author: Morris :

text:
    F. O. Statler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59979.
    Promulgated December 15, 1932.

      E. S. Elliott, Esq., for the petitioner.

      G. H. Ourl, Esq., for the respondent.
   OPINION.

Morris :

The respondent filed a motion in the above entitled proceeding on June 7, 1932, for judgment on the pleadings, which was called for hearing on September 21,1932, when both parties, by .their counsel, were heard in argument upon said motion, and upon the further oral motion of counsel for the respondent that the proceeding be dismissed for want of jurisdiction. The grounds for those motions will be set forth after a brief discussion of the salient facts bearing upon the questions presented thereby.

A deficiency notice was mailed to the petitioner herein on July 21, 1931, setting forth deficiencies in income tax of $17,700.06, and $3,133.10 for the taxable years 1927 and 1928, respectively, together with fraud penalties for the said two years aggregating $10,416.58, whereupon there was filed with this Board, on September 19, 1931, the following telegraphic communication from the petitioner:

WISH TO APPEAL AGAINST ASSESSMENT SIXTY DAY LETTER COMMISSIONER DATED JULY twenty first symbols iteaj cop seventeen three sixty FIVE YEARS NINETEEN TWENTY SEVEN AND EIGHT AMOUNT CLAIMED TWENTY THOUSAND EIGHT THIRTY THREE SIXTEEN CENTS AGREE CORRECT BUT CLAIM NO RIGHT PENALTIES TEN THOUSAND FOUR HUNDRED SIXTEEN FIFTY EIGHT CENTS APPEAL MADE ON GROUNDS DEFICIENCY NOT DUE TO ANY FRAUD OR INTENT ON MY PART TO EVADE PROPER INCOME TAX.

The foregoing having been docketed by the Board as an incomplete petition, and in view of the failure of the petitioner to pay the filing fee prescribed by Buie 8, orders were issued against the petitioner to show cause, on or before October 28, 1931, why the proceeding should not be dismissed for failure to properly prosecute and for failure to pay such filing fee. In response to said orders the petitioner paid the filing fee on October 27, 1931, and filed an amended petition petitioning for a redetermination of the deficiency set forth by the Commissioner * * * in his notice of deficiency,” and alleging, among other things, that “ The taxes in controversy are penalties for the years 1927 and 1928, and for $10,416.58.” This petition was docketed by the Board as an “ amended petition,” and on October 28, 1931, the orders to show cause were discharged.

Thereafter, on December 19, 1931, the respondent filed his answer to the amended petition and, among other admissions and denials, not here material, denied the only allegation of error urged by the petitioner, pertaining to the asserted fraud penalties and, in addition to a general allegation of fraud, he affirmatively alleged the following facts in support of the general allegation of fraud:

(a) The petitioner reported a net income of only $16,494.87 for 1927 and $7,415.08 for 1918 [1928], whereas his correct net income for those years was $107,899.76 and $39,045.50, respectively.
(b) The petitioner grossly overstated the deduction for bad debts for the year 1927 with intent to evade tax.
(c) Petitioner grossly understated his income from business and from sales of membership shares in the Leader Building and Loan Association and other building and loan associations for the year 1928, with intent to evade tax.
(d) The petitioner, with intent to evade tax, failed to keep the books and records required by the income tax laws and the regulations issued thereunder.
(e) The respondent for further facts in this case, refers to the deficiency notice and statement, a copy of which is affixed to the petition and the same is hereby adopted in this answer as fully as if incorporated herein.

The deficiency notice, which the respondent incorporates by reference in subdivision 7 (e) of his answer, increases the petitioner’s business income for 1927 by $8,890.44, and adds to net income reported $27,111.18, with the following explanation: ,

1.Income from business understated as follows:
Correct income received_$83, 355. 74
Income reported_ 79, 465.30
Understated- $3, 890.44
2.Represents profits realized by you from sales of membership shares owned by you in Building and Loan Association. No profit was reported by you from this source.

The deficiency notice also disallows $61,653.42 as a deduction in the computation of net income, with respect to which the respondent states, “ Items claimed in your return do not represent allowable deductions for bad debts.” The deficiency notice increases business income for 1928 by $6,650, and $32,133.80, less bad debts of $7,153.38, with respect to which he states:

1. Represents profit realized on sale of 8,000 membership shares in the Leader Building and Loan Association which profit was not reported.
2. Represents profits on sales of membership shares in Building and Loan Association not reported. (See No. 2 under 1927).
3. Represents bad debts allowable in 1928 which were claimed by you in the year 1927 in computing business income. This deduction was not allowed in 1927 since the accounts were not determined to be worthless until 1928.

Before addressing ourselves to the principal question urged for determination, we shall first dispose of the respondent’s motion to dismiss for want of jurisdiction. The respondent complains that the telegraphic communication lodged with this Board on September 19,1931, within the 60-day period provided for the filing of a petition for redetermination, should not be regarded as a petition, and, therefore, does not confer jurisdiction upon the Board. The petitioner complied with the Board’s orders to show cause and perfected his appeal by the filing of a properly verified petition and by paying the required filing fee. On the authority of Peruna Co., 11 B. T. A. 1180, and Krueger Broughton Lumber Co., 18 B. T. A. 1270, the respondent’s motion to dismiss for lack of jurisdiction is denied.

Belative to the respondent’s motion for judgment on the pleadings, the petitioner does not question the proposed deficiency in tax; in fact he, as well as his counsel, concedes the correctness thereof, so that the respondent’s determination in that particular will not be disturbed.

The respondent directs attention to the fact that the only allegation of error asserted by the petitioner is with respect to the fraud penalty. He contends that, he having alleged fraud in his answer and having set forth specific practices which he alleges were fraudulent, the. petitioner was required under Bule 15 of the Board’s Buies of Practice to file a reply within 45 days after the filing of such answer; that more than six months having elapsed and no reply having been filed, under Bule 19 of the Board’s Buies of Practice, “each and every material allegation of fact set out * * * in the answer and not

denied in the reply, where a reply is required by these Buies, shall be deemed to be admitted.”

Buie 5 of the Buies of Practice of the Board provides for the filing of a petition to initiate the proceeding and Bule 14 provides for the due filing of an answer thereto by the respondent which “ shall contain a specific admission or denial of each material allegation of fact contained in the petition and a statement of any facts upon which the Commissioner relies for defense or for affirmative relief or to sustain any issue raised in the petition in respect of which issue the burden of proof is, by statute, placed upon the Commissioner.”

