed that the party of the first part [grantor] reserves the right to change by a writing duly executed and delivered to the party of the second part [trustee] the proportions of such estate that shall go to any of the parties named or specified herein.

The decedent died intestate January 3', 1929, at the age of 21 years, as the result of an accident. She never married, and left no issue. Surviving her were Mrs. Edward B. Benjamin and her two children, Edward and William.

At the time the trust instrument was executed the grantor “ was in good health, and did not expect to die within the immediate or reasonably distant future.”

The grantor received all of the income from the trust fund during her lifetime. She never withdrew any of the corpus of the trust estate and made no last will and testament disposing of any part of the trusteed property.

The property in the trust had a fair market value at the death of the decedent of $2,301,070.04, all of which the respondent included in gross estate. The petitioner admits that of such amount $400,000, which the decedent could have withdrawn from the trust estate at any time after one year of its creation, is taxable as part of the decedent’s gross estate. The issue relates to the remaining amount of $1,901,070.04. The petitioner admits that 25 percent of this amount is taxable under the right reserved by the grantor to dispose of 25 percent of the market value of securities in the hands of the trustees at the time of her death by her last will and testament. The respondent contends that the calculation should be made before the $400,000 is deducted from market value of the corpus. In view of our decision on the main point it is unnecessary to decide the point of difference between the parties.

In his determination of the deficiency, the respondent included the corpus in gross estate, pursuant to- the provisions of subsection (d) of section 302 of the Revenue Act of 1926. In his amended answer to the petition he alleged that it was taxable as within the terms of subsections (c) and (d). On brief he argues that it is also within subsection (a), but no part of his argument is directed to the question of whether the transfer was made in contemplation of death. The controlling provisions of the statute appear in the margin.

Taxes of tbe kind involved here are levied upon the right to transfer or the transmission of property resulting from death and proceed from the principle that death is the generating source of property rights not theretofore possessed or enjoyed by the donee. Knowlton v. Moore, 178 U. S. 41; Chase National Bank v. United States, 278 U. S. 327. In Tyler v. United States, 281 U. S. 497, a case involving the question of whether the value of property held by tenants by the entirety could be the subject of an estate tax upon the death of one of the parties, the Court said:

Tile question here, then, is not whether there has been, in the strict sense of that word, a “ transfer ” of the property by the death of the decedent, or a receipt of it by right of succession, but whether the death has brought into being or ripened for the survivor, property rights of such character as to make appropriate the imposition of a tax upon that result (which Congress may call a transfer tax, a death duty, or anything else it sees fit), to be measured in whole or in part by the value of such rights.

The more recent case of Porter v. Commissioner, 288 U. S. 436, points out that the 1926 Act imposes estate taxes on transfers not covered by prior statutes. There the grantor reserved the power to alter the trust instrument in any manner other than in favor of himself or his estate. Respecting whether or not the transfers were within section 302 (d) of the Revenue Act of 1926, the Court said:

The net estate upon the transfer of which the tax is imposed is not limited to property that passes from decedent at death. Subdivision (d) requires to be included in the calculation all property previously transferred by decedent, the enjoyment of which remains at the time of his death subject to any change by the exertion of a power by himself alone or in conjunction with another. * * *

This decision has been referred to as a “ distinct holding that, though the trust agreement may contain no reservation of the power to revoke — indeed, though there be no actual prohibition — if nevertheless it contains a right to change the enjoyment, it is within the terms of the act.” Dort v. Helvering, 69 Fed. (2d) 836. See Frederick Foster et al., Executors, 31 B. T. A. 769.

The petitioner insists that, since the power reserved by the grantor did not go beyond the right to change the proportion of the trust property among the several designated beneficiaries, there was no reservation in the trust deed to alter, amend, or revoke within the meaning of subdivision (d). His contention, that to come within the provision the power must be “ equivalent of that degree of control which an owner exercises over his own property ”, is fully answered in Porter v. Commissioner, supra.

The petitioner cites the case of Equitable Trust Co. of New York, Administrator, 31 B. T. A. 329, as a direct authority for the position he takes. In that proceeding, upon the death of the grantor the estate held in trust was to go “ to the lawful descendants of the party of the first part [the decedent] in such proportions as the party of the first part shall in and by her last will and testament appoint, and in case of failure to make such testamentary appointment, then to such descendants absolutely in equal shares per stirpes and not per capita; or if there shall be no such descendants living at the time of the death of the party of the first part, to the person or persons named in her last will and testament, and failing such testamentary disposition, then to the person or persons and in the interests and proportions to whom and in which under the laws of the State of New York existing at the time of the death of the party of the first part said Trust Fund would have been distributed had all thereof been personal property and had the party of the first part died possessed thereof and intestate and a resident of the State of New York.” In holding that the property was not includible in gross estate under the provisions of section 302 (d) we held that “ The decedent retained the power to fix the share of each one of the group of takers. But as she had not theretofore fixed the share each was to take, the retained power to fix for the first time was not a power to change. * * * The retained power was a power to supplement, amplify, or make more specific, but not to alter or amend.” And further on in the opinion we held: “ Here the decedent could not divest the class named as remaindermen, but could only designate the proportions in which the members of the class would take.” In the case before us now, as it is said in petitioner’s brief, “ The power reserved is the naked power to re-apportion the benefits among the designated beneficiaries.” To be exact, the power reserved in the trust instrument by decedent was “ The right to change * * * the proportions of such estate that shall go to any of the parties named or specified herein.” The reserved power here authorized a change not' alone within “ the class ” but included “ any of the parties named or specified herein.” This reservation was not trivial or slight, but substantial. It was broad enough not only to change the proportion of the estate that would go to members of one class, such as any surviving husband or children of the grantor, but to shift the named parties from one class to another and specify the proportion of the estate each would take. She could have reduced the share of any of the parties to a minimum amount. The only restriction on the power was that no new beneficiaries, in being or otherwise, be added to the list of parties specified in the trust instrument. The grantor specified the proportions each possible beneficiary was to take. An alteration of the percentages so designated would have, in our opinion, constituted a change in the enjoyment of the property.

Another distinction exists. In the Equitable Trust Co. case the three children of the grantor had vested remainders in the estate prior to the grantor’s death and she had no power to divest the remainder interests. Here, upon the termination of the trust, fixed to occur at the death of the survivor of Mrs. Benjamin’s two children living when the trust was created, the corpus was to go to the grantor, if living, otherwise to any surviving husband, and child or children and their representatives in specified proportions, and upon a failure of such parties, as was the case, to Mrs. Benjamin. Provision also was made for distributing the estate to others in case Mrs. Benjamin died before the termination of the trust. There is no provision in the trust instrument for the distribution of the corpus in case of failure of any of the designated parties to take under the deed. The grantor was single at the time she created the trust. She never married, and consequently left no husband or children. Such being the facts, no vested remainder was created at the time of execution of the trust. The future estates were contingent until the death of the decedent without leaving a surviving husband or children, when Mrs. Benjamin acquired a vested remainder. Doe v. Considine, 73 U. S. 458; Watson v. Smith, 110 N. C. 6; 14 S. E. 640; Clark v. Cox, 115 N. C. 93; 20 S. E. 176; Ziegler v. Love, 185 N. C. 40; 115 S. E. 887; Mercer v. Downs, 191 N. C. 203; 131 S. E. 575.

