author:
MokRis :
      McMahon,

text:
    Belridge Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31218.
    Promulgated August 16, 1932.

      John B. Millihen, Esq., for the petitioner.

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

MokRis :

While the respondent’s deficiency notice covers deficiencies for the years 1921 to 1923, inclusive, and while the petition states that the taxes “ in controversy are income and profits taxes for the years 1921 to 1923, inclusive,” the said petition, as amended, fails to allege error on the part of the respondent in other than the year 1921, and, since the evidence adduced at the hearing was confined to the issues pertaining exclusively to the year 1921, the respondent’s motion, made at the hearing, to affirm his determination of the deficiencies for 1922 and 1923 is granted.

Our sole question for determination is the “ actual cash value ” of the option “ at the time of ” its payment for the capital stock of the petitioner on January 25, 1911. (Sec. 326, Revenue Act of 1921.) It is conceded by counsel for the respondent that, if the value of the option is satisfactorily substantiated, there is no question about its inclusion in invested capital to the extent justified by the proof.

The identical question here, affecting this same option, was presented to this Board for consideration in Belridge Oil Co., 11 B. T. A. 127, involving the years just preceding 1921, and we there sustained the respondent in his determination “that the option was worth on January 25, 1911, only what was paid for it on January 5 of the same year,” i. e., $25,000. We concur in the views urged by the petitioner that the decision there, based upon the facts adduced at that time, which facts are not before us here, is not res adjudícala (Union Metal Mfg. Co., 4 B. T. A. 287), but, since the same property, the same issues, and the same principles with respect thereto are involved here, a brief review of that case may prove helpful.

Premising its consideration of the question there presented by directing attention to the terms of the option itself and to the fact that it was the result of negotiations between parties dealing at arm’s length, that they were dealing with prospective oil lands, that by their agreement they provided for their exploration, and that they fixed $25,000 as the actual cash cost of the option, the Board said:

In our opinion, under tlie circumstances of this case, this agreement is entitled to great weight. It was executed in the light of such knowledge as the parties possessed about the character and value of the land. It does not appear that the parties were unadvised of any of the elements of its value, nor does it appear that any new proof of value was discovered between the giving of the option and its assignment to petitioner*. The fact that one Van Slyke sometime in 1910 discovered an outcrop of oil sand on the property is not shown to be controlling. This discovery preceded the giving of the option to Hole and for aught that appears the existence of this outcrop may have been known to Hole when he acquired the option. The evidence does not indicate that at the time of the assignment petitioner had any greater knowledge of the oil-bearing properties oi; the land than had Hole when he took the option. When petitioner acquired the option the land was still unproven. No wells had been completed nor had the presence of oil in commercially profitable quantities been otherwise proven.

With the exception of the statement there made indicating the probability that Hole may have had knowledge of the existence of the outcroppings on this tract of land when he acquired the option, the same controlling principles discussed there obtain with equal force here.

While it appears that Hole was acting for the interests of all concerned, it can not be overlooked that he actually consummated the option with Mrs. Hopkins, and that he was in possession of no more nor less favorable information than Mrs. Hopkins, and therefore, it must be concluded that the transaction here, as found in the former decision, was at arm's length and that the cash consideration therefor was arrived at based upon all of the factors then known to them. There was, so far as we are informed, no deception practiced between the parties who consummated the deal. Granting that Hole and Mrs. Hopkins were totally ignorant of 'the information in the possession of Green, Whittier and Van Slyke (although the record does not show and we have no way of knowing that Mrs. Hopkins was not in possession of such facts, or facts equally as valuable), Hole knew, and so did Mrs. Hopkins know, the strategic location of, and the fact that the land contained prospective oil, and that was all that anyone knew with any degree of certainty. She could also reasonably infer that these men had informed themselves about the matter, and she may reasonably have suspected, and no doubt did, that they possessed valuable information about the land. Otherwise, they would not have been so willing and anxious, in fact, to venture $25,000 in the satisfaction of a mere empty curiosity. And it is not as though she, being an untrained woman in such matters, had been misled, because the entire transaction, as the record discloses, was supervised and consummated by her personal counsel and representatives, who must-be presumed to have taken proper precautions to protect her interests.

Let us review the evidence in support of the value contended for by the petitioner.

The record shows that the Associated Oil Company acquired acreage in Kern County, California, in 1910, at a cost to it of $66% per acre. The petitioner contends that that property was not as favorably located as the property in question. In fact, one of its witnesses so testified and attempted to give his reasons therefor, which are far from convincing. The witness testified that for the reason stated that property was less valuable than the petitioner’s tract. While we are reasonably convinced that the properties were similar in many respects, being in the same general locality, we are not convinced that they were less favorably located in respect to production than the petitioner’s properties. As we read the map before us, two of the tracts, there being five in all, were almost if not adjacent to the Lost Hills properties and within what appears to us to be a very short distance of producing wells. The other three tracts, as we locate them on the map, are as near, if not nearer, to the Lost Hills territory, then a producing field, than the petitioner’s tract. But our principal difficulty with this evidence lies in the fact that we do not know from the record what the state of development was with respect to this tract of land, whether or not oil had been discovered thereon at the time of its purchase at $66% an acre, or whether it was virgin soil, and, therefore, comparable to the petitioner’s tract. The evidence is very unsatisfactory respecting this purchase and consequently we are able to give it but very little weight in determining the “ actual cash value ” of the option in question.

Nor do we attach serious importance to the testimony of Green and Connell respecting his and Whittier’s purported offer of $500,000 for one-fifth of the capital stock of the petitioner which Connell owned, for the reason, among others, that as we view the testimony the transaction had not sufficiently crystallized to be regarded as more than a trifling indication of value. Connell testified that he inquired of the members of the board of directors as to the methods to be employed in the development of the properties — if they were to be extravagant — -and he stated that if they were to be he might be compelled to sell his interest. Whereupon Whittier inquired what he would take therefor, but Connell made no reply. It was then that the purported offer was made, to which Connell testified “ I changed the conversation and discussed the question of sale no further.”

We have the testimony of Green, who qualified as an expert through his long and intimate association with the oil business; and Harry It. Johnson, who qualified as an expert through his educational training in geology and his long experience in geological survey work, and, particularly his knowledge in the general region in question; and W. W. Orcutt, who also qualified as an expert through his educational training in geology and his later experience in the oil business.

Green testified that, in his opinion, the “actual cash ” or “ fair market value ” of the land on January 25, 1911, was $100 an acre, based upon sales in the Lost Hills territory — with which the record shows he had no familiarity other than pure hearsay — and upon what he considered that other companies would have been willing to pay for the land had they possessed the information which he and his associates did.

Johnson, who visited the properties in question about two weeks before the hearing, apparently for the purpose of qualifying himself as a witness with respect thereto, was asked:

Now, as a competent geologist, as a person who advised people in 1910, and in the second place taking into account and assuming the location of the structures reported by Mr. Van Slyke, and what in your opinion would a person have been authorized to pay, a person who is a willing purchaser and not compelled to purchase, to a willing seller, not compelled to sell, on January 25, 1911, a person being in possession of the information in possession of which- Mr. Green and Mr. Whittier and Mr. Van Slyke were — •

and he replied:

“ Very close to three million dollars — two million nine hundred and some odd thousand.” He said that his opinion as to the value of the land was based upon his scientific education as a geologist, and years of experience plus several years in this region, which, at that time “ was very active in the transfer of properties.” He did not, however, attempt to enlarge upon his knowledge of such transfers of property about which he spoke.

Orcutt, who visited the property about a week before the hearing, merely corroborated the general testimony of Johnson and testified, in reply to a hypothetical question somewhat similar to that put to Johnson, that in his opinion the fair market value of the land in 1911 was $2,700,000, based, as he said, upon the similarity of the outcroppings and structure of this property to that of Lost Hills and other fields and upon his scientific education in geology and his experience in the profession.

Hone of these witnesses testified to the actual cash value of the option itself, nor did they testify to any cases where similar options had been sold. In fact they demonstrated no knowledge on the subject of options.

The petitioner proposes tUjat we accept the value of $2,700,000 placed upon the land by Orciitt, and it contends that the “ actual cash value” of the option on January 25, 1911, when it was transferred to it, was the difference between that figure and the purchase price, $1,028,198.67, to be paid for the land in the event of the exercise of the option, or an actual cash value of the option itself of $1,671,801.33.

Assuming generally the correctness of the theory urged by the petitioner, we are confronted with this situation: An actual cash ” payment for the option in January, 1911, of $25,000, which the petitioner would have us supplant by a purely theoretical value, measured by the value of the land, based upon opinion testimony supplied about twenty years after consummation of the transaction. Of course there are occasions where no actual cash is involved in the transaction, necessitating a substitute for tax purposes, but that is not the case here. It seems to us that if the theory urged by the petitioner, that is, of assigning a value to the option equal to the difference between the theoretical value of the land and the proposed purchase price thereof as set forth in the option, has anyplace in such determinations of value at' all, it should and neces-sarity must be confined to those cases in which no, or only a very nominal, consideration was given for the option and not where, as here, a very substantial price was paid, to wit $25,000, and which appears to be the real cash value thereof at the time of the transaction.