Buie 15 of the Board’s Buies of Practice, in so far as important here, provides that:

If the answer of the Commissioner sets forth the facts upon which he relies for affirmative relief, or contains a statement of the facts upon which he relies to sustain an issue in respect of which the burden of proof is placed upon him by statute, the petitioner shall, within 45 days after a copy of such answer is mailed to him or his counsel of record by registered mail, file a reply which shall contain a specific admission or denial of each material allegation of fact contained in the answer and shall set forth any facts upon which he relies for defense. * * *

Buie 19 of the Buies of Practice provides, among other things, that:

Each and every material allegation of fact set out in the petition and not denied in the answer, or set out in the answer and not denied in the reply, where a reply is required by these Rules, shall be deemed to be admitted. If no reply is required by these Rules, each and every material allegation of fact set out in the answer shall be deemed to be denied.

The “ burden of proof is, by statute, placed upon the Commissioner ” in this proceeding. The answer of the respondent contained “ a statement of * * * facts upon which the Commissioner relies for * * * affirmative relief [and] to sustain [an] issue raised in the petition in respect of which issue the burden of proof is, by statute, placed upon the Commissioner.” The petitioner filed no reply either admitting or denying the specific instances of fraud alleged by the respondent in his answer within the 45 days provided for in Buie 15 of the Board’s Buies of Practice, nor for that matter has any such reply ever been filed, although the answer was filed by the respondent on December 19, 1931.

The petitioner has entirely ignored the mandate of Rule 15, wholly disregarding his own rights in the matter of the asserted deficiency in tax and penalties, and, finally, upon the day of hearing upon this motion he appeared only by counsel, who submitted the following and only statement of the taxpayer to the Board bearing upon his case:

Your Petitioner, F. O. Statler, of Memphis, Shelby County, Tennessee, has motion of Appeal to be heard at Washington, D. C. August 10th, 1932, through South Trimble, Jr. Attorney, of Record. I am unable to attend the hearing at Washington, D. C. on account of Finances but have given my Power of Attorney to Edward S. Elliott, with data of my defense as to fraud in case now pending before the Department Docket No. 59979. I will appreciate the withdrawal of my case before the Board of Tax Appeals and be allowed to furnish data as to my defense before the U. S. Internal Revenue Department and General Council [Counsel] looking to the disposition of fraudulent intent, Edward S. Elliott, has my records to be used in defense of said claim.

The foregoing considered, it is our opinion that, the petitioner having failed to comply with the Board’s rules and having failed to deny the specific acts of fraud alleged against him, the respondent’s motion for judgment upon the pleadings should be granted. In Miller-Pocahontas Coal Co., 21 B. T. A. 1360, the Board refused to give judgment for the fraud penalty where the petitioner failed to appear at the trial, and respondent moved for dismissal and judgment without offering proof. That proceeding, however, was at issue and decided prior to the time the Board’s rules required the filing of a reply, and is therefore distinguishable from the instant proceeding.

Reviewed by the Board.

Judgment will be entered for deficiencies in tax of $17,700.06 and $3,133.10 for the years 1927 and 1928, respectively, and for fraud penalties aggregating $10,116.68 for said years.

Arundell, Van FossaN, and McMahon dissent.


source: Caselaw Access Project

author: McMahon:

license: Public Domain

text:
    Twin Ports Bridge Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41695.
    Promulgated December 19, 1932.

      Clarence J. Hartley, Esq., for the petitioner.

      M. M. Malumy, Esq., for the respondent.
   OPINION.

McMahon:

The petitioner, in order to further the enterprise in which it was interested, caused the organization of the Arrowhead Company in February, 1926, to carry out the contemplated project. For this purpose the petitioner conveyed or transferred certain of its assets to the Arrowhead Company, receiving in payment therefor in May, 1926, stock of the Arrowhead Company as follows: 200 shares of first preferred stock, 708 shares of second preferred stock, both of the par value of $100 per share, and 6,400 shares of common stock of no par value, the price of which was fixed at $1 per share. This transaction was conceded by respondent to be nontaxable and it is not involved herein except as it may affect the basis to be used for the purpose of determining gain or loss in the transaction which is involved herein.

During 1926 the petitioner transferred to a number of its creditors 104 shares of Arrowhead second preferred stock of a total par value of $10,400, in payment of services or property in the total sum of $10,400. This is the transaction involved in this proceeding. The respondent contends that the difference between $10,400, the total amount of debts paid, and the cost to petitioner of the 104 shares of Arrowhead second preferred stock is taxable gain. i

- The petitioner contends that the respondent erred in treating the transaction as a sale of the 104 shares of Arrowhead second preferred stock at par; that the Arrowhead stock has no market or determinable value; and that the respondent erred in fixing a unit cost price for the various classes of stock. It contends that the transaction was nothing more than an exchange of two things of doubtful value; that no fair apportionment of the cost price or of the value of the various classes of stock could possibly be made; and that consequently petitioner is entitled to charge the entire cost of the assets against stock received until the cost is extinguished, and cites in particular article 1567 of Regulations 62, which is in part as follows:

* * * If property is exchanged for two kinds of property and no gain or loss is recognized under articles 1564 and 1566 the cost of the original property should be apportioned, if possible, between the two kinds of property received in exchange for the purpose of determining gain or loss upon subsequent sale. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until out of the proceeds of sale shall have been recovered the entire cost of the original property. * * *

The first question to be determined is whether the payment by the petitioner of its debts in the aggregate amount of $10,400 by the transfer of 104 shares of stock of another corporation of the par value of $10,400, acquired by petitioner at less than par, resulted in taxable gain to the petitioner.

Section 213 of the Revenue Act of 1926 defines gross income as including “ gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * of whatever kind and in whatever form paid, or from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever.” This section also requires that the amount of such items, except as otherwise provided, shall be included in the gross income for the taxable year in which received by the taxpayer.

A debt is defined in its general sense as “ a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment,” J. S. Cullinan, 19 B. T. A. 930; and is property in the hands of the creditor, Portuguese-American Bank v Welles, 242 U. S. 7. That shares of stock are property is elementary and needs no citation of authority. Under the express terms of the statute, gains, profits, or income derived from “ dealings in property ” or “ from any source whatever ” are within the term “ gross income.”

In United States v. Kirby Lumber Co., 284 U. S. 1, it was held that where a corporation issued its own bonds, for which it received par value, and later in the same year purchased in the open market some of the bonds at less than par, the excess of the issuing price or face value over the purchase price is taxable gain or income for the taxable year, and within the definition of gross income under section 213 (a) of the Revenue Act of 1921, i. e., “ gains or profits, and income * * * derived from any source whatever.” In distinguishing Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, the court, in its opinion, states: “ But the transaction [involved in the Ker-baugh-Empire case] as a whole was a loss, and the contention was denied. Here there was no shrinkage of assets and the taxpayer made a clear gain. As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct.”