The respondent committed no error in including the portion of the market value of the corpus in controversy in the decedent’s gross estate. See H. T. Cook et al., Executors, 23 B. T. A. 335; affd., 66 Fed. (2d) 995; certiorari denied, 291 U. S. 660; Dort v. Helvering, supra; Day Kimball et al., Administrators, 29 B. T. A. 60; affd., 71 Fed. (2d) 1011; certiorari denied, 293 U. S. 607; Sargent v. White, 50 Fed. (2d) 410; Klein v. United States, 283 U. S. 231; Chemical Bank & Trust Co. et al., Executors, 25 B. T. A. 1153.

Decision will be entered under Rule 60.

       Sec. S02. The value of the gross estate of the decedent shall he determined hy including the value at the time of his death of all property, real or personal, tangible or intangible, -wherever situated—
      (a) To the extent of the interest therein of the decedent at the time of his death;
      * * * * s * *
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *


author: Mtjedocb::

text:
    Northwest Bancorporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69789.
    Promulgated October 10, 1935.

      Peter S. Bask, Esq., P. J. Coffey, Esq., and Hayner N. Larson, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Mtjedocb::

The Commissioner determined a deficiency of $38,-497.90 in income tax of the petitioner for the calendar year 1929, based upon a consolidated return which included income and deductions of the Iowa-Des Moines National Bank & Trust Co. for the period September 28 to December 31, 1929. The petitioner assigns as error the action of the Commissioner in (1) disallowing $524,412.48 as a deduction for the Iowa-Des Moines National Bank & Trust Co. representing a loss from the sale of real estate, bonds, stock, and notes which were sold at their total book value, which value was $524,412.48 less than their cost to prior owners; (2) in disallowing “the net loss or prior year loss of the Iowa National Bank of Des Moines, whose name was changed to the Iowa-Des Moines National Bank and Trust Company, in the sum of $216,645.90 and (3) “ in finding that petitioner was affiliated with the Iowa-Des Moines National Bank & Trust Company on September 29th, 1929.” The parties have stipulated practically all of the facts in the record which are material to decision of the issues raised.

The petitioner is the parent corporation of a large group of corporations, most of which are banks. The Iowa National Bank and Des Moines National Bank were national banks located in Des Moines. The Des Moines Savings Bank & Trust Co. was a state bank located in the same city. The petitioner began negotiations in July 1929 to have the three Des Moines banks combine into one bank and to acquire most of the stock of the one bank after the combination had been effected. A plan was adopted to accomplish the desired result and that plan was carried out. The three banks combined under the name of “Iowa-Des Moines National Bank and Trust Company.” The petitioner became the owner of all but directors’ qualifying shares of that bank. The parties have stipulated, inter alia,, “ That said banks were duly combined pursuant to an agreement of consolidation * * * dated August 20th, 1929, under the Charter of the Iowa National Bank of Des Moines, Iowa, under the title of the ‘Iowa-Des Moines National Bank and Trust Company ’, pursuant to and in accordance Avith the provisions of an Act of the Congress of the United States, entitled ‘ An Act to provide for the Consolidation of National Banking Associations ’, approved on the Ith day of November, 1918, and amended on the 25th day of February, 1921, and said merger was effected after the close of business on September 20th, 1929.” The agreement provided that the three banks “ are hereby consolidated under the charter of the said first named bank [Iowa National Bank] as hereby modified and the articles of association of said first named bank are hereby amended so as to conform with this agreement.” The capital stock was increased from $1,200,000 (12,000 shares of $100 par) to $2,000,000 (20,000 shares of $100 par). “ On the date of consolidation its surplus shall be $1,000,000 and its undivided profits not less than $500,000.” Twelve thousand shares of the new stock were “ allotted ” share for share to the stockholders of the Iowa National Bank, 3,333% shares were “ allotted ” to the stockholders of the Des Moines National Bank in the ratio of one-third share of new for one share of old, and 4,000 shares were “ allotted ” share for share to the stockholders of the Des Moines Savings Bank & Trust Co. Five hundred shares were to be purchased at $200 per share by the stockholders of the Iowa National Bank and 166% shares were to be purchased at $200 per share by the stockholders of the Des Moines Savings Bank & Trust Co. The Iowa National Bank was to furnish acceptable net assets of $2,065,000 aboye all liabilities, the Des Moines National Bank, $641,666.67, and the trust company, $660,000. Assets of any bank deemed undesirable or unnecessary were to be transferred in trust for the benefit of the respective shareholders prior to the effective date of the “ consolidation.” Any shortage in the amount to be furnished by any bank was to be paid in cash by the stockholders of that bank. The “ consolidation ” was to “ become effective ” when ratified by certain percentages of the stockholders of the three combining banks and when it “ shall have been approved by the Comptroller of the Currency of the United States.” The Comptroller of the Currency, under date of September 20, 1929, certified that the three banks “have been consolidated under the charter of The Iowa National Bank of Des Moines and under the corporate title of £ Iowa-Des Moines National Bank and Trust Company ’ with capital stock of Two Million DollaRs ($2,000,000) and that the consolidation is hereby approved.” The requisite number of stockholders of the three banks indicated their ratification and consent by vote on August 24, 1929. The board of directors of the Iowa-Des Moines National Bank & Trust Co. met on September 20, 1929, and elected officers.

The petitioner entered into a contract dated August 21, 1929, with “ such of the Shareholders ” of the three banks, “ which Consolidating Banks are proposed to be merged into one new bank, as shall become parties hereto by executing this Agreement, or any counterpart thereof, and, or by depositing their stock for sale or exchange hereunder.” Paragraph 2 of the agreement is as follows:

2. At the present time, it is contemplated that the Consolidating Banks will he merged into a bank to be known as the “ Iowa-Des Moines National Bank & Trust Company ” under a reorganization plan which will enable each Stockholder of the Consolidating Banks to receive stock in the New Bank, upon a basis set out in said merger plan. The Shareholders agree that they will deliver the shares of stock which they now own in said three banks, endorsed in blank, to the Iowa National Bank to be held by said Bank in escrow, for the purpose of depositing the same under said merger or consolidation plan; that they will vote said stock on behalf of the Shareholders in favor of said merger and that when and as said merger has been consummated and the shares of stock in the New Bank has been issued, said shares of stock in the New Bank shall be issued to the Company [the petitioner] and shall be delivered to the Company for sale or exchange as hereinafter provided.

The following is a part of paragraph 3:

3. Each Shareholder hereby agrees to sell to the Company or exchange the shares of stock in the New Bank which he receives on one or other of the following bases, i. e.:
(a) Four and one-half (4%) shares of stock of the Company or
(b) Three Hundred Fifteen Dollars ($316.00) cash.
Said sale or exchange shall be made as of the close of business on August 31st, 1929.

Paragraph 4 is as follows:

4. Tlie Shareholders further agree that they will proceed forthwith to cause a Holding Company to be organized (herein called the “ Holding Company”), which Holding Company will have an authorized capital stock of Twenty Thousand (20,000) shares of One Dollar ($1.00) par value and that they will cause such Holding Company to issue one (1) share of its stock to each Shareholder for each share of stock in the New Bank to which such Shareholder would be entitled on consummation of consolidation by virtue of ownership of the stock in one or more of the Consolidating Banks deposited hereunder and the remainder of said Twenty Thousand (20,000) shares of stock shall be issued to such person or corporation as shall be designated by tlie Shareholders who contribute Additional Stock under subdivision “ 7 ” hereof, to be held by such person or corporation for the benefit of such Shareholders. As Additional Stock is released under said Sub-division “ 7 ” an equal number of shares of the Holding Company shall likewise be released by the person or corporation holding same.