Naturally when property is purchased at a stated time for $25,000 aiid it is contended, twenty years later, that that same property would have sold for the huge sum of $1,671,801.33 cash at that time, the human mind becomes skeptical and requires considerably more than ordinary proof. Now all that we have, of any tangible importance, is opinion evidence of one man who was a party to the transaction and the testimony of two experts who visited the property just a few days before the hearing in order that they might visualize and confirm, if possible, conditions as they were supposed to exist thereon in 1911. It is because ox the extremely flexible nature of opinion testimony that such should be carefully weighed. These witnesses testify unqualifiedly to the respective values which we have referred to before and they did so primarily, if not entirely, from their geological observations. Witness Johnson testified that in this region all geology was on the surface. As we understand this, it may be reasonably inferred that any geologist might visit this particular piece of property and determine from surface formations that the property contained oil. If the matter was so obvious to the trained expert, we are unable to understand why others who had already explored this field were unable to discover the presence of oil, for, as Green himself testified, other companies had scouts over the property, but had never discovered any indications of oil.

There is still another important factor which influences our conclusion, and that is that Mrs. Hopkins had agreed to sell the entire tract of land, after the discovery of oil thereon, for $1,028,-198.67, which figure was fixed with the most optimistic outlook that could possibly attend the development of the land and, consequently, represents what the parties regarded the fair market value of the tract of land to be as a producing oil field. Therefore, we can not minimize this factor when the parties urge us to place a value on the option itself, in 1911, prior to the actual discovery of oil, of $1,671,801.33, or nearly $700,000 more for the option than the vendor was perfectly willing to sell the land for as, if and when it should become a producing oil field.

Then, too, the testimony of these experts is retrospective in its nature, a factor which must be considered in weighing the evidence. A somewhat analogous situation was presented in Tracy et al., 15 B. T. A. 1107, where the petitioner introduced various real-estate men to testify to the March 1, 1913, value of certain realty. With respect to their testimony the Board premised its considerations by saying: “ None of these witnesses had actually made an appraisal of the Manhattan property in 1913, but were expressing their opinion at the present time of what the value of the property was in 1913,” which is true here, and, continued the Board: “ This testimony, then, is retrospective in its nature and is subject to the weaknesses of that type of appraisal.” Upon rejection by the Board of the values testified to there the matter was reviewed by the Circuit Court of Appeals in Tracy v. Commissioner, 53 Fed. (2d) 575. It was there contended that, the only evidence of value introduced before the Board being opinion evidence of experts, the Board was under obligation to accept the petitioner’s valuation, and the court said:

* * * While the opinions of experts are competent and often very helpful, such evidence is not considered binding upon the tribunal before which it is produced, at least not to the extent that such tribunal is bound to follow it if contrary to the best judgment of its members. Anchor Co. v. Commissioner, 42 F. (2d) 99 (C. G. A. 4) ; Am-Plus Storage Battery Co. v. Commissioner, 35 F. (2d) 167 (C. C. A. 7). But it is true that no administrative board may act arbirarily and without - evidence, and this suggests other questions which here arise, viz., whether there was substantial evidence before the Board to support its findings and, if so, the effect to be given to this fact.

See also Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893.

In reaching the conclusion which we deem inescapable, we do not do so arbitrarily, nor have we substituted our own “ knowledge, experience and judgment ” for the opinions of these experts. There are two bases of valuation of record — not merely the one which the petitioner would have us accept — and after carefully weighing all considerations pertaining to each of them the result is that we are forced to reject the valuations tendered by these experts and to adopt the other. In other words, we are not convinced from the evidence that the theoretical “ actual cash value ” should be substituted for the value as measured by “ actual cash.” Cf. Van Kannel Revolving Door Co., 11 B. T. A. 1209; aff'd., 36 Fed. (2d) 1022; and Keystone Wood Products Co., 19 B. T. A. 1116.

Reviewed by the Board.

Judgment will be entered for Che respondent.

McMahon,

dissenting: I do not agree with the majority opinion in holding that the option for the sale of the Hopkins land (sometimes referred to as the Belridge property in the record) in fee simple, under the favorable conditions to the purchaser giving him at least one year in which to exercise the option at so favorable a price as $33)4 per acre, had an actual cash value of only $25,000 at the time such option was paid in to petitioner for stock.

Since I presided at the hearing in this proceeding and had an opxDortunity to see the witnesses upon the witness stand, all of whom were called by the petitioner, and observe the candor, earnestness, sincerity and intelligence with which they testified, I feel that I would be derelict in my duty if I did not make known my views fully.

The valuation of $25,000 'placed upon the option in the majority opinion is based primarily upon the fact that such option, which was entered into on January 5, 1911, provides for the payment by Hole of $25,000 and that this was the amount furnished by Green and paid by Hole for it. An essential question for determination here is whether that transaction establishes the actual cash value of the option, notwithstanding the infirmities of the transaction and the rather voluminous evidence in the record to the contrary.

The proceedings of the Board and its Divisions are conducted in accordance with the rules of evidence applicable in courts of equity of the District of Columbia. (Sec. 907 (a) of the Revenue Act of 1924, as amended by sec. 601 of the Revenue Act of 1928.) It has been held by the courts of the District of Columbia that evidence of a “ fair sale ” of the same property, when not too remote from the date of valuation (the element of remoteness is not in question here), may outweigh expert opinion evidence, standing alone, upon the subject of value; and no presumption or prima facie showing of the correctness of the value fixed by the sale arises unless the sale is a “ judicial ” or “ fair public ” sale. Andrews v. Commissioner, 38 Fed. (2d) 55; affirming Estate of Effie Andrews, 13 B. T. A. 651; Hazelton v. Le Duc, 10 App. D. C. 379; and Ruppert v. McArdle, 42 App. D. C. 392. Since there was no “ judicial ” or “ fair public ” sale effected in the instant proceeding, no such presumption arises and no such prima facie showing has been made. On the other hand, the sale of the option, relied upon by the majority opinion (as aj)pears therefrom) as a basis for valuation in this proceeding, was not a “ fair sale,” as will be pointed out presently, and hence it can not be permitted, under any rule established by these cases, to outweigh expert opinion evidence upon the subject of value, standing alone, or otherwise. Furthermore, the expert opinion evidence upon the subject of value in the instant proceeding does not stand alone. On the contrary, it is well corroborated and fortified by other undisputed facts and circumstances, many of which are inherent in the situation, as will likewise be pointed out.

In passing it may be said that no authority has been found to support the view that the value fixed in any sale made at or near the date of valuation is conclusive of the value of the property in question at such date as against all evidence or as against expert opinion evidence, standing alone, or that it is the best evidence in the sense that no other evidence will be used as a basis for determining such value. This view, if enforced in any case, might give rise to the question as to whether it would be in violation of the Fifth Amendment to the Federal Constitution in so far as it guarantees due process of law. Cf. Heiner v. Donnan, 285 U. S. 312; Schlessinger v. Wisconsin, 270 U. S. 230; United States v. Lee, 106 U. S. 196; and Zeigler v. South & North Ala. R. R. Co., 58 Ala. 594.

With regard to the establishing of fair market value, the following appears in Andrew B. C. Dohrmann, 19 B. T. A. 507:

We think it is well settled that whether property at a given date has a fair market value or not is a question of fact to be determined from all of the evidence introduced and admitted in each individual ease; that no set rule or formula can be employed; and that in weighing and sifting the evidence the fact to be found, if it exists, is the cash price at which a seller willing but not compelled to sell and a buyer willing but not compelled to buy, 'both having reasonable Knowledge of all the material circumstances, mil trade. Walter v. Duffy, 287 Fed. 41; Phillips v. United States, 12 Fed. (2d) 598; Heiner v. Crosby, 24 Fed. (2d) 191; O’Meara v. Commissioner, supra; Ault & Wilborg Co., supra; and James Couzens, 11 B. T. A. 1040. [Italics supplied.]

This applies with equal, if not greater, force to the instant proceeding, which involves the determination of actual cash value.

Looking to substance and not mere form, it appears that Hole, in negotiating for the second option, was in reality acting in behalf of the group composed of himself, Green, Whittier, Connell and Buck. Green furnished the $25,000 for Hole to pay for the option. Thus in the negotiations for the option the real parties were the group, on the one hand, and Mrs. Hopkins, on the other. Green and Whittier, the two moving spirits, had actual knowledge of the presence of oil sands on the land, whereas the inference to be drawn from the evidence is that Mrs. Hopkins did not have such knowledge. The evidence shows that Green and Whittier were very careful to keep their knowledge secret; and even Hole did not have such knowledge.