In this proceeding we have unsecured debts or accounts payable of the petitioner paid for with stock of another corporation, whereas in the Kirby Lumber Co. case, supra, bonds of the taxpayer were sold for cash at the par value and repurchased for cash at less than par value. In the instant proceeding debts of the aggregate amount of $10,400 were paid with stock of the par value of $10,400 which was acquired at less than par, whereas in the Kirby Lumber Co. case, debts were paid in cash in an amount less than the amount of-debts paid; and in the instant proceeding the debts represented property and services received, whereas in the Kirby Lumber Co. case the debts or bonds represented money received. We do not believe that the differences are material. There is no evidence that such debts were not valid and subsisting obligations of the petitioner. Nor is there any evidence that the debts were compromised or that the creditors intended to forgive or cancel part of such debts without payment therefor.

Another case which we deem in point is Bacon-McMillan Veneer Co., 20 B. T. A. 556. In that case a corporation declared a 50 per cent dividend, to be payable in Liberty Loan bonds. The Liberty bonds, at the time they were paid over to the stockholders in payment of the dividends, had a value in excess of their cost to the corporation. It is there held that the transaction resulted in taxable gain to the corporation. We stated in part:

The resolution provided that a 50 per cent dividend he declared. A 50 per cent dividend is a definite amount. It created an obligation of the corporation. to its stockholders. Then when that obligation was satisfied by the distribution of the Liberty Bonds owned by the petitioner, we have a realization of a gain through disposition thereof. When the dividend of 50 per cent was declared the corporation could not satisfy the legal demands of the stockholders by delivering to them bonds less than that value. The corporation discharged its obligation to its stockholders by giving them the bonds which here had a value in excess of the cost. We think that this is a realization of gain in every substantial sense of the word. * * * [Italics supplied.]

See also Callanan Road Improvement Co., 12 B. T. A. 1109, where it was held that a similar disposition of property by a corporation resulted in a deductible loss to a corporation.

Commissioner v. Rail Joint Co., 61 Fed. (2d) 751, in which Rail Joint Co., 22 B. T. A. 1277, was affirmed, has not been overlooked; it is distinguishable.

Assuming that the petitioner had paid all its debts incurred in acquiring the assets transferred to the Arrowhead Company, which, as determined by the respondent, totaled $68,569.37, with Arrowhead second preferred stock at par, it is apparent that it would not have been necessary to use all of the 708 shares of such stock, the par value of which was $70,800, and in addition it would also have the 200 shares of Arrowhead first preferred stock and 6,400 shares of common. It appears from the records that some debts, including cash advancements to petitioner and the purchase price of the real estate in Duluth, were paid with cash out of the $16,650 cash received from the sale of Arrowhead stock. In 1927 claims aggregating $35,000 -were paid with Arrowhead second preferred stock at par. The debts thus paid with such second preferred stock at par and cash total $62,050, leaving $1,519.37 unpaid. However, it further appears that 300 shares of common, 55 shares of second preferred and 15 shares of first preferred were also used to pay indebtedness, but whether the indebtedness so paid was a part of the original indebtedness or was indebtedness incurred after the transfer of assets to the Arrowhead Company does not appear. However, it does appear that petitioner still owns 5,915 shares of common and ten shares of second preferred and distributed 189 shares of second preferred to its stockholders in 1927. As a result it has at least 5,915 shares of common and 199 shares of second preferred stock, representing “ assets previously oifset by the ” debts “ now extinct.”

It is contended that neither company had any funds with which to pay the claims of the creditors of petitioner and neither was able to finance the enterprise. Whether petitioner had funds or not to pay .its debts is immaterial. It was not shown to be insolvent and it had Arrowhead stock which was accepted by the creditors at its par value in lieu of cash. As stated in Service Recorder Co. v. Routzaln, 24 Fed. (2d) 875:

The value of a thins is not always and solely to be determined by precise methodical computation based upon cash exchanged therefor; and values are sometimes enhanced by faith in the ultimate future of the thing for which those having such faith are willing to hazard their time, money and effort. * * * Within sound limits, the judgment and expectation of those assuming the risk are elements entering into a determination of value.

In our opinion, the transaction herein involved is not materially different in principle from that involved in United States v. Kirby Lumber Co., supra, and any resulting gain is therefore taxable. See Bacon-McMillan Veneer Co., supra.

In order to determine the gain or loss resulting from the transaction it is necessary to ascertain the proper basis to be used in such determination.

The transaction between the petitioner and the Arrowhead Company was a nontaxable transaction under section 203 (b) (3) of the Bevenue Act of 1926. The basis to be used under section 204 (a) (6) of the Bevenue Act of 1926 in the computation of gain or loss from the sale “ or other disposition ” of stock acquired upon an exchange of property under section 203 (b) (3), sufra, is “the same as in the case of the property exchanged.” It is therefore necessary to determine the cost to the petitioner of the property or assets transferred to the Arrowhead Company, since the basis of the Arrowhead stock acquired by petitioner is the same as the cost to the petitioner of the property conveyed in exchange for such stock.

As heretofore stated, it appears that the respondent, in computing the asserted deficiency, determined that the total amount expended and incurred by the petitioner in connection with the enterprise taken over by the Arrowhead Company amounted to $63,569.37, which he used as a basis in his computation of the asserted deficiency. The correctness of this amount as representing total liabilities of the petitioner incurred by it in the acquisition of or in connection with the assets transferred to the Arrowhead Company is apparently not questioned by petitioner.

In computing the gain on the transaction here involved, the respondent used as a basis for the common and first preferred the basis which he used in his computation of gain or loss on the sale by petitioner in 1926 of 185 shares of Arrowhead first preferred stock together with 185 shares of common as bonus, at $100 per unit of one preferred and one common, less a commission of $10 per unit. Since the basis used by the respondent and net amount received is the same, no taxable gain resulted. No question with respect to the determination of the respondent as to such transaction is raised by the petitioner.

The respondent allocated the total basis used by him to the three classes of stock as follows:

t 6,400 shares of common at $1_$6,400. 00
200 shares of first preferred at $89- 17, 800.00
^708 shares of second preferred at $65.6065_ 39, 369.37
Total cost_ 63, 569.37

The assets transferred by petitioner to the Arrowhead Company are described in the corporate minutes in part as permit or franchise, right of way, plans, maps, drawings, various rights, etc., deemed of great value,” and the reasonable value of the permit was fixed at $25,000. J. B. Finch, who devoted considerable time to the enterprise and has been president of both corporations since their incorporation, and who is a principal stockholder and apparently was the person most actively interested in the enterprise, testified that the corporate minutes adduced in evidence correctly state the facts. However, he also testified that at the time the transfer was made the only assets which the petitioner had to convey to the Arrowhead Company consisted of the permit or franchise to build the bridge, contracts for the purchase of land to serve as approaches to the bridge, on one of which less than $2,000 had been paid and nothing on the other, a few piles in the river, and the claims against the petitioner for promotional and other services, all of very little value. This testimony is in conflict with statements in the minutes of petitioner.

With respect to the construction of the bridge, it is to be noted that the Arrowhead Company assumed and agreed to pay the cost and expenses of the construction work and the engineering services from the commencement of the actual construction work on or about February 15, 1926. The cost of such work and services therefore can not be a part of the liabilities which petitioner was obligated to pay, or a part of the cost of the assets transferred by petitioner.