Paragraph 5 is in part as follows:

5. * * * All assets of the Bank which have been heretofore charged off, or may hereafter be charged off, on or before August 31st, 1929, shall be transferred to and shall become the property of the Holding Company.
If after making tlie examination herein referred to in Sub-division “ 6 ” hereof, the company finds the assets and earnings of the Consolidating Banks in their opinion to be other than as herein stated, the Company’s sole remedy herein shall be to rescind this contract, but if upon examination it finds the capital surplus and undivided profits and the earnings of the Company to be satisfactory to it, and the Company consummates the sale or exchange of stock as herein provided for, then the Company shall be deemed to have accepted tlie stock of the New Bank and the assets and earnings of the Consolidating Banks and shall thereafter have no further claim of any kind against the shareholders, on account of the statements contained in this subdivision “5'”.

Paragraph 6 is in part as follows:

6. It is further agreed that the Company shall cause examination to be made of assets of the Consolidating Banks and if, in its opinion, the New Bank has in excess of Two Million Dollars ($2,000,000.00) book value of assets which are not proper assets for Banks to own and carry the Company may, at its option, cancel this agreement. If, however, in the opinion of the Company there are not in excess of Two Million Dollars ($2,000,000.00) book value of such assets, the Company shall loan to the Holding Company the amount of the book value of such assets, and the Shareholders agree that they will cause the Holding Company to buy from the New Bank and the New Bank to sell to the Holding Company, such assets at book value up to the face amount of such loan.

Paragraph 7 is as follows :

7. The Company further agrees that it will cause to be issued to the Holding Company one share of stock of the Company for each share of stock of the New Bank which is sold or exchanged under the terms of this agreement by the subscribing Shareholders, provided that, not less than Twenty Thousand (20,000) shares of stock of the Company shall be issued to said Holding Company. In the event that less than all of the stock of the New Bank is sold or exchanged hereunder, as aforesaid, so that less than Twenty Thousand (20,000) shares of stock of the Company are issued to the Holding Company as aforesaid, then the subscribing Shareholders will assign, transfer and deliver to the Holding Company from the stock of the Company, which they each receive hereunder, such additional number of shares of stock of the Company (herein called “Additional Stock”) as is necessary to make up the deficit.
The Holding Company shall agree that it will not sell any of said Twenty Thousand (20,000) shares of stock of the Company without the consent of the Company until the loan, herein referred to, is reduced to One Million Four Hundred Thousand Dollars ($1,400,000.00) or less. When the loan has been reduced to One Million Four Hundred Thousand Dollars ($1,400,000.00) and thereafter as further reductions on the loan are made, then the additional stock deposited with the Holding Company as aforesaid shall be released on this basis, that is to say — one share of such Additional Stock shall be released for each Seventy Dollars ($70.00) reduction of the principal amount of the loan below One Million Four Hundred Thousand Dollars ($1,400,000.00).
When all of the Additional Stock has been released as aforesaid and the loan has been reduced below One Million Four Hundred Thousand Dollars ($1,400,000.00) as aforesaid, the Holding Company may offer to each of its Shareholders the right to purchase one (1) share of Bancorporation stock at Seventy Dollars ($70.00) per share for each share of Holding Company stock owned by such Shareholder and all moneys received from sale of such stock shall be applied in payment of the loan. Any stock of Northwest Bancorporation, which is not acquired by the Shareholders of Holding Company within thirty (SO) days after offer is made, shall be sold by the Holding Company at such price or prices as it may determine upon except that none of said stock shall be sold for less than Seventy Dollars ($70.00) per share without the consent of the Company.
If Additional Stock of the Company is transferred to the Holding Company as aforesaid to make up the full Twenty Thousand (20,000) shares of stock, then if the other Shareholders of the New Bank become parties to this agreement and deposit their stock hereunder with the result that an excess of Twenty Thousand (20,000) shares of stock of the Company are issued to the Holding Company, the excess shall be released by the Holding Company out of the Additional Stock deposited hereunder.
As Additional Stock of the Company is released by the Holding Company, it shall be delivered to such person or corporation as the Shareholders who contributed same shall designate to be held by such person or corporation for the benefit of the contributing Shareholders under such terms and conditions as the contributing Shareholders shall agree upon.
In the event that it becomes necessary to sell any of the said Twenty Thousand (20,000) shares of stock of the Company in order to pay the loan of the Company to the Holding Company as aforesaid, then the additional shares of stock shall be sold last.

The agreement provides that the petitioner shall not be bound by the agreement, except at its option, in case “ the merger * * * cannot be consummated ” because of any ruling of law or ruling of any public official, and the. petitioner shall not be bound, except at its option, “ until the holders of the shares of stock of the Consolidating Banks as will receive Eighty-five Per Cent (85%) of the stock of the New Bank have executed this agreement and deposited their stock hereunder.”

The petitioner found, upon examination of the assets of the three banks that $3,250,000 book value of their assets were not proper assets for the bank to own. The examination was completed about September 12, 1929. The petitioner then made an agreement supplemental to the agreement dated August 21, 1929, which supplemental agreement provides in part as follows:

* * * it is agreed between the parties hereto that said assets to the amount of $3,250,000 may be selected by the Company from the assets of said banks and transferred and delivered to the Holding Company as provided in said original contract. That the company shall loan to the Holding Company the $3,250,000 upon the same terms and conditions as provided for in said original contract, in lieu and place of the $2,000,000 designated therein.

This supplemental agreement also provides that the petitioner shall select the assets to be furnished the Iowa-Des Moines National Bank & Trust Co. and all excess assets shall become the property of the Holding Co. It was to become effective “upon the same being signed by the holders of a majority of the stock in said banks and the Company.” The petitioner signed it on September 12, 1929.

There is some contradiction in the evidence as to the exact date upon which the petitioner received the stock of the “ New Bank ” and issued its own stock in exchange. The stipulation states that in accordance with the terms of the contracts all of the stock of the three combining banks was endorsed in blank and delivered to the Iowa National Bank prior to September 19th, 1929 ” and in accordance with the terms of the contracts “ and on September 29th, 1929, the stock of the Iowa-Des Moines National Bank & Trust Co. was issued direct to ” the petitioner and the petitioner “ issued its stock direct to all former stockholders ” of the three combining banks as their interests appeared.” The stipulation was made “ subject to the right of either party to offer evidence as to facts not inconsistent herewith.” Yet the petitioner introduced evidence at the hearing without objection which showed that the petitioner on September 20, 1929, issued its stock to the former stockholders of the three banks in exchange for the stock of the “New Bank.” This discrepancy in dates is not important so far as decision of the issues in this case is concerned, but the stipulation must be in error. On September 20, 1929, 85,636 shares of the stock of the petitioner were issued pursuant to the agreements to the former stockholders of the three old banks and 19,039 shares of the stock of the “New Bank” were issued directly to the petitioner on or about that same date.

Arrangements were made to place excess and undesirable assets in the hands of the holding company mentioned in the contracts instead of placing them in trust as provided in the agreement with the three banks. The StockhoMers Investment Co. was organized for that purpose. Its stock was issued to the former stockholders of the three banks. Neither the petitioner nor any of the banks ever owned any of its stock. It borrowed $3,250,000 from the petitioner and $212,168.89 from the “ New Bank ”, with which it purchased from the latter certain assets.

The Des Moines Savings Bank & Trust Co. owned property just prior to the close of business on September 20, 1929, which had cost it $512,788.27. This property was carried on that owner’s books at $258,375.79. The Commissioner had allowed it deductions in 1926, 1927, and 1928 totaling $127,349.16 on account of its successive reductions in the book value of this property. The property was transferred to the Iowa-Des Moines National Bank & Trust Co., pursuant to the agreements already referred to, at a value of $258,375.79. It was carried on the boobs of that bank at that figure after the close of business on September 20, 1929, until October 1, 1929, when it was sold to Stockholders Investment Co. for $258,375.79.