In the majority opinion it is stated that “ the entire transaction, as the record discloses, was supervised and consummated by her personal counsel and representatives, who must be presumed to have taken proper precaution to protect her interests.” Any such presumption that might be indulged in in the ordinary case can not apply here in the face of the evidence, which shows that Hole paid one Benedict, a nephew of Mrs. Hopkins, $125,000 for his services and influence in negotiating this option; that Hole also enlisted similar services and influence of William Hill, Mrs. Hopkins’ manager, for which he paid Hill $35,000 and agreed to give him one-fourth of the stoeJc which he (Hole) was to receive in the corporation to be organized; and that Mrs. Hopkins’ attorney was “ anxious ” for Mrs. Hopkins’ nephew to “ make something.” The option was not signed by Mrs. Hopkins, but was signed on her behalf by her counsel as attorney in fact. This option called for a price for the land of $33% per acre, whereas the first option which Mrs. Hopkins had granted to Hole called for a price of $20 per acre for the land. It was understood by Mrs. Hopkins’ attorney that the difference of $13% per acre to be paid under such option should go to Hole, and that Mrs. Hopkins would only get $20 per acre for the land if the option were exercised. The evidence definitely shows that Mrs. Hopkins did not have intimate management of the property. The inferences to be drawn from this situation are that Mrs. Hopkins did not know of the price of $33% per acre provided in the option, or that Hole was to receive the difference of $13% per acre. The evidence does not disclose that Hill, Benedict, or Mrs. Hopkins’ attorney knew of the discovery of oil sands on the property; but, even if they did, it is apparent that they would not have advised Mrs. Hopkins of the fact, for the reason that they were all personally interested, for one reason or another, in seeing the option granted to Hole. In so far as Mrs. Hopkins and Hole dealt for an option covering the land in question, the actual cash value of the option is not reflected for the reason that neither of them had knowledge of the existence of the numerous indications that this was oil land. Hole’s principal experience had been in agricultural land and he was not an experienced oil man like Green and Whittier. In so far as Hole dealt in reference to this option with Green and Whittier or with the petitioner, the actual cash value is not reflected, for the reason that Hole did not have this knowledge of the existence of these indications of oil upon the land. Furthermore, Mrs. Hopkins and her representatives, on the one part, and Hole, on the other part, were not dealing as strangers or at arm’s length. They were dealing at close range. If a sale is made under peculiar circumstances, and we have such here, it does not establish market value. See Weed v. Lyons Petroleum Co., 294 Fed. 125, at page 734. The facts and circumstances and the infirmities pointed out above take the sale out of the category of a “ fair sale ” for the purpose of establishing actual cash value of the option, and also fail to satisfy the requirements jaointed out in Andrew B. C. Dohrmann, supra, to the effect, among others, that both parties to a trade must have reasonable knowledge of all the material circumstances.

It should be pointed out, however, that the petitioner was not a party to this deal with Mrs. Hopkins. Petitioner was not in existence than. Furthermore, no question is raised here as to the legality of the transaction. Mrs. Hopkins and those in privity with her are the only parties who might successfully raise questions as to the validity of that transaction. See Taplin v. Commissioner, 41 Fed. (2d) 454. They are not before us. The only question before us is that of the actual cash value of the option.

Hole was willing to pay a great deal more than $25,000 to procure the option, and he did in fact pay, besides the $25,000 furnished by Green, $160,000 in cash and transferred one-fourth of the stock which he received in the petitioner corporation, or a total of more than $185,000. The very fact that Hole actually did pay out a total of at least $185,000 to procure this option leads to the ines-capeable inference that the option had a value far in excess of $25,000. The actual cost of procuring the option is at least $185,000. In addition to this $185,000, Hole was required to deliver to Hill one-fourth of Hole’s share of petitioner’s corporate stock. Hole thus paid over $185,000 to procure the option, notwithstanding that he did not know that Yan Slyke had discovered outcroppings of oil on the land, which were confirmed by others. It must be inferred from the evidence that, if Hole had known what Van Slyke and others knew in this respect, he would have put a higher value on the option. He testified that if he had known this, he would not have sold the land at $33% per acre.

There is evidence to show that on September 2,1910, the Associated Oil Company purchased, for $66% per acre, 24,000 acres of prospective oil land located a little closer to the producing Lost Hills oil property than the Hopkins land. That transaction is more convincing upon the question of value before us than the evidence of the sale of the option with all of the infirmities inherent therein, as pointed out above.

In the majority opinion it is stated in effect that this sale of property to the Associated Oil Company is not entitled to much weight, for the reason that the record does not show its state of development. The map, petitioner’s Exhibit 6, demonstrates that none of that property was developed as oil land previous to 1911 and that previous to 1911 there were no indications of oil or gas upon that land. Furthermore, it is established by other evidence that that land had not been proven to be oil land and that it was merely prospective undeveloped oil land, as was the property in question here. Harry It. Johnson, of whom more will be-said later, testified that the closest ;proven oil territory to the property purchased by the Associated Oil Company at that time was a part of the Lost Hills Field. He testified that the land acquired by the Associated Oil Company was not in as good prospective oil territory as the property involved here and was less valuable for oil. The map shows that the Hopkins land was located closer to producing oil lands than was the Associated Oil Company’s property. The Hopkins land was near Gould Hill, Temblor Valley, and the McKittrick Field, which were at that time better established oil fields than the producing portion of the Lost Hills area, which was the closest proven oil territory to the land of the Associated Oil Company. The Hopkins land was about three miles north of Gould Hills, about six miles north of the Temblor Ranch Field and the McKittrick Field, and was not more than eight miles south of the producing area of Lost Hills.

There is also convincing expert testimony in the instant proceeding which establishes an actual cash value for the option greatly in excess of $25,000. The expert witnesses were Burton E. Green, Harry R. Johnson, and W. W. Orcutt.

Green went into the oil business in 1895 and, at various times, operated in the northeastern part of the Los Angeles Field, in the Colinga Field, and in the McKittrick Field, and was instrumental in the organization of several oil companies including the Green-Whittier Oil Company, the Associated Oil Company, the Amalgamated Oil Company, the West Coast Oil Company, and the Inca Oil Company. He was familiar with the developments that had taken place in the Midway Oil Field and the Lost Hills section, and he had developed the McKittrick Field. At the hearing Green testified that the outcroppings of oil on the Hopkins land were quite similar to those in the Lost Hills section. He testified that all the outcroppings which he had ever approved resulted in the development of oil fields, including the Colinga Field, McKittrick Field, the Kern River Field, the La Habra Field, and the Wolfskill property. He testified that the fair market, or actual cash, value at January 25, 1911, of the Hopkins land was at least $100 per acre, that he would have paid $100 per acre for it, and that he was in financial condition to do so. He further testified that if other companies had known the facts which he and Whittier knew about the property he and Whittier would not have been able to obtain the land for $100 per acre. He stated that the Lost Hills territory had been under development for about a year before the petitioner obtained the option and that land in that section had sold for as high as $100 per acre. These sales had taken place after oil croppings had been exposed and a shallow hole had been drilled. The land sold was located some distance from this shallow hole and in a portion of the Lost Hills area which was not as favorable for oil.

Johnson is a consulting petroleum geologist. He graduated from Leland Stanford University about 1905 or 1906. Thereafter, he reentered the United States Geological Survey, with which he had been associated even before he entered college, and in 1908 did extensive work in examining the geologic structure of the general region in which the property in question is located, and in compiling Government bulletins in connection therewith. In 1911 he personally became informed of the conditions of the Hopkins land as found in 1910 by Van Slyke. He visited the property with Van Slyke shortly before the hearing in this proceeding and verified all material conditions found by Van Slyke in 1910, which were substantially the same as they were shortly before the hearing. These material conditions of 1910 were likewise verified shortly before the hearing by W. W. Orcutt, of whom more will appear later. After his resignation from the United States Geological Survey in 1909, Johnson went into private business in Los Angeles. Such business consisted of examining and valuing oil areas and advising clients as to. prices to be paid for prospective oil lands. At the hearing he testified that Van Slyke’s findings of oil indications in 1910 should have caused a practical oil man like Van Slyke to reach the natural and almost inevitable conclusion that the Hopkins land was valuable oil land, that a person having the knowledge of the Hopkins land which Green and Whittier had in 1910 would have been justified in paying approximately $2,900,000 for it, and that he would have advised clients to purchase the property under those conditions at that price. He testified that that was its fair market value as of January 25, 1911, prior to any actual discovery of oil on the property, beyond that made by Van Slyke.

Orcutt graduated from Leland Stanford University in 1895, with the degree of A. B., after pursuing the study of geology as a maj ox-subject. He was thereafter employed by the Union Oil Company to organize their geological department. He was later chief engineer and manager of the geological and land department of that company and still later became vice president. That company at first had a capitalization of about $50,000,000. Later its capitalization was increased to $100,000,000. He leased and purchased oil lands for the Union Oil Company and was so employed in 1910 and 1911. He testified that if on January 25, 1911, he had known the facts which Green knew about the Hopkins land on that date, and he had been advising his employer, the Union Oil Company, or any other party, what to pay for the property, he would have recommended that they pay $2,700,000. This, he testified, was the fair market value of the property as of that date. His opinion was based in part upon the similarity of the outcroppings and structure of this area with that of the Lost Hills section, the Buena Vista Field and several other oil fields throughout southern and central California.