The petitioner presented no evidence as to the cost to it of the property transferred to the Arrowhead Company or of the total indebtedness incurred in acquiring the assets transferred to such company. At the time the Arrowhead stock was acquired by the petitioner, no allocation of cost as between the various classes of stock was made, at least no evidence to that effect was adduced. .

The petitioner presented no evidence disclosing the persons to whom the 104 shares of Arrowhead second preferred stock were transferred or as to the nature or character of the debts paid therewith, except that 19 shares thereof were transferred in payment of the purchase price of $1,900 of the land or right of way on the Superior side of the bridge and 50 shares thereof were transferred to Paine, Webber & Company in payment of services in addition to the stock to be. transferred to them under the finance agreement entered into between that company and the Arrowhead Company. There is no ! evidence that the creditors agreed or intended to take something of | a value less than the full amount or value of their claims. The record merely discloses that the claims totaled $10,400 and that 104 shares of second preferred stock of the par value of $10,400 were paid in liquidation thereof. With respect to the debts paid in 1927 it appears that such creditors were willing to take 350 shares of Arrowhead second preferred stock at par in payment thereof. The first preferred and common were used in obtaining cash, not only to finance the construction of the bridge, but also for the purpose of paying certain of petitioner’s obligations, some of which represented cash advancements to the petitioner and part of the purchase price of the Duluth right of way, or real estate. The market value of such stock was fixed in the finance agreement and by actual sales in 1926. No evidence was offered disclosing the terms upon which the second preferred stock was issued. However, it was used and deposited with Paine, Webber & Company in lieu of a bond, and accepted by creditors of petitioner at par as payment. The fact that such stock was highly speculative does not divest it of all value. Walls v. Commissioner, 60 Fed. (2d) 347; Commissioner v. Swensen, 56 Fed. (2d) 545; Collins v. Commissioner, 32 Fed. (2d) 1753; Service Recorder Co. v. Routzahn, supra.

The petitioner offered or suggested no method for determining the cost of the 104 shares of Arrowhead second preferred stock. The burden of proof is upon the petitioner. The determination of the respondent is presumed to be correct. The opinion of J. B. Finch, who was the only witness to testify on behalf of the petitioner, that the assets transferred for the Arrowhead stock had little value; that the claims against the petitioner had no substantial value or were not worth the paper written on unless the bridge was constructed; that it was doubtful whether the creditors could realize anything thereon; that the claims were not worth more than the stock given for them; and that the Arrowhead second preferred stock had no ascertainable value and was speculative, is not sufficient, under all the facts and circumstances here, to overcome such presumption.

Furthermore, the Board is not absolutely bound by the opinion of a single witness as to value, but must weigh that opinion in the light of all of the evidence. American Chemical Paint Co., 25 B. T. A. 1208.

If the method of computation used by the respondent is questioned, it is incumbent upon the petitioner not only to show that the respondent erred, but also to prove a correct basis and proper method or sufficient facts from which the Board can determine a correct basis or proper method of allocation or computation. Alexander D. Falck, 26 B. T. A. 1359; Roessler & Hasslacher Chemical Co., 25 B. T. A. 915; J. S. Cullinan, 19 B. T. A. 930; Uncasville Mfg. Co., 19 B. T. A. 920; Jacob F. Brown, 18 B. T. A. 859; J. S. Cullinan, 5 B. T. A. 996. The petitioner having failed in this respect, the determination of the respondent must be approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

Black concurs in the result.


author: Murdock:

text:
    William Merriam Crane, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57713.
    Promulgated December 19, 1932.

      Warren Wattles, Esq., for the respondent.
   OPINION.

Murdock:

Except as otherwise provided in section 202 of the Revenue Act of 1926, gain or loss under that act is the difference between the amount realized from a sale and the basis provided in subdivision (a) or (b) of section 204. Section 204 (b), which is applicable here, provides that the basis shall be the fair market value of the property as of March 1, 1913. This must be diminished by depreciation allowable up to the date of sale. Section 202 (b) (2). The parties have agreed upon March 1, 1913, value. There is no dispute about any figures nor is any argument made as to the effect of depreciation. The only question presented to the Board is whether or not, in computing gain or loss on the sale of the real estate, any adjustment should be made representing the cost or value of improvements made by the lessee. ■

No portion of the value of the improvements placed upon the property by the lessee has ever been reported as income by the petitioner. The Commissioner contends that because of this fact no adjustment representing value or cost of the improvements should be made in computing gain or loss. The improvements were made in 1920. The petitioner states that under the regulations in force for the year 1920 he should have included in his income for that year the value of the improvements to him. But he argues that his failure to properly report his income for 1920 has no effect upon the sale in 1921. He says that the law entitles him to add the cost of the improvements to March 1, 1913, value. As authority for this statement he cites section 202 (b) (1) of the Revenue Act of 1926 and article 1561 of Regulations 69. Section 202 (b) (1) provides that “ proper adjustment shall be made for any expenditure or item of loss properly chargeable to capital account.” The language of the regulations relied upon by the petitioner is, “ In computing the amount of gain or loss, however, the cost or other basis of the property must be increased by the cost of capital improvements and betterments made to the property since the basic date.” This article should not be read alone. Article 48 of Regulations 69 is pari materia. Read together, the two show that the Commissioner intended to allow an adjustment only to the extent that the value of the improvements had been included in income. The petitioner contends that article 48 does not cover the question of how gain or loss shall be computed in a case such as his, because it does not purport to deal with a sale of property subject to a lease. We agree that the article does not precisely cover his case, but it certainly points the way if there is no other article more nearly in point. If he had reported a profit at some time based upon the added value given to his property by the improvements placed thereon by his lessee, he might well argue that article 48 would authorize an adjustment to the extent of the amount reported as income. But he reported no profit and he can find no comfort in the regulations now.

The petitioner has not called our attention to any regulation which fits his case. Therefore, he must go back to section 202 (b) (1). What expenditure was properly chargeable to capital account in his case ? He made no actual expenditure. If he should argue that he acquired the building after February 28, 1913, so that the basis is cost, this basis is nihil, since the improvement cost him nothing. Furthermore, he is not in position to charge himself with any amount of increase in capital value as he might have been had he first taken some part of the increase into income. Prior to the sale he never recognized the receipt of any benefit from the expenditures made by his lessee. Until he has recognized the receipt of the asset, he can not set up capital value for it.

The petitioner never gets to the question of whether or not any provision of the law prevents the adjustment for which he contends. He first must show some provision of the revenue act entitling him to the adjustment. He argues that the Commissioner should have taxed him with a profit in 1920, but, since the bar of the statute of limitations prevents any additional assessment for 1920, the Commissioner can not avoid the effect of the statute and correct his mistake in 1927 by refusing to recognize a proper adjustment under the law. In many cases this reasoning would be quite forceful. It would be more forceful here if the petitioner could point to any specific provision of the revenue acts or regulations as authority for his position. But he has not done so. Under such circumstances he should not have an adjustment for which he never laid a proper foundation.