It is thus obvious that the Iowa-Des Moines National Bank & Trust Co. sustained no loss on the sale of this particular property unless it is entitled to use as its basis for loss the same basis which the prior owner, the Des Moines Savings Bank & Trust Co., would have been entitled to use. Furthermore, the latter, having written down the cost on its books and having benefited from loss deductions on account of a part of the amount written off, could not claim as its adjusted basis more than the excess of cost over the total amount allowed as deductions in prior years. There is nothing to suggest that the deductions were not properly claimed and allowed. Even a reorganization does not result in double deductions. The question as to these particular assets is thus narrowed to whether or not the Iowa-Des Moines National Bank & Trust Co. sustained a deductible loss of $127,063.32.

The Des Moines National Bank owned real estate in 1927 which had cost it $881,044.39. It formed in 1927 twelve corporations to hold its real estate. The bank then conveyed the real estate to these corporations at cost. Thereafter the bank held notes of the corporations in the total amount of $881,044.39. These notes were written down to $681,044.39 on September 20, 1929, and were immediately transferred to and placed upon the books of the Iowa-Des Moines National Bank & Trust Co. at $681,044.39. The latter bank sold the notes to the Stockholders Investment Co. for $681,044.39 on October 1, 1929. Here again the Iowa-Des Moines National Bank & Trust Co. wmuld not be entitled to use a basis of $881,044.39 and claim a loss of $200,000 unless it is entitled to use the basis of the transferor and unless that basis is not to be reduced by $200,000.

The statement attached to the notice of deficiency shows among adjustments to income as disclosed by the revenue agent’s report:

Unallowable deductions * * *
(b) Loss on real estate (company #12)---$27,620.63
Explanation oí Items
(b) Iowa-Des Moines National Bank and Trust Company, (company #12)
Loss on real estate disallowed-$38, 633. 83
Write down oí assets in prior year not considered in sale transaction and here allowed- 11, 013. 30
Income increased-$27, 620. 53

It is impossible to tell from the record whether this adjustment relates to the items in controversy in issue (1) or, if it does not relate to those items, what action the Commissioner took in regard to those items. At no time has counsel for the Commissioner admitted that the Commissioner disallowed the deduction, or some or any part of the deduction, claimed under issue (1). On the other hand, he has never made any point of the petitioner’s failure of proof. The return is in evidence. The revenue agent’s report, upon which the computation of the deficiency is based, is not in evidence. The return is a long and complicated one. The Board is unable to determine what action the Commissioner took in regard to the items mentioned as being involved' in this issue. Since the petitioner has failed to show what the action of the Commissioner was in regard to these particular items, it is, of course, impossible to say that the Commissioner erred. But aside from this difficulty, for which the petitioner alone is responsible, the petitioner must lose this point.

The combination of the three banks was a reorganization within the meaning of that term as defined in section 112 (i) (1) (A) of the Revenue Act of 1928, since there was either a consolidation or merger of the three banks. But it does not follow as a necessary consequence of a reorganization that the property transferred pursuant to the plan of reorganization takes the same basis for gain or loss in the hands of the transferee' that it had in the hands of the transferor. As a general rule the basis for gain or loss is the cost of the property to the owner. Sec. 113 (a). There are certain exceptions to that general rule. The petitioner contends that the exception provided in section 113 (a) (7) applies. The provision is as follows:

SEO. 113. BASIS EOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 2S, 191$. — The basis for determining the gain or loss irom the sale or other disposition oí property acquired after February 28, 1913, shall be the cost of such property; except that—
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall he the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * *

The petitioner’s theory is that it owned all of the stock of the three banks immediately prior to the reorganization and it owned all of the stock of the “ New Bank” after the reorganization; an interest or control in the property transferred by each combining bank remained in the petitioner; no gain or loss was recognized to any trans-feror ; and therefore the basis of the property to the transferee is the same as it would be in the hands of the transferor. .

However, the facts do not support this argument. The petitioner never contracted to acquire and it never acquired the stock of any one or more of the combining banks prior to the combination. Each contracting shareholder of the combining banks agreed, in view of the contemplated reorganization, to sell or exchange the shares of stock in the New Bank which he receives.” The petitioner did not own any of the stock of the transferor banks and consequently lacked the control to bring into operation the exception provided in section 113 (a) (7). Cf. Durand-McNeil-Horner Co., 30 B. T. A. 769; American Compress & Warehouse Co. v. Bender, 70 Fed. (2d) 655; certiorari denied, 293 U. S. 607.

The petitioner suggests no other theory on which it would be entitled to use the old bases. The control required in section 113(a) (7) did not remain in the old stockholders of the banks, since they were already under contract to permit the shares in the “ New Bank ” to be issued directly to the petitioner in order to complete the plan of reorganization. In no real sense were they ever the owners of the new shares. Cf. Wilbur F. Burns, 30 B. T. A. 163, 172. According to the plan the petitioner was to become the owner of the shares of the “ New Bank ” immediately after the transfer and combination became effective. Section 113(a)(6) does not apply because the “ New Bank ” acquired the property by the issuance of its stock as consideration for the transfer of the property to it. See the last sentence of section 113(a) (6). Nor does section 113(a) (8) apply, since the control mentioned in section 112(b) (5) was lacking. Thus none of the exceptions apply and the “ New Bank ” does not take the old bases for the properties transferred to it. There is no evidence and no contention that the cost of the properties to the “ New Bank ” was greater than the amount it realized from the sale. The evidence shows that its cost was the exact equivalent of the amount realized. Consequently the Iowa-Des Moines National Bank & Trust Co. sustained no deductible loss from the disposition of the assets to Stockholders Investment Co. Other phases of the transaction need not be weighed to see whether or not they meet the requirements of any provision of section 113(a) already considered.

The Iowa-Des Moines National Bank & Trust Co. had taxable net income of $3,855.45 for the period September 21 to September 29, 1929. In determining the deficiency $228,385.73 was included in consolidated net income as income of that bank for the period September 29 to December 31,1929. The Iowa National Bank had a net loss of $220,501.35 for the period January 1 to September 20, 1929. No part of that net loss has been deducted in computing the deficiency.

The petitioner contends that the Iowa-Des Moines National Bank & Trust Co. and the Iowa National Bank are one and the same corporation and therefore the net loss of the Iowa National Bank for the period January 1, 1929, to the effective date (September 20,1929) of the combination of the three banks can be used to reduce the income of the Iowa-Des Moines National Bank & Trust Co. for the remaining portion of the year 1929. The benefit of the net loss provision of the statutes has been held to be personal to the taxpayer sustaining the loss, so that a net loss of one taxpayer can not be deducted from later income of any other taxpayer. New Colonial Ice Co. v. Helvering, 292 U. S. 435; Central National Bank, 29 B. T. A. 530; General Finance Co. of Philadelphia, 32 B. T. A. 949. Thus the first question on this point is whether the Iowa-Des Moines National Bank & Trust Co. was the same taxpayer as the Iowa National Bank within the meaning of section 117(b), or whether there were two separate taxpayers. A true consolidation results in a wholly new corporation, while in the case of a merger there is a continuation of one of the combining corporations. See discussion and authorities cited in R. D. Musser, 2 B. T. A. 1031; A. J. Siegel, 4 B. T. A. 186; and Grange National Bank, 22 B. T. A. 1209. Whether or not there is a new grant of corporate powers by the sovereign and a new corporation created depends primarily upon the statutory authority for the combination effected. Central Railroad & Banking Co. v. Georgia, 92 U. S. 665, 670. If under that authority there may be either a true consolidation or a true merger, then the intent of the parties and the terms of their agreement become quite important.