The opinions of all of these experts as to the value of the Hopkins land were well .fortified by reasons and were borne out by the fact that, promptly after petitioner obtained the option in question, producing oil wells were brought in on the land. The logs of the first two wells which were sunk by the petitioner on the Hopkins land were received in evidence for the limited purpose of corroborating the findings of Van Slyke made in 1910, which were confirmed by Green in the same year and by Johnson and Orcutt shortly before the hearing in the proceeding, and for no other purpose. No attempt was made to prove the value of the option in question by showing how many wells were sunk, how much oil was produced by each, and what profits were made by the petitioner. Such evidence would be inadmissible. Green did testify, without objection, that the development of the oil lands covered by the option in question was successful.

These expert witnesses were intelligent, candid, and well qualified to express opinions as to the value of the land which was the subject of the option, and their testimony shows that it had a value greatly in excess of the price at which it could he purchased under the option. None of them was impeached. Their expert opinions were not met or rebutted by similar proof to the contrary. Their expert opinions stand undisputed in the record. Their expert testimony is in fact corroborated by other competent, credible, persuasive evidence, much of which is inherent in the situation. This expert opinion evidence, together with this other evidence in line with it, should be used together with all of the competent evidence upon the subject in arriving at the actual cash value of the option. There is nothing in the record to outweigh it all. No mere presumption or prima facie showing can stand as against it all. See Montana Ry. Co. v. Warren, 137 U. S. 348, and more particularly the discussion at pages 352 to 354. That case involved the value of mineral lands and sustains the view that expert opinion evidence as to value is peculiarly helpful and looked upon with favor in a situation such as we have here. See also Troxel Mfg. Co., 1 B. T. A. 653; and Bowman Hotel Corporation, 24 B. T. A. 1193, more particularly at page 1210.

Once the value of the land is established, the value of the option can be readily determined. The actual cash value of an option is the difference between the value of the land and the price at which it can be obtained under the option. Karl von Platen, 10 B. T. A. 250; Realty Sales Co., 10 B. T. A. 1217; Robert Brunton Studios, Inc., 15 B. T. A. 727; and United Studios, Inc., 15 B. T. A. 737.

To the effect that an option is tangible property, see section 325 of the Revenue Act of 1921, Nansemond Brick Corporation, 8 B. T. A. 1117, and Reserve Natural Gas. Co., of Louisiana, 15 B. T. A. 951. It should therefore be included in petitioner’s invested capital for the years in question at its actual cash value. (Sec. 326 (a) (2), Revenue Act of 1921.)

The majority opinion also relies upon our decision in Belridge Oil Co., 11 B. T. A. 127, which was a proceeding between the same parties as are here concerned, and wherein it was held that the value of this same option for invested capital purposes for the years 1917 and 1920 was $25,000. While that decision is not res judicata in the instant proceeding, findings of fact in a proceeding before the Board under the Revenue Act of 1921 are prima facie correct in subsequent proceedings before the Board between the same parties, when properly introduced, as they were in the instant proceeding. Union Metal Mfg. Co., 4 B. T. A. 287; Goodell-Pratt Co., 6 B. T. A. 1235; American Steel Co., 7 B. T. A. 641; American Seating Co., 14 B. T. A. 328; aff'd., Commissioner v. American Seating Co., 50 Fed. (2d) 681. However, findings of fact made by the Board in a prior proceeding, being mere prima facie evidence, máy be rebutted in a subsequent proceeding between the same parties before the Board. See Charles M. Monroe Stationery Co., 15 B. T. A. 1227, wherein we stated that the decision in Charles M. Monroe Stationery Co., 3 B. T. A. 69, was consistent with the evidence there presented, but. that in the proceeding under consideration there was present a different state of evidence.

The evidence introduced by petitioner in this proceeding overcomes the presumption in favor of the correctness of the value found in Belridge Oil Co., 11 B. T. A. 127. In that proceeding there was lacking evidence which appears in the instant proceeding, namely, evidence of the infirmities of the sale of the option, the actual cost of the option of over $185,000, the acquisition by the Associated Oil Company in September, 1910, for $66% per acre, of property in Kern County, California, which was comparable to the land in question, expert testimony upon the question of value, and other evidence which did not appear in the prior proceeding, as herein set forth. The testimony of four witnesses, Hole, Clute, Gillan, and Van Slyke, was offered in the prior proceeding upon the question of the value of the land as oil land. The testimony of two of them, Hole and Clute, was stricken. Gillan expressed his opinion as a layman, and not as an expert. The opinion of Van Slyke, whose testimony shows that he was not qualified to testify as an expert on value, was received without objection. Thus, in the prior proceeding there was no expert opinion evidence of the value of either the land as oil land, or of the option.

In the opinion in the former proceeding in regard to the transaction by which Hole acquired the option, it is stated:

* * * The fact that one Van Slyke sometime in 1910 discovered an outcrop of oil sand on the property is not shown to be controlling. This discovery preceded the giving of the option to Hole and for aught that appears the existence of this outcrop may have been known to Hole when he acquired the option. The evidence does not indicate that at the time of the assignment petitioner had any greater knowledge of the oil-bearing properties of the land than had Hole when he took the option. * * *

The evidence in the instant proceeding discloses that Hole did not know of the discovery of an outcrop of oil sand on this property. He testified that if he had known what Green and Whittier knew in this respect he would not have parted with his option for the consideration which he received for it. The evidence further shows that at the time of the assignment of the option to the petitioner, the stockholders (and more particularly the moving spirits, Green and Whittier) other than Hole did have greater knowledge of the oil-bearing properties of the land than had Hole when he took the option.

We are not called upon here to reconsider or review the correctness of the Hoard’s decision in Belridge Oil Co., 11 B. T. A. 127, and no criticism of it is being offered. But the proof is radically different in the instant proceeding.

The Board’s decision in the former proceeding has been invoked, in the majority opinion, as a precedent for the instant proceeding. As such it has no value, for the reason that it is clearly distinguishable upon the facts, as fully pointed out herein. As a precedent, it is not binding. To hold otherwise would lead to the same result as to hold that the former decision is res judicata. The majority opinion recognizes that it is not. Since this is true, we are in the same position as we would be in if there had been no former proceeding, with the exception of the prima facie showing based on the Board’s former finding of the value of the option; and that, as pointed out herein, has been overcome by the proof which appears here and did not appear there.

The only evidence offered by the respondent in the instant proceeding consists of the findings of the Board fixing the value of the option in this former proceeding. In doing this he merely made a prima facie showing, which was rebuttable. His proof accomplished nothing else. A careful examination of the entire record discloses that there is nothing to support the position of the respondent in which he limits the actual cash value of this option for invested capital purposes to $25,000, except rebuttable presumptions or their equivalent. The first presumption is that his deter mi nation in this respect is correct. The second presumption or its equivalent arises from the prima facie showing that was made when he offered the findings of the Board in Belridge Oil Co., 11 B. T. A. 127, as evidence of the value of this option as therein fixed at $25,000 for similar purposes for previous years. A presumption, such as we have here, is not proof, as was stated in Heiner v. Donnm, supra. As stated there, it is merely a substitute for proof and is open to challenge and disproof. A prima facie showing, such as we have here, is no stronger. Both of them have been rebutted, disproved, and overcome. In this situation the burden of proof shifted to the respondent. He has done nothing to discharge his burden in this respect.

Notwithstanding any presumption in favor of the respondent or prima facie showing made for him, the evidence adduced at the hearing establishes a value of the land substantially in excess of the price at which it could be purchased under the option and an actual cash value of the option substantially in excess of $25,000.

Any statements or comments of fact made herein by way of supplement to the findings of fact of the majority of the Board will be found to be supported by evidence which is not disputed.

Obviously, it is not the province of a dissenting opinion to fix another value in excess of $25,000. That is within the province of the majority of the Board.


source: Caselaw Access Project

license: Public Domain

text:
    Arioch W. Erickson and Willoughby H. Stuart, Jr., Executors, Estate of Susan M. Stuart, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47550.
    Promulgated August 16, 1932.

      Frauds B. Hines, Esq., for the petitioners.

      R. F. Staubly, Esq., for the respondent.
   OPINION.

Van Fossan: The question we are called upon to solve is whether or not the value of the corpus of the trust described in the findings of fact should be included in the decedent’s gross estate under the provisions of section 302 (c) of the Revenue Act of 1924. That section reads in part as follows:

Tlie value of tlie gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
Jf: * * * * * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, 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 a fair consideration in money or money’s worth. * * *

It is stipulated that the conveyance of the property in trust does not constitute a gift in contemplation of death. The respondent claims, however, that pursuant to the provisions of the trust deed the decedent’s death effected a transfer of the corpus of the trust to her issue which was intended to take effect in possession or enjoyment at or after her death and that therefore pursuant to the provisions of the quoted section the corpus of the trust should be included in decedent’s gross estate. We do not concur in that view.