Reviewed by the Board.

Decision will ~be entered wider Bule 50.


author: SteRNHagen :

text:
    Trahern Pump Company and Geo. D. Roper Corporation, Successor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40498.
    Promulgated December 19, 1932.

      Albert W. Torbet, O. P. A., and B. B. Early, Esq., for the petitioner.

      Elden McFarland, Esq., and William S. Delaney, Esq., for the respondent.
   OPINION.

SteRNHagen :

A motion of the respondent to dismiss for want of jurisdiction because the Trahern Pump Company, to which the deficiency notice was addressed, had been previously dissolved and the Eoper Corporation, which, as its successor, had instituted this proceeding, was not the corporation as to which a deficiency had been determined, was denied prior to the hearing. It was renewed at the time of trial. Since the Trahern Corporation was not simply dissolved, but was, with others, consolidated under the Illinois consolidation statute to form the Eoper Corporation, the Board has jurisdiction of a proceeding instituted in the name of either, and a fortiori one instituted in the name of both, Bowman Hotel Co., 24 B. T. A. 1193; Oswego Falls Corp., 26 B. T. A. 60.

The petitioners contend that from the beginning of the last fiscal period, i. e., September 1, 1918, until the date of the consolidation into the Roper Corporation, i. e., August 18, 1919, the Trahern Company was affiliated, within section 240 of the Revenue Act of 1918, with the three other corporations, by virtue of which a consolidated return was rightfully filed. The Commissioner held against the inclusion of the Trahern Company in the affiliated group, and computed the deficiency with regard to its separate income.

The evidence is that from August 31, 1918, to February 15, 1919, 370 shares (30.83 per cent) were owned by unidentified persons, and 101 shares (8.41 per cent) were owned by Jilbert, who was not a shareholder in any of the other three corporations. Thus, so far as this record shows, over 39 per cent of the total outstanding shares was owned by persons who had no relation to the other corporations. In the succeeding period until the date of the statutory consolidation, i. e., August 18, 1919, as shown by the list of shareholders on February 15, 1919, and the temporary receipts for shares deposited, the holders of 35.33 per cent of the shares of the petitioner were not shareholders in any of the other three corporations. There is no evidence from which it could be said these shareholders of 39.24 per cent and 35.33 per cent, respectively, were the same interests as those who owned the remaining 60.76 per cent and 64.67 per cent. It needs no demonstration to hold that substantially all the shares are not owned by the same interests, and Handy & Harman v. Burnet, 284 U. S. 136, has settled any lurking doubt.

The petitioners argue, however, that the express intention to consolidate, with its mere postponement to await the modification of the state statute, the deposit of shares with the trust company, the unified operation of the business of the four corporations, and the consummation of the consolidation upon the basis of values on September 1,1918, was within the intendment of the affiliation provision of the revenue act and a substantial compliance with its conditions; and, furthermore, that this contention is consistent with the exposition of the statute in Handy & Harman v. Burnet, supra. The argument must, we think, be rejected. Notwithstanding the deposit of shares and the unification of management and operation, there continued until August 18, 1919, a want of that “legally enforceable control ” which the Supreme Court held to be indispensable to affiliation. During the period of suspense of the plan of consolidation, the minority shareholders of the Trahern Company were still the owners of their shares in that corporation. They owned no shares in any of the other corporations, and no one else had legally enforceable control of their shares. Prior to the proposed consolidation, they were not, as petitioners argue, beneficial owners, proportionate or otherwise, in any of the shares of the other corporations. The clause of the Handy & Harman case which petitioners invoke is “ unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations.” This may not be forcibly-expanded to include the tentative expectancy of the separate shareholders which is here. Lafayette-South Side Bank v. Commissioner, 33 Fed. (2d) 646. Nor is the test of legally enforceable ownership or control of shares satisfied by control of the business, even though the shareholders of all corporations tolerate a shifting of profits or expenses,. Commissioner v. Gong Bell Mfg. Co., 48 Fed. (2d) 205 (certiorari denied, 284 U. S. 670), reversing 15 B. T. A. 152; Black Diamond Coal Co. v. Commissioner, 61 Fed. (2d) 573. That the basis of measuring the individual shareholder’s right in the consolidated corporation when formed was the face value of capital, surplus and undivided profits as of September 1, 1918, is not determinative of the legally enforceable control during the interim period, nor is the fact that during that period there was no distribution of surplus or profits. They only indicate the existence and fulfillment of the plan of consolidation of which they were incidents; but, as we have seen, the plan and its incidents are not the determinants of the statutory control of shares.

The petitioners claim that the deficiency determined on the basis of a separate return is excessive in so far as it does not take into the computation the amount paid by or for the Trahem Company as its share of the tax assessed upon the consolidated return. The petitioners are obviously entitled to offset the deficiency by such payment of 1919 tax already made, Washburn Wire Co., 26 B. T. A. 1146; Folger & Co., 27 B. T. A. 1.

Judgment will be entered under Rule 50.


author: Smith :

text:
    Walter G. Winne, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60900.
    Promulgated December 19, 1932.

      B. G. Carson, Esq., for the petitioner.

      C. A. Ray, Esq., for the respondent.
   OPINION.

Smith :

The petitioner contends that the compensation received in the taxable year 1929 from the City of Hackensack and the Boroughs of Lodi and Teterboro, and as master or special master in chancery, is exempt from Federal taxation, apparently abandoning a similar contention with respect to the compensation received from the Borough of Maywood, since no evidence was offered with respect to that compensation.

The petitioner’s appointment as counsel or attorney for the several political subdivisions of the State of New Jersey was in accordance with the statute (sec. 24-3, I Cum. Supp. to Com. Stats., p. 168), which provided, inter alia, that such appointee “ shall hold office during the pleasure of the council.” While the petitioner took an oath of office, he was nevertheless free to accept any other concurrent employment, and apparently did so. His duties were not prescribed by statute. “ There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law.” Metcalf & Eddy v. Mitchell, 269 U. S. 514. The petitioner’s relation to the several political subdivisions of the State of New Jersey does not come within the definition of an office laid down in Metcalf & Eddy v. Mitchell, supra. The several political subdivisions procured the petitioner’s professional services and retained those services at their pleasure, paying therefor the fees charged by the petitioner in addition to the compensation (salary and/or retainers) agreed upon for routine services. No effort has been made to show what portion, if any, of the compensation was received for services rendered in connection with the exercise of essential governmental functions. In the circumstances we are of the opinion that the relationship of attorney and client existed between the petitioner and the City of Hackensack and the several boroughs, and that the compensation for the services rendered by him to those political subdivisions is not exempt from Federal taxation. George H. Gabel, 25 B. T. A. 60.