The question of whether the corporate existence of one national bank is continued under the statute in question because the consolidation takes place under the charter of that particular bank has been discussed by the Board and by the courts a number of times. The results reached have not been uniform, but the weight of authority seems to be for the view that the resulting bank is a new corporation, different from each of the consolidating banks. Bonnet v. First National Bank of Eagle Pass, 24 Tex. Civ. App. 613; 60 S. W. 325; Buist's Estate, 297 Pa. 537; 147 Atl. 606; First National Bank of Tulsa v. Hoover (Tex. Civ. App. 1925), 269 S. W. 262; Unaka & City National Bank v. United States, 50 Fed. (2d) 1031; certiorari denied, 284 U. S. 645; Meek v. Stein, 5 Fed. Supp. 656; R. D. Musser, 2 B. T. A. 1031; Grange National Bank, 22 B. T. A. 1209; Manufacturers Trust Co., 28 B. T. A. 1260; National Bank of the Republic of Chicago, 31 B. T. A. 680. Contra: A. J. Siegel, 4 B. T. A. 186; United States v. Siegel, 52 Fed. (2d) 63; Worcester County National Bank, 263 Mass. 444; 162 N. E. 217. (See also decision of the Supreme Court of the United States in that case Ex Parte Worcester County National Bank, 279 U. S. 347.) Cf. Commonwealth v. First National Bank, 303 Pa. 241, 154 Atl. 379; Overbrook National Bank of Philadelphia, 23 B. T. A. 1390. The Circuit Court of Appeals for the Eighth Circuit said in the Siegel case, supra, that the resulting corporation was “ an essentially different corporation ” from the one in which the taxpayer originally held shares, yet it seemed to be of the opinion that the corporate existence of the original bank was continued. A sufficient grant of new corporate powers is contained in the act. Here the parties spoke of the Iowa-Des Moines National Bank & Trust Co. as the “New Bank” and it certainly was a very different bank from the Iowa National Bank. It had different capital, assets, stockholders, customers, and management. It made profits during 1929 whereas the Iowa National Bank had been suffering losses. Of course, some of the circumstances mentioned would not be determinative of the question before the Board. Furthermore, the cases cited are not directly in point, yet after a full consideration of all of the facts and circumstances we have come to the conclusion that the petitioner has failed to show that the Iowa-Des Moines National Bank & Trust Co. is entitled to deduct the net loss of the Iowa National Bank. Cf. Brandon Corporation v. Commissioner, 71 Fed. (2d) 762.

The petitioner filed a consolidated return for the calendar year 1929 in which it included the income and deductions of the Iowa-Des Moines National Bank & Trust Co. for the period from Sep-iember 29 to the end of the year. The Commissioner accepted that period as the period of affiliation of those two corporations. Section 141 (a) of the Bevenue Act of 1928, provides, “ In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.” The petitioner now contends, under the third issue, that it became the owner of all of the stock of the three original banks not later than September 18, 1929, and therefore their income and deductions for September 18, 19, and 2'0 should be included in the consolidated return. It originally contended that affiliation began on September 13, 1929, but conceded later that the evidence does not support that contention. It adopts the 18th day of September because of the stipulation that prior to the 19th all of the stock of the three banks had been endorsed in blank and deposited in escrow pursuant to the agreements of the petitioner with the stockholders of the three banks. However, the parties to those agreements never intended that the petitioner should become the owner of the stock of the three banks. The petitioner was to exchange its stock or pay cash, not for the stock of the three banks, but for the new stock of the Iowa-Des Moines National Bank & Trust Co. after the combination and transfer of assets had been carried out. The petitioner never owned any of the stock of the three combining banks and those three banks were not members of an affiliated group of which the petitioner was parent. Therefore their income and deductions for the 18th, 19th, and 20th of September may not be included in the petitioner’s consolidated return for 1929 under the statute. That is the extent of the petitioner’s contention in regard to affiliation and no more need be decided, since neither party asks, as an alternative, to have the income of the Iowa-Des Moines National Bank & Trust Co. for the period September 20 to 28, inclusive, included in the consolidated return.

Eeviewed by the Board.

Decision will be entered for the resfondent.

       Counsel for the respondent at the request of counsel for the petitioner agreed at the hearing (see Record p. 3«’l) “ that the cost of the stock of the Iowa National Bank to the Northwest Bancorporation was in excess of $221,000.” The obvious purpose of the request was to meet a certain requirement of Regulations 75, art. 41, par. (c). This stipulation can not be accepted to contradict the clear evidence that the petitioner never bought any Iowa National Bank stock. It must mean that the cost to the petitioner of that portion of the stock of the “ New Bank ” allotted to the stockholders of the Iowa National Bank was in excess of $221,000.

       The Des Moines Sayings Bank & Trust Co. in another proceeding claims it was an independent hank until September 20, 1929.


author: Mellott :

text:
    Harry Goldstine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63391, 69590, 73527.
    Promulgated October 10, 1935.

      John G. Weisbaeh, Esq., for the petitioner.

      Paul D. Page, Esq., for the respondent.
   OPINION.

Mellott :

Petitioner contends that the compensation received from the Board of Local Improvements of the city of Chicago, is exempt from the Federal income tax. He bases his contention on the doctrine, often enunciated by the courts, that the Federal Government may not interfere with the exercise of an essential governmental function by the state through taxing the agencies of the state. The rule is well settled and not difficult to understand, but its application to a particular set of facts has given the courts and this Board some difficulty.

The rule is recognized by respondent. By regulations duly enacted, he has provided for the exemption in a proper case, as follows: “ * * * compensation received for services rendered to a State or political subdivision thereof, is included in gross income unless (a) the person receives such compensation as an officer or employee of a state or political subdivision, and (b) the services are rendered in connection with the exercise of an essential governmental function * * *.” (Art. 88, Begulations 69; Art. 643, Begulations 74.)

It is, therefore, essential for this petitioner to show, first, that he was an officer or employee and, second, that the services were rendered in connection with an essential governmental function.

It is not seriously contended that petitioner is an officer, but in the brief and reply brief submitted by him it is earnestly argued that he “ was an employee.”

It is contended that the Board of Local Improvements is an executive branch of the city government, performing an essential or ordinary governmental function. It is doubtful if we should so hold, in the face of the well reasoned decision by the Seventh Circuit in the case of Lyons v. Reinecke, 10 Fed. (2d) 3. However, we do not deem it essential to determine the question in this case, being content to rest our decision upon other grounds.

Petitioner is not entitled to the immunity unless he brings himself clearly within the rule under which exemption can be allowed. The mere fact that he received compensation from the board is not sufficient. Private citizens engaged in the practice of a profession or the conduct of a business frequently enter into contracts with the Government from which they derive a profit. In such cases, the income so received is not exempt.

But it is contended that petitioner was an employee, and in support of that contention the fact that he was paid by the day (consisting of five hours) is stressed. Let us see.

One item in controversy is $2,000, paid by check dated July 26, 1929. This was in connection with services rendered in the case of B. A. Eckhart, and consisted of examination of property, conferences with corporation counsel and witnesses, and court attendance.” This particular voucher did not purport to cover any particular time, number of days or hours, or to be based upon anything other than the value of the services rendered. Clearly as to this item petitioner was merely an independent contractor.