By her trust deed which was executed and delivered on December 30, 1915, the decedent provided an annuity of $5,500 for her husband, which was to be paid out of the net income of the corpus of the trust. The trust deed further provided that the balance of the net income, if any, should be paid to the settlor, or, if she died before the termination of the trust, that the net balance of income, if any, should be paid in equal shares to her issue. The trust deed also provided that upon the death of the decedent’s husband or upon the earlier termination of the trust the trustees should pay over and convey the trust property to the decedent if then living, or, if she should be deceased, to her issue equally per stirpes and not per capita.

The intention of the settlor in executing and delivering the trust deed was to secure to her husband a fixed annual income for his life for the consideration expressed in the deed. The provisions in respect to the payment of the net balance of income were only incidental to the settlor’s main purpose. It is conceivable that in the course of the years succeeding 1915 there might have been no net balance of income after the payment of the husband’s fixed annuity. Upon his death the course of succession to the corpus of the trust was definitely determined by the provisions of the trust deed and could not be controlled by any absolute power of recall reserved to the decedent. The power of recall provided in the third paragraph of the trust deed quoted in the findings of fact is so hedged about with conditions and limitations and is so dependent upon the action and approval of the trustees that it could not be said that the decedent could exercise it freely of her own will in any event. The property was not, therefore, under her absolute control and she made no attempt to exercise the limited control referred to in any way at any time before her death.

The possession and enjoyment of the trust property had passed from the decedent immediately upon her execution and delivery of the trust deed on December 30, 1915. At her death, which occurred before that of her husband, the possession and enjoyment of the corpus of the trust, as well as title thereto, remained in the trustees, and nothing passed from her to the living. Title to the trust property had been definitely fixed by the trust deed. May v. Heiner, 281 U. S. 238. Cf. Wheeler, Exec., 20 B. T. A. 695. Possession and enjoyment of the corpus of the trust could not and did not. as a matter of fact and law, pass to the decedent’s issue until at or after the death of her husband.

In our opinion the facts of this proceeding bring it directly within the principles stated in Reinecke v. Northern Trust Co., 278 U. S. 339, in which Mr. Justice Stone, in discussing the provisions of section 402 (c) of the Revenue Act of 1918, which are similar to those of section 302 (c) of the Revenue Act of 1924, said:

In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402 (c), “to take effect in possession or enjoyment at or after his death ”, include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer.

In accordance with the foregoing, it is our opinion that the corpus of the trust should not be included in decedent’s gross estate.

Judgment will be entered under Rule 50.


author: Van Fossan:

text:
    The Starr Piano Company (Pacific Division), Petitioner, v. Commissioner of Internal Revenue, Respondent. Gennett Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43809-43811.
    Promulgated August 16, 1932.

      E. A. Mihills, G. P. A., for the petitioners.

      D. P. Kimball, Esq., and E. G. Adams,, Esq., for the respondent.
   OPINION.

Van Fossan:

There are two underlying issues in these proceedings: (1) The right to deduct as an expense the commission of $40,000 paid to a broker for negotiating the 60-year lease executed by the Realty Company and the Pacific Division jointly to Bullock’s, and (2) the right to consolidate accounts under the provisions of sections 240 (d) of the Revenue Act of 1924 and section 240 (f) of the Revenue Act of 1926. A secondary issue is the right of the petitioners to file consolidated returns for the year 1924.

We have held repeatedly that commissions paid by an owner of a leasehold in order to secure a tenant under a sublease are deemed capital expenditures and are spread over the term of the lease. Bonwit Teller & Co., 17 B. T. A. 1019; aff'd., 53 Fed. (2d) 381; Evalerva M. Howard, 19 B. T. A. 865; James M. Butler, 19 B. T. A. 718; Mary C. Young, 20 B. T. A. 692; Spinks Realty Co., 21 B. T. A. 674.

The petitioner further contends that even if such a charge should be held not deductible as a business expense, its return to capital should be spread over a 15-year period covered by the lease from the Realty Company to the Pacific Division. We can not agree with this alternative contention. The Realty Company and the Pacific Division were joint lessors in the lease to Bullock’s. They received equal benefits thereunder for the full term of 60 years. Even if we disregard the fact that the Pacific Division owned the entire capital stock of the Realty Company and thus indirectly enjoyed the profits arising from the lease, we may well conclude that the inclusion of the Pacific Division as a joint lessor for the period not comprehended in its lease from the Realty Company was in consideration of its relinquishment of its rights under the latter agreement. The brokerage fee was paid to secure a lease for the entire 60-year period and should be spread over that period.

Section 240 (d) of the Revenue Act of 1924 (identical with section 240 (f) of the Revenue Act of 1926) provides as follows:

In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

The petitioner claims that, pursuant to the above section, certain expenses paid during 1924 and 1925 by the Piano Company should be allocated to the Pacific Division. Those expenditures were as follows:

An analysis of these items shows that they contain no factors which either in themselves or in conjunction with other elements of the case entitle the petitioners to the relief afforded by sections 240 (d) and 240 (f) above quoted. No interest was actually paid on the monthly balances and inventories nor was any liability incurred therefor. The proportions of the amounts paid by the Piano Company for the salary of Fred Gennett and for bookkeeping costs are mere estimates. The record discloses no charges or accounts on the books of either the Piano Company or the Pacific Division indicating what, if any, benefit the latter company derived from such services. As in Roessler & Hasslacher Chemical Co., 25 B. T. A. 915, no effort was made to segregate accurately any of the expenses of any of the specific accounts in order to determine the amounts applicable to each company.

Furthermore, we are not asked to marshall all the accounts of both the Piano Company and the Pacific Division in order to reallocate such accounts or parts thereof for the purpose of making an accurate distribution of the gains, profits, income, deductions or capital between those corporations as provided by the statute, but, instead, we are given two interest items unsupported by any charge, payment or agreement to pay, and two charges for services also based on no payment or liability to pay. No attempt has been made to show how the proposed reallocation of expenditures would affect the gains, profits, etc., of each company. Broadway Strand Theatre Co., 12 B. T. A. 1052; Western Hide & Fur Co., 26 B. T. A. 354; Herald News Co., 26 B. T. A. 688. Cf. Nowland Realty Co., 18 B. T. A. 405; aff'd., 47 Fed. (2d) 1018. Under these circumstances we must deny the petitioners the relief sought under section 240 (d) of the 1924 Act and section 240 (f) of the 1926 Act.

Though it be unnecessary to this opinion, in view of the failure of proof, it should be observed that the Piano Company received the full benefit of the deductions claimed by the Pacific Division for the bookkeeping costs and the proportion of Fred Gennett’s salary. Moreover, the Piano Company entered into a closing agreement with the respondent covering the years under consideration in this case. The allowance of deductions claimed by the petitioner would result in a double benefit.

The Realty Company also claimed the right to file a consolidated return with the Pacific Division. Each of those companies, however, filed a separate return upon the advice of a public accountant. We have held that when affiliated corporations have elected to file separate returns for a givén year they may not later, without consent of the Commissioner, file a consolidated return for that year and have their incomes determined on a consolidated basis. Radiant Glass Co., 16 B. T. A. 610; aff'd., 54 Fed. (2d) 718; Harbour-Longmire Co., 18 B. T. A. 33; Ohio Mining Co.., 20 B. T. A. 1062; Hennepin Holding Co., 23 B. T. A. 119; Pine Ridge Coal Co., 23 B. T. A. 489. See also Lucas v. St. Louis National Base Ball Club, 42 Fed. (2d) 984.

The fact that the petitioners were ill advised prior to their filing of returns can not relieve them of the consequences of filing separate returns — they made their election and must abide by the results of that act. Harbour-Longmire Co., supra.

Judgment will be entered for the respondent.


text:
    James S. Darcy, Archibald B. Gwathmey, Jr., Archibald B. Gwathmey, 2nd, and Gaines Gwathmey, Executors, Estate of James Temple Gwathmey, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47604.
    Promulgated August 17, 1932.
    (841)

      Allen G. Gartner, Esg., for the petitioners.

      Allin Pearce, Esg., for the respondent.
   OIUNION.

Van Fossan:

The first question for determination is whether or not the respondent properly included in decedent’s income for the period commencing January 1, 1924, and ending on the date of his death, namely, June 11, 1924, a prorated share of the net income of the partnership for its fiscal year ended August 31, 1924.

The applicable statute is section 218 (a) of the Revenue Act of 1924, which reads as follows:

Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the taxable year upon the basis of which the partner’s net income is computed.

The decedent had used the calendar year for reporting his income on the basis of cash receipts and disbursements. The executors continued the same maimer and method used by decedent. The partnership of George H. McFadden & Bro., of which the decedent was a member, filed its income-tax return on the basis of a fiscal year ending on August 31. In his return for the calendar year 1923 the decedent had reported his distributive share of the net income of the partnership for its fiscal year ended August 31, 1923. The petitioners contend that no part of the net income of the partnership for its fiscal year ended August 31, 1924, is taxable as decedent’s income for the period from January 1,1924, to the date of his death, namely, June 11, 1924, except the amount of his withdrawal during the year 1924 before his death.