The petitioner as a master or special master of the court of chancery was an integral part of the judicial system of the State of New Jersey. See sec. 2, 3d Com. Stats, of New Jersey, par. 8, p. 3785; Buies of Court of Chancery of New Jersey, Bule XXYI, secs. 176, 179, printed in the preface to Volume 100 of the Atlantic Reporter. Following our decision in David K. Cochrane, 26 B. T. A. 1167, we hold that the fees received by the petitioner as master or special master in chancery are exempt from Federal taxation.

The compensation received from the several political subdivisions of the State of New Jersey, not being exempt, should be treated as any other compensation paid for professional services rendered by either partner in the conduct of the partnership law practice, and included in the gross income of the partnership in order that it may be properly offset by the expenses, reflected in the partnership accounts, incident to the earning of that income. The petitioner would therefore be taxed upon his distributive share of such compensation.

Judgment will be entered under Rule 50.


author: Matthews :

text:
    Kate R. De Forest, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37284.
    Promulgated December 19, 1932.

      Andrew T. Smith, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   opinion. .

Matthews :

This is a proceeding for the redetermination of a deficiency in gift tax asserted for the calendar year 1924 in the amount of $5,194.07.

The sole question for our determination is whether a gift made by the petitioner of 1,925 shares of the common stock of the DeForest Estate Corporation took place in 1924 or in 1925, the petitioner having waived the issue raised as to the value of the stock.

The petitioner is an individual, a resident of New York City. On December 13, 1924, she was the treasurer of the DeForest Estate Corporation, a New York corporation, and the owner of 1,925 shares of its stock. On that date she executed an instrument, the pertinent parts of which are as follows:

Agreement made tbis 13th day of December, 1924, between Kate Rogers de Forest, wife of Shepherd Knapp de Forest, now residing in the City, County and State of New York, of the first part, and The Corn Exchange Bank, a corporation organized under the laws of the State of New York, and having its principal place of business at Number 13 William Street in the City, County and State of New York, (hereinafter sometimes called the “Trustee”), of the second part,
Witnesseth: that
* * * #'* * * #
Now, Therefore, the said Kate Rogers de Forest, in consideration of the premises, and of One Dollar paid to her by The Corn Exchange Bank, the receipt of which is hereby acknowledged, does hereby sell, assign, transfer and set over to The Ooen Exchange Bank nineteen hundred and twenty-five (1925) shares of the common capital stock of De Forest Estate Corporation in trust as follows:
^*#***#*
The Ooen Exchange Bank hereby accepts the trusts herein created upon the terms and conditions stated.
In Witness Whereof the parties have executed this instrument in duplicate the day and year first above written.
Kate Rogers dh Forest, L. S.
[Seal affixed] The Corn Exchange Bank
by W. E. Fkew
President.
STATE OF NEW TORE 1 COUNTY OF NEW YORK/ S ‘
On this 13th day of December, 1924, before me personally came Kate Rogers de Forest, to me known to be the individual described in and who executed the foregoing instrument, and to me duly acknowledged that she executed the same.
Preston B. Handy,
Notary Public, N. Y. Go.
STATE OF NEW YORK 1 COUNTY OF NEW YORKJ
On the 2d day of January, 1925, before me came Walter E. Frew, to me known, who, being by me duly sworn, did depose and say that he resides in New York City, that he is the President of The Corn Exchange Bank, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order.
Feed R. Huber
Notary Public.

This deed of trust was not delivered to the Corn Exchange Bank or signed and acknowledged by Frew on its behalf until January 2, 1925.

The petitioner had been contemplating the execution of this trust for some time. After discussing it with her husband, Shepherd Knapp de Forest, she decided to make the trust agreement. Upon the advice of her attorney she first planned to carry out the gift in 1925, and the deed of trust, which is quoted from above, was originally prepared with “-day of January, 1925.” The “ January, 1925 ” was later erased and “ December, 1924 ” typed in. The reason for not making the gift until 1925 was that the constitutionality of the gift tax provision had been challenged in a court proceeding and it would probably be settled during 1925, or prior to the date in 1926 on which the return of gifts made in 1925 was required to 'be filed. However, the petitioner decided to leave for a trip to Europe prior to 1925, so she executed the trust agreement on December 13, 1924. She later abandoned the contemplated trip and the certificate of stock remained in her possession until January 2, 1925, on which date she surrendered the certificate to the corporation and new certificates were issued to the Corn Exchange Bank.

On December 26, 1924, Charles D. Wheelock, the trust officer of the Corn Exchange Bank, wrote a letter to Shepherd Knapp de Forest, husband of the petitioner, saying in part as follows:

In accordance with your request we gire below the names in which we would like to have issued the stock which is to be delivered to us under the trust deed of Mrs. de Forest.
You will note that the date of the trust deed is left blank since we are not sure of the exact date. You will, no doubt, know this and can insert the proper date when issuing the certificates.
We regret if our delay in furnishing the above has caused you any inconvenience and trust the information supplied is that which you desire.

On December 27, 1924, Shepherd Knapp de Forest wrote to Wheelock, as follows:

I have your letter of December 26, 1924. Thank you for the information contained therein. No inconvenience was caused me by the slight delay you refer to.
I should like to set Friday, the second of January, as the date for the Corn Exchange Bank to accept this Deed of Trust, and the new certificates of stock will also be of that date.

On January 2,1925, Certificate No. 51, for 1,925 shares of DeForest Estate Corporation, owned by petitioner, was canceled and stamp tax of $77 paid thereon. On the same date new certificates, Nos. 101, 102, 103 and 104, for 270, 270, 422 and 963 shares, respectively, were issued by the De Forest Estate Corporation to take the place of canceled Certificate No. 51. These certificates were issued in the name of and delivered to the Corn Exchange Bank on January 2, 1925.

The petitioner executed a Federal gift return on March 12, 1926, which was received at the office of the collector of internal revenue for the third district of New York on March 13, 1926, accompanied by a check for $2,775. The collector gave a receipt for this amount, acknowledging the payment as on account of the calendar year 1925. The return showed “ gifts during the calendar year 1924 ” and in the schedule for the description of the property under the heading “ Date of gift ” appeared “ December 13, 1924.” Attached to the return was the following protest:

Tills payment and accompanying report are made under compulsion and duress with a reservation of all rights and subject to protest on the ground that the Law imposing a Gift Tax is unconstitutional and void.
Dated March 192S.
Kate Rogers de Forest.

The respondent, in determining the deficiency herein involved, asserted a gift tax for 1924 in the amount of $7,969.07, holding that the property had a value in excess of that returned by the petitioner on her return. Against this, he applied the $2,775 paid by petitioner, leaving $5,194.07, the amount of the deficiency herein.

The petitioner contends that the gift was not made until 1925, and was, therefore, not taxable until that year.