Should a different conclusion be reached as to the compensation paid for services rendered on a per diem basis for supervising the work of other appraisers, consulting with the legal department, and assisting in the preparation of cases for trial? In that connection petitioner cites United States v. Butler, 49 Fed. (2d) 52, and especially the following language of the court:

That he Indulged to some extent in private practice is immaterial. It is quite usual for attorneys occupying public positions to engage in private practice if time and opportunity permit.

In our opinion, the facts in this case are not similar to the facts in the Butler case. In that case the taxpayer, employed by a board of county commissioners to represent it as its legal advisor, was carried on the pay roll of the board and was paid his salary monthly. He was continuously under the direction and control of the board, and frequently advised with, and received instruction from, it. He was required to represent the county in all matters of a legal nature, and was expected, without express orders from the board, to represent and defend the county in all such matters.

An entirely different situation is shown here. Petitioner was not “ on the pay roll.” All of his compensation was received upon vouchers, detailing the work performed by him — “ examination of property; conferences.” Each voucher also made specific reference to the project in connection with which the services were rendered— “ Ee widening Eobey Street ”; “ Ee widening Ashland Avenue ”; “ Ee widening Western Avenue ”; “ Ee widening Damen Ave.”; “ Ee Magnolia Sewer ”, etc. Some of the vouchers were for “ 13 days of 5 hours each at 100 per day, 1300. 65 hours overtime at $20 per hour, 1300, total $2,600.” Some vouchers cover only parts of a month — periods of one week or two weeks — and others 25, 26, or 27 days.

The following vouchers are submitted in connection with the widening of Eobey Street:

Other vouchers were submitted in connection with other projects.

In the case of Edgar N. Finn, 31 B. T. A. 439, we held that the compensation of an expert real estate appraiser for the city of New York was not exempt, following Metcalf & Eddy v. Mitchell, 269 U. S. 514, and Frank H. Mesce, 64 Ct. Cls. 481. We see no reason to do otherwise in this case.

Petitioner having failed to establish facts showing he is entitled to exemption, it follows that respondent’s determination of the deficiency should stand.

Judgment will be entered for the resfondent.


author: SteRnhagen: TRAmmell,

text:
    A. G. Hull, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48693.
    Promulgated October 10, 1935.

      L. A. Luce, Esq., and Tom F. Garey, 0. P. A., for the petitioner.

      E. P. Hertzog, Esq., for the respondent.
   OPINION.

SteRnhagen:

The petitioner urges first that the $100,000 which he received under the option contract of December 31, 1925, was actually received by him not in 1926 as the respondent now argues, but in 1925, when he took possession of the four certificates of deposit and placed them in his safe deposit box. Failing this argument, the petitioner argues in the alternative that, if the $100,000 is held to have been received by him in 1926, it is nevertheless not within his gross income because it was part of the sale price of the Arizona claims which had cost him $109,000, thus representing no present profit. The respondent, in addition to his argument on the merits that the $100,000 was received in 1926 as the consideration for an option and not as sale price, argues further that the petitioner is estopped to urge that the amount was income in 1925; but in view of our disposition of the merits in respondent’s favor, there is no occasion for considering this argument of estoppel.

Despite the petitioner’s lengthy argument, the facts seem to us to lead very simply to the conclusion that the $100,000 was income received by him for the first time in 1926 as the consideration for an option. The contract by its terms provides unambiguously for an option and there is no room for its construction as a present sale.

The care with which the corporation, acting by petitioner as its president, refrained in 1925 from making an outright payment to him and from endorsing the certificates of deposit, as their terms required, as a condition to receiving the cash, precludes the idea that such nonpayment was either inadvertent or without significance. If it was intended that Hull should be paid in 1925, such payment would have been easy to make without the use of certificates of deposit. The deliberate omission to make a simple payment can hardly be construed as evidence of an intention to make payment or as an actual payment.

Any doubt, however, as to the significance of the conduct of the corporation and the petitioner in 1925 is completely removed by the fact that the certificates of deposit were returned by petitioner to the corporation in 1926 and a corporation check to his order issued. Certainly if the corporation had regarded the certificates of deposit as his in 1925 and the payment of $100,000 thereby completed, there would have been no occasion for the payment in 1926.

In our opinion, the petitioner did not receive the $100,000 in 1925. It was received by him in 1926 as consideration for an option and not as sale price of a capital asset. It was within his ordinary income of 1926.

Reviewed by the Board.

Judgment will be entered under Rule 50.

TRAmmell,

dissenting: I dissent from the majority view in this case. In my opinion, the $100,000 was received by the petitioner in 1925. In the instrument, whether it be called an option or a sale contract, receipt of consideration was acknowledged. The certificates of deposit were taken out of the bank by the petitioner and put in his personal safe deposit box. He had the sole possession thereof; all that remained for him to do was to endorse them, which He could have done at any moment. Where a man owns practically all the stock in a corporation, is its president and entirely in control of its management, as in this case, if his endorsement of the certificate is necessary to constitute the receipt thereof as income to him, such person can determine when and to what extent he receives income by merely endorsing certificates or a portion of them in different years. In my opinion, the law does not permit this. What he received was of value to him and represented a consideration payable to him, and it was so understood by all the officers of the corporation. Otherwise there was no consideration for the agreement. Had the petitioner come into court in 1925 to set the agreement aside for lack of consideration, undoubtedly the court would have held that the consideration had been duly paid and received by him. It is not necessary to rely upon the doctrine of constructive receipt, but even on that theory I think to all intents and purposes the consideration, the equivalent of cash, was received in 1925.

It is not necessary for the majority opinion to discuss the question of estoppel, taking the view that the consideration was received in 1926; however, it does become necessary to discuss it if it was received in 1925. I do not believe that this doctrine applies in this case. The transaction involving receipt of this money was subject to investigation by the Bureau of Internal Revenue long prior to the expiration of the statute of limitations for 1925. However, based on that investigation, the Commissioner determined that the amount was received in 1926. The petitioner at no time represented that the money was received in 1926. The record does not disclose that any misrepresentation of fact was made. The amount was not reported in 1925 by the petitioner, on the theory that the transaction was a sale and that no taxable income was received in that year. The position of the petitioner is not inconsistent with his position throughout. The taxpayer contended that it was not income at all and has always so contended, but says that if it was income it was income in 1925. All the facts appear to have been as fully before the Bureau of Internal Revenue before the statute of limitations expired in 1925 as they are at the present time and, in my opinion, the rule of estoppel does not apply.

McMahoN agrees with this dissent.

       See Rialto Milling Corporation, 25 B. T. A. 980, 985, where it is said:
      “ * * * The option agreement is not in evidence, hut Hull, president of the petitioner and owner of the claims, testified that he gave the petitioner an option to purchase at any time before November 15, 1927, and received therefor $100,000 in cash, with the understanding that the petitioner would pay him an additional amount of $200,000 as and/ when it exercised the option.”


author: ARUndell :

text:
    Preston R. Bassett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63263.
    Promulgated October 11, 1935.

      Howard M. Bassett, Esq., for the petitioner.

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

ARUndell :

The first question raised in this case is whether the gain derived from the sale in 1929 of the 30 shares of Hall & Connolly stock held in trust by the petitioner for the benefit of his wife constitutes income taxable to the petitioner. The petitioner created an irrevocable trust, naming his wife beneficiary for life, with reversion to himself and his heirs on her death. He named himself trustee and reserved full powers to manage the investment of the trust property. Assuming that a valid trust was created, a point which respondent does not concede and which will be considered hereafter, respondent’s cardinal contention is that the trust would be comprehended under section 167, Revenue Act of 1928, the pertinent portion of which reads as follows:

Where any part .of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, he distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor.