The petitioners rely on DeRoy et al., Exec., 19 B. T. A. 452. Louis J. DeRoy, the decedent in that proceeding, was at the time of his death a member of a partnership reporting its income on the basis of a fiscal year ending January 81, in each year. DeRoy died October 7, 1924. He had used the calendar year in reporting his income on the basis of cash receipts and disbursements. His executors filed an income-tax return covering the period from January 1, 1924, to October 7, 1924, and included therein the decedent’s distributive share of the partnership income for the fiscal year ending in 1924, namely, the fiscal year ending January 81, 1924. The Commissioner added to the amount returned by the executors an .amount representing the decedent’s distributive share of the income of the partnership for the period beginning February 1, 1924, and ending October 7, 1924. This later period was a portion of the partnership’s fiscal year ending January 81,1925. Therefore, the latter fiscal year did not end within the decedent’s taxable year, namely, the calendar year 1924, and was not within the statutory inclusion. In the DeBoy proceeding we said: “The death of the partner did not terminate or shorten the accounting period of the partnership ending in the taxable year before us-.” We, therefore, held in accordance with the statute that only the decedent’s distributive share of the partnership’s net income for its fiscal year ending during the decedent’s taxable year 1924 was taxable to him. We discussed a similar question in Archibald et al., Exec., 4 B. T. A. 483, where the decedent was on a calendar year basis and the partnership on a fiscal year basis. In that proceeding the Board held, as we said in Davison, Exec., 20 B. T. A. 856 (aff'd., 54 Fed. (2d) 1077), that, “ since the accounting period of the part-i nership for the year in which the partner died did not end until after ! the close of the calendar year for which a return was required to be ; filed for the decedent for the year of his death, no share of the profits of the partnership which were determined after the calendar year for which the decedent’s return was required to be filed should be included in such return.” In the present proceeding the fiscal year of the partnership ending August 31, 1924, ended during the taxable year in which the decedent died and the respondent included in the decedent’s income for the portion of 1924 during which he was alive only a prorated distributive share of a fiscal year ending in 1924. It is clear, therefore, that the facts of the present proceeding distinguish it from the DeRoy case and also from the Archibald proceeding.

In Goldman et al., Exec., 15 B. T. A. 1341, the decedent used the calendar year for his return of income and the partnership involved in that proceeding also made its returns on the basis of the calendar year. The same conditions existed in Davison, Exec., supra. In each of these cases we held that there should be included in the income of the decedent for the calendar year in which he died his distributive share of the net income of the partnership allocated from the 1st day of January of that year to the date of his death. We see no reason why the principles enunciated in these cases should not be applied to the present proceeding. In this proceeding, while the partnership’s accounting period was different from that of the decedent, its current accounting period closed on August 31, in the decedent’s taxable year 1924, which was the year of the decedent’s death.

The statute provides that a partner’s distributive share in the net income of the partnership, whether distributed or not, is taxable to him as income. In our opinion the decedent’s share of the net income of the partnership for the fiscal year ending August 31, 1924, apportioned as of the day of his death was his income. Goldman et al., Exec., supra. Such apportioned share was not the income of his estate. Nichols v. United States, 64 Ct. Cls. 241; certiorari denied, 277 U. S. 584. The fact that under the partnership agreement the business of the partnership was to be carried on up to August 31, 1924, and the decedent’s interest therein was to be continued until the end of that accounting period does not mean that upon the ascertainment of the profits of the business for such fiscal year a part thereof may not be attributed properly to the period of the calendar year 1924 when the decedent was alive. Even though such share might not be distributed until after August 31, 1924, it was nevertheless distributable during the calendar year of the decedent’s death for which a return was required to be filed on his behalf. We are further of the opinion that these conclusions are consistent with the principles underlying our decisions in Arohbald et al., Exec., supra, and DeRoy et al., Exec., supra.

The petitioners have not attempted to prove that the respondent’s method of prorating the decedent’s distributive share of the income of the partnership is incorrect. We therefore do not disturb the respondent’s determination of the amount of the deficiency.

The second question for solution is whether or not the assessment of the deficiency is barred by the statute of limitations. The return for the period January 1 to June 11, 1924, inclusive, was filed on behalf of the decedent on March 16, 1925. Therefore, the four-year period of limitation upon the assessment of the deficiency would have expired on March 16, 1929, unless the waiver set forth in the findings of fact is valid. The petitioners contend that the waiver is invalid for the reason that it was signed by only one of the four executors, and for the further reason that none of the executors had ever given notice to the respondent pursuant to the provisions of section 281 of the Revenue Act of 1926 and section 312 of the Revenue Act of 1928 that they were acting individually or collectively in a fiduciary capacity for the decedent or for his estate.

Section 281 of the Revenue Act of 1926 and section 312 of the Revenue Act of 1928 are substantially similar in their provisions. Section 281 of the Revenue Act of 1926 provides in part as follows:

(a) Upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the taxpayer in respect of a tax imposed by this title or by prior income, excess-profits, or war-profits tax Act (except as otherwise specifically provided and except that the tax shall be collected from the estate of the taxpayer), until notice is given that the fiduciary capacity has terminated.
*******
(d) In the absence of any notice to the Commissioner under subdivision (a) or (b), notice under this title of a deficiency or other liability, if mailed to the taxpayer or other person subject to liability at his last known address, shall be sufficient for the purposes of this title even if such taxpayer or other person is deceased, or is under a legal disability, or, in the case of a corporation, has terminated its existence.

The purpose of the section is shown clearly by the report of the Senate Committee on Finance concerning the Internal Revenue Bill of 1926. (Rept. No. 52, 69th Cong., 1st sess., p. 30.) This report states as follows with reference to section 281:

Section 281: The term “fiduciary” is defined in section 200(b) to mean a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person. The right of the commissioner to assess and distrain and otherwise proceed for the collection of tax depends, for instance, upon giving notice of the deficiency to arid making demand upon the proper person. It, therefore, becomes necessary to make certain that there shall be some individual to whom the notice may be mailed and upon whom the demand may be made, in the case of, for example, an incompetent, a decedent’s estate, or an estate in the hands of a receiver or trustee in bankruptcy.
To accomplish this purpose, the section provides that if the Commissioner of Internal Revenue has been notified as to the identity of the fiduciary, notice is to be mailed to and demand made on the fiduciary. In case the Commissioner has not been notified of the fiduciary, notice is to be mailed to and demand made on the taxpayer at his last known address. In case of a change of fiduciary, notice is to be mailed to and demand made on the last fiduciary of whom the Commissioner has been notified. * * *

It is evident from the foregoing quotation and from examination of the section itself that the purpose of section 281 is to facilitate the accomplishment of matters connected with the administration of the internal revenue acts. Its intendment is to provide means by which notices required to be mailed by the Commissioner may be directed to the proper person at the proper address in cases where fiduciaries have been appointed. The intent of the section is beneficial to estates entrusted to fiduciaries. For example, if a deficiency in the tax of an incompetent had been determined by the Commissioner and the incompetent’s committee had neglected to give the Commissioner the notice provided by the section, it is conceivable that because of such neglect the committee might receive the notice of deficiency too late to seek a redetermination by this Board within the time limited.

However, in our opinion there is no provision of the section in question which operates to invalidate any act of a fiduciary which he may lawfully perform. The execution of a waiver is an act which a fiduciary may lawfully perform.

The facts show that Darcy, with the knowledge and consent of the other executors, had charge of tax matters relating to the estate. Acting in that capacity and as executor he had executed for the decedent the return for the period January 1, 1924, to June 11, 1924, the period here in question. The fact that the petitioners were the duly appointed executors is alleged in the petition and stated in the stipulated facts. It also appears that the other executors had knowledge of the execution of the waiver by Darcy.

As a matter of law the lawful act of one executor is the lawful act of all the executors and binds the estate. Bartlett et al., Exec., 16 B. T. A. 510, and the cases cited therein. In the Bartlett case we held that a waiver executed by one of two executors was valid. Moreover, the Commissioner accepted the waiver now in question and acted on it. As was said in Liberty Baking Co. v. Reiner, 37 Fed. (2d) 703, “ it would be unconscionable to allow the taxpayer to after-wards repudiate a consent upon which the Commissioner has acted and relied.”

For the foregoing reasons we are of the opinion that the waiver here in question is valid and binding on the decedent’s estate. Since the waiver extended the time within which the assessment might be made to December 31, 1929, and the notice of deficiency was mailed to the petitioners before that date, the assessment of the deficiency is not barred by the statute of limitations.

Judgment will be entered for the respondent.


author: Goodeich:

text:
    The Apartment Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42024.
    Promulgated August 17, 1932.

      Theodore B. Benson, Esq., for the petitioner.

      J. M. Leinenkugel, Es'q., and T. G. Riston, Esq., for the respondent.
   OPINION.

Goodeich:

This proceeding involves the redetermination of a deficiency in income tax for the year 1926 of $4,442.73 (only a part of which is in controversy), resulting largely from respondent’s disal-lowance of a loss of $27,983.67 claimed by petitioner to have been sustained upon the liquidation of its subsidiary either as advances made to it and unrepaid, which petitioner charged off as a loss as of December 31, 1926, or as a loss upon investment in stock of its subsidiary. Despondent contends that, because petitioner and the subsidiary were affiliated, any advances made to the latter, or investment in stock of the subsidiary, must be regarded as an intercompany transaction from which no loss to petitioner may be recognized upon liquidation of the subsidiary. A stipulation of some length was received, which we adopt as our findings of fact, together with the additional finding, based upon testimony, that the liquidation of University Homes Company and the surrender for cancellation of the-stock of that company owned by petitioner both occurred on December 31, 1926. For the purposes of this report, the following summary of facts is sufficient.