Section 319 of the Revenue Act of 1924 provides:

For the calendar year 1924 and eacli calendar year thereafter, a tax equal to the sura of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States, whether made directly or indirectly: * * *

We must, therefore, determine when the transfer of this stock took place. The law as to gifts is well settled, that in order to be an effective gift there must be three factors present: (1) An intention to give; (2) a transfer of title or delivery; and (3) an acceptance by the donee. Estate of David R. Daky, 3 B. T. A. 1042, and Allen-West Commission Co. v. Grumbles, 129 Fed. 287. The Latter case involved a gift of stock, the court holding that, when a husband, owner of 110 shares of stock in a corporation, delivered a written assignment of his interest in the corporation’s business to his wife, but retained the certificate of stock, voted it and received dividends thereon, there was not a valid, completed gift of stock to his wife.

In some cases it has been held that delivery of a deed of transfer is sufficient to effect transfer of the title, although the certificates themselves are not transferred. See Grymes v. Hone, 49 N. Y. 17; DeCaumont v. Bogert, 36 Hun. (N. Y.) 382; and In re Valentine's Estate, 204 N. Y. S. 284.

It will thus be seen that whereas some cases hold that delivery of a deed is sufficient to transfer title to stock, and some that delivery of the certificates themselves is essential, they all agree that there must be an intent on the part of the donor to pass title. Where the donor retains the power to control the property which is the subject matter of the gift, the gift is not completed until she has put it out of her power to exercise such control. In the instant case we are of the opinion that the donor did not intend to transfer title to the certificates until 1925. The deed of trust was signed by her, but it was retained in her possession and control, as was the certificate, and was not delivered to or accepted by the trustee until 1925. The notary public who attested the signature of Frew, the trust officer of the bank, unequivocally testified that Frew signed it .in his presence on January 2, 1925. The acts of the petitioner and the correspondence above set forth between her husband and the trust officer of the bank clearly show that the parties did not intend the gift to take place until 1925, and, there being no delivery either of the deed of trust or of the certificates themselves until that year, the transfer did not take effect until 1925. It follows, therefore, that the respondent erred in asserting a gift tax for 1924 upon such transfer.

The respondent did not file a brief, but, in view of objections raised by his counsel at the hearing with regard to the admission of certain testimony offered by deposition, we might state that we do not consider as of much weight the statements in the return filed by the petitioner to the effect that the gift was made in 1924. The return was not made until March, 1928, the receipt issued by the collector showing payment of the tax for 1925. The evidence clearly established that the date of March, 1925, appearing on the protest, was a typographical error and that it was not executed until March, 1926. The question of estoppel was not raised by the pleadings. Moreover, the question as to when the gift took place is one of law and not one of fact, and we are not bound by a statement of one of the parties that as a fact it took place at a certain time.

Judgment of no deficiency will he entered.


author: McMahon :

text:
    Kizzie Gordon, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 22332-22338, 22340, 22341, 22640, 24882.
    Promulgated December 20, 1932.

      George E. Roster, Esq., and L. A. Luce, Esq., for the petitioners.

      J. E. Mather, Esq., and J. G. Gibbs, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Max L. Gordon; Andy Martins; Ivor B. Bell; George W. Ley; Mary C. Ley; Albert O. Pegg; Kathleen M. Turner; Walter E. Hettman; Joseph Costello; and C. B. Kibele.

   OPINION.

McMahon :

In view of the stipulation that the petitioners herein are liable as transferees of the National Engineering Corporation, a dissolved corporation, within the meaning of section 280, except for the petitioner, Walter E. Hettman, these proceedings, in the last analysis, present the following issues for our determination: (1) The constitutionality of section 280 of the Revenue Act of 1926; (2) whether respondent correctly computed the net income of the National Engineering Corporation for the years 1918 and 1919; (3) the applicability of the statute of limitations;. and (4) whether Walter E. Hettman is liable for any part of the taxes due, if any, from the National Engineering Corporation.

The first issue must be decided adversely to petitioners, in view of our decisions in Henry Cappellini, 14 B. T. A. 1269; South Penn Oil Co., 20 B. T. A. 1180; and Edward H. Garcin, 22 B. T. A. 1027, and in view of the decision of the Supreme Court in Phillips v. Commissioner, 283 U. S. 589. In their brief, petitioners, except Hettman, admit that they are liable as transferees for the 1919 deficiency if section 280 is constitutional. Therefore, in view of our decision on this issue, we approve respondent’s determination that petitioners, with the exception of Hettman, are liable as transferees for the 1919 deficiency, amounting to $5,785.46.

Likewise, the second issue must be determined adversely to the petitioners, because the evidence is insufficient to show error in respondent’s method of computing the taxpayer’s net income for the years in question. At the hearing petitioners attempted to lay the foundation for secondary evidence relative to the claim asserted against the Government under certain contracts, upon the ground that they could not produce the original records of their transactions with the Shipping Board, but they were unable to lay a proper foundation for such secondary evidence. Accordingly, the record is silent as to how the sums received from the Shipping Board should be allocated. In this situation the Board must affirm' the allocation made by the respondent, since the burden of showing error rested upon the petitioners.

The third issue relates to the bar of the statute of limitations, and involves the collection of the 1918 tax and the unpaid portion of the • tax assessed on the National Engineering Corporation’s original 1919 return. The stipulated facts show that the taxpayer corporation filed its 1918 income and profits tax return on June 16, 1919; that the deficiency letters addressed to these petitioners show that a deficiency of $5,681.69 was assessed against the corporate taxpayer on February 25, 1924; and that said deficiency has not been paid nor has any suit or proceeding been instituted for the collection of said tax, other than these appeals.

The stipulated facts and documentary evidence further show that the taxpayer corporation filed its 1919 income and profits tax return on May 15, 1920; that on May 27, 1920, a tax of $7,885 was assessed against it on the basis of said return; that of the original tax so assessed only $4,811.11 was paid, leaving a balance due of $3,073.89, which is still unpaid; that no suit or proceeding has been instituted to collect such unpaid balance; that a “waiver,” dated January 28, 1925, was filed for the taxpayer corporation by its former president for the purpose of extending the time for making any assessment of income and profits taxes for the year 1919 until December 31, 1925; and that on March 3, 1925, a deficiency of $5,785.46 was assessed against said corporation with respect to its 1919 tax liability.

Under these facts the petitioners contend that the 1918 deficiency and the unpaid portion of the original 1919 tax are barred by the statute of limitations, citing inter alia, D. E. Wheeler, 16 B. T. A. 96, and Caroline J. Shaw, Executrix, 21 B. T. A. 400.