The respondent urges on us the argument that, since the petitioner and his heirs have a reversion after his wife’s death of the whole corpus of the trust, any gain which would constitute income under the Federal taxing statutes and which was not distributable to petitioner’s wife would therefore “ be held or accumulated for future distribution ” to petitioner, within the meaning of the statute. The provision respecting the distribution of income in the trust deed is in very simple terms and merely states that the petitioner has created an irrevocable trust “ to pay the net income thereof to my wife, Jeanne M. Bassett, for and during the term of her natural life, and at her death such trust to cease and the principal sum to go to her husband, and his heirs forever.” It does not appear therefore in so many words what disposition would be made of capital gain such as that involved here, but, as under the rule applicable in most states any capital gain would be added to the corpus of the trust and only gain derived from the use of the corpus would be distributable to the beneficiary, we may concede so much to the respondent’s argument, that the capital gain here in question by being added to the corpus would ultimately return to the petitioner. We may concede also that such capital gain, although under local law not “ income ” of the trust, would clearly be income under the Federal statutes. Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509; Charles Kaplan, 26 B. T. A. 379; affd., 66 Fed. (2d) 401. To make such a capital gain presently taxable to the settlor, however, it must come within the provisions of section 167. That section makes taxable to the settlor only such part of the income of a trust as “ may in the discretion of the grantor of the trust * * * be distributed to the grantor or be held or accumulated for future distribution to him * * Obviously, the crucial phrase here is “ in the discretion of the grantor of the trust.”

There is no ambiguity in this phrase. It imports an unfettered command over the income of the trust resident in the settlor, or, if not completely unfettered, hampered only by a control not adverse to the settlor’s. It imports a command over the income existing not only at the time of the creation of the trust, for obviously the settlor of a trust has at this time full power to make what disposition he likes of both corpus and income, but a continuing power which may be exerted in the future from time to time after the creation of a trust and as the income on the corpus arises. “ Discretion ”, as defined by Webster, means “ freedom to decide or to act according to one’s judgment; unrestrained exercise of choice or will.”

Obviously the present trust does not come within this definition, for the settlor had no discretion to withhold income from the beneficiary and accumulate it for future distribution to himself. The fact that capital gains would be added to the corpus and eventually distributed to him, as already pointed out, was not the result of any exercise of his discretion, but came about through the operation of a general rule of law. It is true that the petitioner in his capacity as trustee had the discretion to invest and reinvest the corpus of the trust and thereby to multiply capital gains on such conversions of the corpus, but this power was exercised by him in his capacity as trustee and not as settlor. This was his duty as the trustee. It is the power of the'settlor that is aimed at by the statute and the functions of petitioner as settlor and trustee must not be confused. Cf. Reinecke v. Smith, 289 U. S. 172. But, even if this power of investment be treated as inhering in the petitioner as settlor, we do not think that that fact brings it within the section. Cf. Reinecke v. Northern Trust Co., 278 U. S. 339.

We are of the opinion, therefore, that the capital gain realized on conversion of the trust assets was not income to be held or accumulated for future distribution to the settlor by reason of any exercise of discretionary powers on his part, and consequently that no part of it is includable within his gross income.

Respondent relies on Malcolm W. Greenough, 29 B. T. A. 315; affd., 74 Fed. (2d) 25; and Charles Kaplan, 26 B. T. A. 379; affd., 66 Fed. (2d) 401. Both of these cases are clearly distinguishable. In the first the settlor made an irrevocable gift on trust for the term of five years, the income to be paid to himself and the corpus to revert to himself, and named himself as one of three trustees (none of whom except the petitioner was a beneficiary), but as the only trustee who might not be removed on motion of the two others, The trustees were given power to determine in their discretion what receipts shall be deemed income and what principal.” In such circumstances we held, and the Circuit Court (First Circuit) affirmed our judgment, that gain realized from the sale of trust assets, although constituting corpus of the trust under local Massachusetts law, was properly taxable as income to the settlor-trustee in the year of its realization by the trust. Obviously the grantor and sole beneficiary of the trust there had complete control and was simply utilizing the trust device to manipulate, as he saw fit, his receipt of income — the kind of situation which section 167 sought to put an end to.

In the Kaplan case we had a situation closely analogous to that here. Petitioner made a gift on trust to his wife for life, to himself for life, remainder over to his children, irrevocable without his wife’s written consent, and named himself trustee. The trustee was given full powers of management. So far we have stated no incident which is not present in the instant case. But the trustee or trustees were given additional power “ to distribute the income arising from the trust property from time to time in such amounts and at such times as they shall think fit, with power to reserve a reasonable portion of the income ”, any such accumulated income to be held for the benefit of the particular persons entitled to it. We thought the case came within section 219(h), Revenue Act of 1924: “It contemplates a trust wherein the grantor retains dominion over the trust income to the extent of diverting it to himself.” In other words, petitioner could take income that normally would go to his wife, accumulate it, and then after her death pay it over to himself as the next life tenant. The Circuit Court (First Circuit) affirmed in principle, saying:

Kaplan is under the obligations imposed upon the trustees by the trust instrument. Among these is that he shall exercise his powers as trustee with due regard to the rights and interests of the immediate beneficiary [citations]. The large discretion given to the trustee diminishes these rights, but it does not extinguish them. Applying the law as above stated, the portion of the income properly taxable to Kaplan personally was the entire income minus that portion of it which constituted the irreducible minimum of which the trustee had no right to deprive Mrs. Kaplan. The commissioner held as above stated that the entire income was taxable to Kaplan personally. In this he fell into error, as did the Board of Tax Appeals in affirming his decision. * * *

The Kaplcm case is readily distinguishable on its facts from the instant one, for the petitioner here had no control of the income of the trust at any time, either capital gains or ordinary income.

The recent case of Margaret S. Sawtell, 32 B. T. A. 687, was one wherein the petitioner created a trust on April 80,1930, to terminate at the end of the same year, solely for her own benefit, the income to be paid to her alone and the corpus to revert to her on termination of the trust. At the time the trust was created a sale of the trust assets was pending. We held the capital gain on the sale to be income to the petitioner under section 167 of the Revenue Act of 1928. While we believe that that result was entirely correct on the ground that the trust was not a real one within the intent of the revenue act, but a mere disguise to postpone the realization of income, we are of opinion that the construction given section 167 in that case was too broad and was unnecessary in reaching the decision.

In Francis J. Stokes, 28 B. T. A. 1243; affd., 79 Fed. (2d) 256, we held that where the income of a trust was distributable to the grantor’s children during their minority and the grantor’s wife was given power to withdraw securities or money from the trust, and a similar power was reserved to the grantor but to be exercised by him only on the death of his wife, the grantor retained no powers that would bring him within section 166 or 167 of the 1928 Revenue Act and he was not taxable on the income. The Circuit Court said in affirming: “It is not a question of the power of Congress to provide that under such facts as before the court the income of the trust is taxable to the settlor (Burnet v. Wells, 289 U. S. 670; DuPont v. Commissioner, 289 U. S. 685), but it is a question of whether or not Congress has given statutory authority to tax the income derived from the fund to the settlor.”