Beginning in 1920, and from time to time prior to December 31, 1926, petitioner, a Maryland corporation having its principal office in Baltimore, made advances on notes and open accounts in various amounts to University Homes Company, also a Maryland corporation; On December 31, 1926, the balance due on such advances was $70,282.91. In 1921, it being apparent that the University Company could not meet its obligations; the individual owners of its outstanding stock surrendered the same to the company, which then reissued it to petitioner, which at the same time assumed the obligations of the University Company. Thereafter, these corporations were affiliated and filed consolidated returns upon which were included the net losses sustained bj^ the University Company in all years except 1926, when it had income which was likewise included. In April, 1926, University Plomes Company disposed of its last parcel of real estate and its assets thereafter consisted only of mortgages receivable and cash. On December 31, 1926, University Company being unable to repay to petitioner the balance due it on advances made, turned over to petitioner all its assets, totaling $42,299.24, which was $27,983.67 less than the amount due and is the loss claimed by petitioner. On the same day the outstanding stock of the University Company, all of which was held by petitioner, was surrendered for cancellation. Thereafter, the University Company engaged in no business and presently, for failure to pay license taxes, was dissolved by proclamation, as provided by the laws of Maryland. The loss claimed was charged off upon its records by petitioner on. December 31, 1926, as a debt ascertained to be worthless and uncollectible.

The fact that petitioner sustained a loss in the amount of $27,983.67 from its dealings with University Homes Company is not in dispute. The issue is, May that loss be deducted from its gross income, and, if so, when? Respondent bottoms his position upon the decision in Utica Knitting Co. v. United States, 68 Ct. Cls. 77; certiorari denied, 281 U. S. 739. But that case may be distinguished upon its facts from the case at bar. There, the subsidiary did not liquidate and, although it ceased its manufacturing operations, it continued in existence and in business for the purpose of collecting its accounts and winding up its affairs, while the parent company continued to hold its stock. Here, the subsidiary was liquidated completely and the parent company at the same time surrendered its stock. That the subsidiary thereafter existed resulted from the apparent choice of its directors to permit the corporation’s charter to be nullified by operation of law rather than to dissolve it in the usual manner, but during the period intervening between its liquidation and its legal dissolution it transacted no business.

In our opinion, the loss sustained by petitioner is deductible from its gross income in 1926. The affiliation theretofore existing between these corporations was terminated on December 31 of that year by the liquidation of the subsidiary, as well as by the surrender of the stock; petitioner’s claims in excess of the amount received upon liquidation were then ascertained to be worthless and were charged off as a loss, and, since the loss resulted from the liquidation, it occurred outside the period of affiliation and was not sustained in an intercompany transaction. Carey Salt Co. et al., 26 B. T. A. 675, and cases there cited.

It matters not whether the loss be regarded as one resulting from a bad debt or as one sustained upon an investment. If as the first, the loss is deductible, since it is the difference between the amounts advanced and the amounts received in repayment, and that difference was determined to be uncollectible and was charged off as by statute required. If regarded as a loss from investment, the amount claimed is the difference between the total capital expenditures made in purchase of the stock and the amounts received thereon upon its surrender and the liquidation of the company. In either case, such a loss, sustained under the circumstances here obtaining, is a proper deduction from gross income under the statute.

Since the entire deficiency does not result from respondent’s dis-allowance of the loss claimed,

Judgment will be entered vmder Rule 50.


author: Teammell:

text:
    The Joseph & Feiss Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46465.
    Promulgated August 17, 1932.

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

      J. M. Leinenkugel,'Esq., for the respondent.
   OPINION.

Teammell:

For the year 1925, prior to affiliation, the petitioner sustained a net loss in the amount of $232,365.48. On May 5, 1926, the petitioner purchased all the capital stock of the Kibler Company and the two corporations thereafter were affiliated through the taxable year 1927.

Under the provisions of section 206(b) of the Bevenue Act of 1926, as amended by section 111 (e) of the Bevenue Act of 1928, the amount of the petitioner’s 1925 net loss is allowable as a deduction in computing its net income “ for the succeeding taxable year ” and in the event such net loss is in excess of such net income, computed without such deduction, the amount of such excess is allowable as a deduction in computing its net income “ for the next succeeding taxable year.” However, the amount of the petitioner’s 1925 net loss is not allowable as a deduction in computing net income of the affiliated group in the succeeding and next succeeding taxable years, except only to the extent that the petitioner individually had income in such years from which such net loss might be deducted. Wool-ford Realty Go. v. Rose, 286 U. S. 819.

Thus far the parties are in agreement, but controversy arises in respect of what periods of time constituted the “ succeeding taxable year ” and the “ next succeeding taxable year ” within the meaning of the statute. The respondent determined that the period from January 1 to May 4, 1926, or that part of the calendar year 1926 prior to affiliation, constituted the petitioner’s “ succeeding taxable year,” and that the period May 5 to December 31, 1926, constituted the “ next succeeding taxable year,” and applied the petitioner’s 1925 net loss against its income for said periods accordingly. The petitioner contends, on the other hand, that since it reported its income on the calendar year basis, the calendar year 1926 was its “ succeeding taxable year,” and that the calendar year 1927 was its “ next succeeding taxable year,” within the meaning of the net loss provisions of the statute.

In support of his position, the respondent relies upon the provisions of section 200 of the Bevenue Act of 1926, defining the term “taxable year,” and our decision in Summerfield Co., 24 B. T. A. 829 (Nov. 18, 1931).

In the cited case, the Summerfield Company and the Taylor Furniture Company became affiliated on March 21,1925, and in our opinion we said “the peribd from January 1 to March 20, 1925, * * * is one £ taxable year ’ and the period from March 21 to December 31, 1925, is another ‘ taxable year.’ ” However, that case was reconsidered by us subsequent to Woolford Realty Co. v. Rose, supra, and on authority of that decision our former determination of November 18, 1931, was reversed in an opinion promulgated June 15, 1932, at 26 B. T. A. 440. For that reason, the case cited by the respondent is not authority for decision of the question in the instant case.

Also, after reversal of our first determination in the Summerfield case, there was no income in the subsequent years against which the petitioner’s prior net loss could be applied. Hence, the question of what periods of time constituted the two subsequent “ taxable years ” became purely academic, not necessary to be decided there, and what was said in our opinion on that point is obiter dictum.

We may further note in passing that the Summer-field case is distinguishable on the facts from the present proceeding in two vital points, namely, (a) in that case separate returns were filed for that part of the calendar year prior to affiliation and a consolidated return filed for that part of the calendar year subsequent to affiliation, and (b) the taxable income was computed upon such basis. In the present proceeding a single consolidated return was filed for the entire calendar year 1926, in which were included the incomes of both the petitioner and its subsidiary and upon that basis taxable income was computed. The significance of these facts will be discussed in connection with the provisions of the applicable statutes hereinbelow.

The Revenue Act of 1926 contains the following pertinent provisions :

Sec. 200. (a) The term “taxable year” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. * * * The term “taxable year” includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made.
Sec. 226. (a) If a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return -shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. * * *
Sec. 239. (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. * * *
(b) Returns made under this section shall be subject to the provisions of section 226. * * *
Sec. 240. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. * * *

The Commissioner’s Regulations 69, under the Revenue Act of 1926, provides in pertinent part as follows:

Abt. 634. Change in ownership during taxable year.— * * * (6) where corporations are not affiliated at the beginning of the taxable year but through change of stock ownership during the year become affiliated, a full disclosure of the circumstances of such changes of stock ownership shall be submitted to the Commissioner.
Ordinarily in such cases, where only two corporations are involved * * * under the conditions described in (6) above, each corporation should file a separate return from the beginning of the taxable period to the date of change in stock ownership, and a consolidated return should be filed by the parent or principal corporation from the date of change of stock ownership to the end of the taxable year, including therein the income of the subsidiary or subordinate corporation for such period.
Where there are more than two corporations affiliated at the beginning of the taxable year, and due to a change in stock ownership the affiliated status of one or more is terminated, there remain at least two corporations affiliated during the entire year, the parent or principal corporation should file a consolidated return for the entire year, excluding from its return the income of the corporations whose affiliated status is terminated from the date of the change in stock ownership; or where two or more corporations are affiliated at the beginning of the taxable year, and through change in stock ownership additional corporations become affiliated, the parent or principal corporation should file a consolidated return and include the income of such corporations from the date of change of stock ownership. * * * In any case in which the change of affiliated status is for a period so short as to be negligible, a consolidated return or separate returns for the entire period, as the case may be, may be filed; in such cases, however, there should accompany the return a complete statement setting forth the changes in the affiliated status occurring during the taxable year.