This brings us to respondent’s secondary contention in support of the proposition that the present trust falls under section 167. Admitting by implication that the precise words of that section do not cover the present situation, the respondent offers a gloss on the section in the form of the House Report on the corresponding section in the Revenue Act of 1932. The section of the later act reads:

Where any part of the income of the trust is or in the discretion of the grantor * * * may be held or accumulated for future distribution to the grantor. [Italics ours.]

Such an amendment of the provision, as Holmes, J., said in Lewellyn v. Frick, 268 U. S. 238, in respect to a similar amendment to another provision of the statute, “ does not help, but if anything hinders the collector’s construction of the present law.” Such an enlargement of the scope of the provision in the 1932 Act can not be read retrospectively into the 1928 Act.

We must not lose sight of the fact that the trust has been treated as a separate taxable entity since the Revenue Act of 1916. Merchants Loan & Trust Co. v. Smietanka, supra. And its definition in the revenue acts as a “ taxpayer ” has been pursued to its logical conclusion in a long series of decisions. Baltzell v. Mitchell, 3 Fed. (2d) 428; Anderson v. Wilson, 289 U. S. 20. This distinction between classes - of taxpayers has been rigidly adhered to by the Supreme Court, even in the circumstances of the Wilson case, supra, where hardship to the beneficiaries, who were “ men of flesh and blood ”, might have been relieved but for the necessity which the Supreme Court felt imposed by the statute to treat the trust, a mere “ abstraction ”, as having a separate existence. Such a provision as section 167, therefore, since it obliterates well recognized lines between classes of taxpayers, and seeks to tax to the settlor what is nominally the income of the trust or of the beneficiary, is anomalous, and finds its excuse only in the recognized necessity to prevent evasion. This was, of course, its confessed purpose, cf. House Report 179, 68th Cong., p. 21; Senate Report 298, p. 25; both on section 219(h), Revenue Act of 1924; and, within the words of the section, every effort should be made to effect this purpose, Burnet v. Wells, supra; but we do not think its meaning should be extended by construction beyond the unambiguous import of its words. Consequently, we do not think that the Committee Reports of Congress on section 219(h), Revenue Act of 1924, the prototype of section 167, employing language of wider meaning than the terms of the enactment, may be availed of. United States v. Shreveport Grain & Elevator Co., 287 U. S. 77, 83; Crooks v. Harrelson, 282 U. S. 55, 61.

Respondent’s other contentions may be briefly disposed of. He contends that in the circumstances of the sale contemplated at the time the trust was created petitioner made a gift of the proceeds of the stock after sale and not of the stock itself. This contention rests on the assumption that the trust was a mere device to avoid taxation and as such is to be disregarded, for otherwise it is clearly demonstrable that the gift of the stock covered by an executory contract of sale is something essentially different from the gift of the proceeds received on the sale after its consummation, Williston on Sales, § 1, 2. The sale might well have never gone through. In fact, such a possibility was contemplated by the parties and expressly provided for in the contract, for if certain representations of the sellers were not made good by the three months’ audit provided, the buyer might withdraw. He might, indeed, withdraw in any case, but if caprice were his only motive, he forfeited the $12,000 which he had put in escrow on signing the contract. Evidently, then what petitioner’s wife received on April 12, 1929, was a gift of stock with an interest in the contract of sale, which was agreed upon on the day the trust was created and signed on the next day after.

As for the respondent’s contention that the present case falls within the ambit of section 166 on the theory that the petitioner as trustee had revested in himself during the year the title to the trust property, we need only point out that petitioner’s title after the creation of the trust was that of a fiduciary only for the benefit of his wife, an entirely different thing from title held for his own benefit. Helvering v. Duke, 290 U. S. 591.

Respondent’s argument that the trust was not a bona fide one we regard as without substantial merit.

We are of the opinion, therefore, that any gain on the proceeds of the sale of the Hall & Connolly stock held in trust by the petitioner for his wife was not taxable to the petitioner.

The question remains whether the portion of the purchase price of the shareholders distributable to petitioner individually — not what was distributable to him as trustee for his wife, for that question is eliminated by our decision of the first issue — which was held in escrow until 1930 and then paid over to the sellers, was taxable to petitioner in 1929, the year of the sale; or in 1930, the year it was actually paid. Petitioner was on a cash basis.

We think it clear from the provisions of the contract that the $20,000 to be placed in escrow with Chase National Bank as depositary was withheld by the buyers as a guarantee that the warranties and representations were true and would be faithfully carried out. It was obviously impossible to determine precisely the value of cash accounts receivable and physical assets, which were guaranteed to be $60,000, until a reasonable time had been allowed for the payment by the sellers of outstanding liabilities and for the collection of accounts receivable. Therefore, $20,000 was deposited with a common agent, who should hold this amount for both buyers and sellers until the question as to the value of these assets should be clearly resolved. It does not appear from the contract, nor from the facts stipulated, whether the depositary paid interest on $20,000 to the sellers, and we may not infer this fact without evidence.

Generally, as the Supreme Court said in Lucas v. American Code Co., 280 U. S. 445, the income tax law is concerned only with realized gains. Moreover, where the petitioner is, as here, on the cash basis, pretty clear evidence of his command over the money held in escrow would have to be present to justify our holding that it was received in the year of execution of the contract, although not paid over until nine months later. Respondent relies on Federal Development Co., 18 B. T. A. 971; and on Blaine L. Stoner, 29 B. T. A. 953; since reversed, 79 Fed. (2d) 75. In the Federal Development Co. case the petitioner was a vendor of land under lease who had promised the purchaser possession by a certain date, with liquidated damages for every day which the lessee held over, the purchaser withholding $50,000 of the purchase price as a guarantee. Upon this sum the purchaser agreed to pay interest to the vendor at an agreed rate. We held that the portion of the purchase price so withheld and not paid to the vendor until the following year was income to the petitioner in the year of purchase. The instant case is obviously distinguishable.

What has generally been made decisive of the receipt of income by a taxpayer is whether he may exercise an unlimited command over it, and this holds true although for contractual or other reasons he may eventually have to part with some or all of it later on. In North American Oil Consolidated v. Burnet, 286 U. S. 417, the Supreme Court held that the taxpayer, whether on the cash or accrual basis, had received income in 1917 to the extent of certain moneys then in litigation between it and the Government, for in that year the District Court had paid these moneys over to the taxpayer, and thereafter the outcome of the litigation on appeal would only be a contingent liability which might or might not be realized.

Here the petitioner had no command over the $20,000 deposited in escrow in July 1929 until it was paid over to him in April of the following year. We think the present case is ruled, therefore, by Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85 and Stoner v. Commissioner, supra. In the former case it was held that the percentage of the payment to be made by a city on a completed paving contract which was retained by the city to guarantee maintenance. of the pavement was not taxable to the contractor until the year of its actual receipt. In the latter case, the Circuit Court held that a sum received by the seller of certain stock and under the contract deposited by him on his own behalf and that of the other stockholders in a bank to guarantee against possible liabilities for income tax and other liabilities of the corporation which might not be on its balance sheet at the time the agreement of sale of the stock was carried out, which sum was not withdrawn by the petitioner for his own use until two years later, was taxable to him only in the latter year. The court thought that petitioner never received the fund except as a fiduciary and consequently he could not have realized income on it until his possession of it in that capacity had ceased.

The present case is all the stronger, as petitioner here did not have even a qualified control of the money in escrow, nor, so far as is evident, any benefit from it, until the year 1930.

We hold, therefore, that the share of this $20,000 distributable to the petitioner in his individual capacity for the 25 shares held in his own name which he had sold, in the sum of $11,229.51, should not be included in his gross income for the year 1929.

Reviewed by the Board.

Decision will he entered under Rule 50.