The foregoing statutes, in section 240, provide that affiliated corporations may make either separate returns or a consolidated return, requiring in each case that the taxes thereunder shall be computed and determined upon the basis of such return. Section 239 re-quires every corporation to make a return, stating specifically the items of its gross income and allowable deductions and credits, subject to the provisions of section 226, which last section provides that if a taxpayer changes the basis of computing net income from fiscal year to calendar year, or vice versa, separate returns shall be made for the fractional part of the fiscal or calendar year, as the case may be.

These provisions clearly indicate an intent to require in all cases that returns be made upon the basis of which the net income is computed, and that net income shall be computed upon the basis of the proper return. There is no mandatory provision in the statute respecting the particular kind of return to be made by the members of an affiliated group of corporations as distinguished from individual corporations. They may make separate returns, or they may make a consolidated return. The specific requirement of the statute goes no further, except where the annual basis of computing net income is changed. Also, the Commissioner’s regulation does not lay down any hard and fast rule as to the kind of return or returns to be filed where a change in ownership of corporate stock during the taxable year results in the affiliation of two corporations, as in the instant case. Article 634, supra, requires only that a full disclosure of the circumstances “ shall be submitted to the Commissioner,” and further provides that “ ordinarily in such cases ” separate returns should be -filed, for the fractional part of the taxable period prior to affiliation, and that a consolidated return should be filed for the period subsequent' to affiliation. But the same regulation permits a different procedure where there are more than two corporations affiliated at the beginning of the taxable year and the affiliated status of one or more is terminated during the year so that at least two corporations remain affiliated during the entire year. In that situation the parent corporation may file a consolidated return for the entire year, excluding from such return the income of the corporations whose affiliated status is terminated from the date of such change. A similar rule is prescribed where two or more corporations are affiliated at the beginning of the year and additional corporations join the affiliated group during the year. And it is further provided substantial^ that where the change in affiliated status produces a negligible result, either a consolidated return or separate returns for the entire period may be filed.

In the case at bar, a consolidated return was filed for the calendar year 1926, in which return the petitioner reported its net income for such calendar year in the amount of $63,469.86, together with the net income of the subsidiary for the period February 1 to December 31, 1926, in the amount of $1,816.53. For the year 1927 a consolidated return was filed, showing net income for the petitioner in the amount of $87,229.11 and a net loss of the subsidiary in the amount of $22,725.54, all without deduction of any part of the petitioner’s 1925 net loss.

Those returns were accepted by both parties as the basis for computing taxable net income and for determining tax liability. The amounts of the net income shown therein have been stipulated by the parties to be correct, and the latter return furnishes the basis upon which the respondent computed the deficiency in controversy. Thus, the returns meet the requirements of the statute, and neither the statute nor the Commissioner’s regulations contain any mandatory provision for the filing of any other or different return. The tax liability of the affiliated corporations for 1926 was not affected by their consolidation. The tax liability of each would have been exactly the same if affiliation had not occurred. The result of affiliation, then, on the tax liability for 1926 was certainly negligible, and under the Commissioner’s regulation, above quoted, either separate returns or a consolidated return might properly have been filed. The petitioner elected to file a consolidated return.

All items of gross income and allowable deductions and credits of the affiliated corporations were reported in said returns upon the basis of a taxable year consisting of the calendar year, and a different taxable year can not, therefore, under the statute be used as the basis only for the allowance of the deduction of the petitioner’s 1925 net loss. The deduction of the excess of such net loss over the petitioner’s net income for 1926 should be allowed from the petitioner’s net income for the taxable year 1927. We know of no legal reason why deductions for net losses should be computed and applied on the basis of a taxable year or period different from that used in respect of all other authorized deductions.

The respondent lays stress upon the provisions of section 200 of the 1926 Act, supra, that “ The term ‘ taxable year ’ includes, in the case of a return made for a fractional part of a year * * * the period for which such return was made.” But in the instant case there was no return made for a fractional part of the year 1926, nor was such a return required to be made by law or regulation, as we have pointed out above. The petitioner did not change its accounting period as provided in section 226 so as to create separate fractional years and section 200 does not define the period before affiliation as a fractional part of a year unless a return is made for such period. As said in American La Dentelle, 1 B. T. A. 575, in respect of the filing of consolidated returns under section 240 of the Revenue Act of 1918, “ until the conditions underlying the application of the special provisions of this section exist, the section can not be operative.”

In 1927 the petitioner had net income of $87,229.11 and its subsidiary had a net loss of $22,725.54. The excess of the petitioner’s 1925 net loss over its net income for 1926 exceeded its net income for 1927. Hence, neither the petitioner nor its affiliate had any taxable income in 1927, and there is no deficiency in tax.

Judgment will Toe entered for the petitioner.


author: Muedock:

text:
    Beneficial Loan Society, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39001, 40121.
    Promulgated August 17, 1932.

      Jackson R. GoTlins, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

Muedock:

The Commissioner determined deficiencies as follows for the consolidated group headed by the petitioner:

The respondent made claim that the deficiency for 1925 should be increased to $15,853.87. The petitioner agreed that all of the tax for the group should be assessed against and paid by it. The facts have been presented by means of a stipulation, which need not be set forth in full here.

The petitioner is a Delaware corporation organized in 1913. Through a number of unincorporated branches and with a number of affiliated corporations it was engaged solely in the business of making industrial loans. The group consisted of 29 corporations in 1923, but during the next two years a number of new corporations were formed and took over the business of most of the branches so that in each year the group included over sixty corporations. Some of the corporations specialized in services from which the others benefited.

The stipulation shows for each of the three fiscal years 1923, 1924, and 1925 the income or loss of each corporation and branch, the amount of dividends each received from outside companies in 1923 and the amount of intercompany dividends for that year. All of the latter were received by the petitioner. Some of the companies had income in 1923, but the losses of others exceeded the total income of the group and no tax was due on the consolidated return for 1923.

The petitioner contends that the 1923 losses, undiminished by intercompany dividends, should be carried forward to offset 1924 and 1925 income. The respondent would reduce the petitioner’s loss for 1923 by these dividends in computing its statutory net loss. The petitioner further contends that the income of the group for 1924 and 1925 should be offset by the. full amount of the group loss for 1923, offsetting a branch loss against corporate income where a corporation succeeded a branch unincorporated in 1923. The respondent concedes that there were statutory net losses in 1923, but contends that each net loss may offset only the income of the same corporation for later years, and that corporations which were.not in existence in 1923 can not have any losses for 1923 set off against their income for 1924 and 1925. He further contends that the total of all statutory net losses of the separate companies in 1923 may not exceed the total net loss of the group for that year, since otherwise losses would be used twice to absorb income of the group. He would, therefore, eliminate from the loss of each company having a loss in 1923 a proportionate part of the total losses necessary to absorb the income of the earning companies in 1923.

The statutory net loss provisions are to be applied separately to each member of an affiliated group. Where some members of the group, as here, have losses and others have income in 1923, but the total loss exceeds the total income of the group, the losses are first used to absorb the income and the excess loss is distributed proportionately among the members having losses. The amount thus apportioned to each company having a loss is used to compute the statutory net loss of that company. Swift & Co. v. United States, 38 Fed. (2d) 365; Kaiwiki Sugar Co., 21 B. T. A. 997. In the following year this statutory net loss may be used to offset any income which that particular company has for the year before being reduced by any losses of its affiliates. If there is an excess of loss it is carried over to the third year. See Delaware & Hudson Co., 26 B. T. A. 520. Cf. Woolford Realty Co. v. Rose, 286 U. S. 319; Planters Cotton Oil Co. v. Hopkins, 285 U. S. 533. Companies having income in 1924 and 1925 may not offset against that income the 1923 loss of the unincorporated branches of the parent.

This disposes of all of the questions raised in these proceedings except that relating to intercompany dividends. The petitioner alone received these dividends and it had losses in all three years; therefore, we need not decide how its statutory net loss for 1923 should be computed. The parties rightly concede that outside dividends must be deducted from the unabsorbed losses in computing statutory net losses for 1923.

Judgment will be entered imder Rule 50.


author: Lansdon:

text:
    The Board of Fire Underwriters of the City of Duluth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43150.
    Promulgated August 17, 1932.

      Frank W. Wilson, G. P. A., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Lansdon:

From the facts set forth above it seems clear that the petitioner was neither organized nor operated for profit. Its only receipts came by requisition from the National Board of Fire Underwriters and any excess' of receipts over disbursements was deducted in arriving at future estimates. It is difficult for us to see how such operations could result in the receipt of income, which has been defined by the Supreme Court as the gain derived from capital, from labor, or from both combined; something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and received or drawn by the recipient for his separate use, benefit, and disposal. Eisner v. Maeomiber, 252 U. S. 189.

The petitioner was merely an agent through which the National Board of Fire Underwriters carried out one of its functions requiring the expenditure of money which was furnished to the petitioner. We are of the opinion that the petitioner was not in receipt of taxable income and that respondent erroneously determined the deficiency involved.

Decision will be entered for the fetitioner.