Considering, first, the bar of the statute of limitations as it applies to the deficiency for 1918, we find that the facts herein bring these proceedings within our decisions in the Shaw and Wheeler cases, supra, and our decision in E. N. & O. M. Ennis, 21 B. T. A. 406. The deficiency assessment was made on February 25, 1924, which was within the 5-year period of limitation for assessment and collection provided by section 250 of the Revenue Act of 1918, and was prior to the enactment of the Revenue Act of 1924, which occurred on June 2, 1924. Since the assessment was made before June 2,1924, section 278 of the 1924 Act did not serve to extend the period of limitation for collecting the assessment. Russell v. United States, 278 U. S. 181.

The statute of limitations having run against the transferor taxpayer, no suit against the transferee could be had (Russell v. United States, supra; United States v. Updike, 281 U. S. 489) unless the time in which suit may be brought against a transferee is extended by section 280 of the Revenue Act of 1926.

It has been repeatedly held by the Board that where the statutory period for assessment did not expire until after the enactment of the 1926 Act, section 280 (b) (1) of such act is applicable and thereunder the statutory period of limitation for assessment of liability of a transferee is extended one year. J. A. Kemp, 20 B. T. A. 875; National Bank of Commerce, 19 B. T. A. 1080; Louis Costanzo, 16 B. T. A. 1294. Section 280 (b) (1), however, is not applicable in cases where the period of limitation has expired prior to the passage of the 1926 Act. Barron-Anderson Co., 17 B. T. A. 686.

Although the facts herein apparently bring this proceeding within section 280 (b) (2) of the 1926 Act, such section is not applicable. In Caroline J. Shaw, supra, in construing section 280 (b) (2), it was stated that it applied:

* * * to assessments made before the passage of the 1926 Act, which did in fact at the time they" were made serve to extend the period for collection, which would include all valid assessments made after the passage of the 1924 Act, but would, not include assessments made before June 2, 192b, which it has now been definitely held in the Russell case were not included in the provisions extending the period for collection. [Italics supplied.]

Therefore, the assessment and collection of the asserted deficiency for the year 1918 against the petitioners, as transferees, is barred.

We have next to consider whether the respondent is barred from collecting the unpaid portion of the original 1919 assessment, and in this connection we must examine the waiver that was filed to determine its effect upon the period of limitations for collecting this original assessment. The 1919 return of the taxpayer was filed on May 15,1920, and the period of limitation for collection expired five years thereafter, unless extended by consent of the parties.

In 1920 the National Engineering Corporation was dissolved. On or about January 28, 1925, the former president of such corporation signed a waiver on behalf of such corporation providing in part that “ the time prescribed by law for making any assessment of * * * taxes due under any return made by or on behalf of the taxpayer for the year 1919 ” be extended until December 31, 1925. Assuming this waiver to be valid and giving it a construction most favorable to the respondent, nevertheless it is of no significance herein, as the time was extended thereunder only to December 31, 1925. The first notice of deficiency sent to certain of the petitioners was mailed November 6, 1926.

What we have heretofore stated with respect to the 1918 taxes applies equally here. Since the assessment was made May 27, 1920, prior to the enactment of the 1924 Act, the statutory period is not extended under the 1924 Act or the 1926 Act, and collection of the unpaid portion of the original 1919 assessment is therefore barred.

The remaining issue is whether Walter E. Hettman was a transferee within the meaning of section 280 of the 1926 Act. The stipulated facts show that Kibele transferred certain shares of stock in ihe taxpayer “ merely for the purpose of having said Walter E. Hettman represent him, * * * at the meetings of the stockholders and directors ” of the taxpayer corporation. Upon dissolution of the corporation Hettman received and immediately thereafter paid over to Kibele his proportionate part of the assets.

In our opinion these facts present a stronger case for the petitioner Hettman than did the facts in John Robert Brewer, 17 B. T. A. 713, wherein we said:

Respondent contends that since the stock stood in petitioner’s name when the payment was made, he was a transferee of the property of the corporation, thus overlooking the provisions of section 280 to the effect that petitioner must be liable for the obligations of the Oil Company, either at law or in equity. Here petitioner’s liability was purely equitable and his liability was one which could be enforced only upon equitable principles. See Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371; McDonald v. Williams, 177 U. S. 397; and Lawrence v. Greenup (C. C. A.), 97 Fed. 906. Here the right of Kenny to the proceeds of his stock was absolute and his equity was prior and superior to the equity of those asserting corporate obligations, including respondent. The stock was at all times Kenny’s stock and the proceeds were at all times the property of Kenny. It would be exceedingly inequitable to compel petitioner to pay to the Government that which never was his property and which, in compliance with law and good faith he has long since paid to the person absolutely entitled thereto. Cf. Love v. Bracamonte, 241 Pac. 514. We are of opinion that petitioner’s maximum liability was the amount of $3,960, which was the whole amount received by him in his own right.

In view of the foregoing decision we hold that Walter E. Hett-man is not a transferee of the taxpayer within the meaning of section 280 of the 1926 Act, and that the deficiencies in the other proceedings shall be redetermined in accordance herewith. In view of the fact that Kibele is one of the petitioners herein, his liability should be computed upon the basis of the liquidating dividends from the taxpayer corporation, amounting to $8,203.60 plus $1,400.60, which Hett-man received for him.

Decision will be entered, v/nder Rule 50.


author: Trammell:

text:
    Estate of Mary D. Gladding, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31435.
    Promulgated December 20, 1932.

      Samuel Dowden, Esq., for the petitioner.

      B. TJ. Steele, Esq., for the respondent.
   OPINION.

Trammell:

This is a proceeding for the redetermination óf a deficiency in estate tax in the amount of $2,041.33. The sole issue involves a deduction of $91,125 claimed by the petitioner on account of alleged prior taxed property, which deduction respondent disallowed. The decedent died on November 27, 1924.

The Revenue Act of 1924, in section 303 (a) (2), provides that the value of the net estate, in the case of a resident, shall be deter-/ mined by deducting from the value of the gross estate, among other things:

(2) An amount equal to the value of any property * * * forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent * * * where such property can be identified as having been received by the decedent * * * from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. This deduction shall be allowed only where * * * an estate tax under this or any prior act of Congress was paid by or on behalf of * * * the estate of such prior decedent * * * and only in the amount of the value placed by the Commissioner on such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate * * *.

The deduction here in question is claimed under the above quoted provisions of the statute, and is based on the following facts established by the record: On June 1, 1919, Sarah F. Atkins, the prior decedent, sold to her daughter, Mary D. Gladding, the present decedent, 675 shares of the capital stock of E. C. Atkins & Company, at $135 per share, or the total agreed consideration of $91,125. Mary D. Gladding at the time of the transaction executed and delivered to her mother, said prior decedent, two promissory notes in the aggregate amount of $91,125, payable on or before ten years after date, with interest at the rate of 6 per cent per annum, and the shares of stock were pledged as collateral to secure the payment of the notes.

Sarah F. Atkins died testate on September 30, 1920, at which time Mary D. Gladding had not paid any portion of the principal of the promissory notes and they were included in the estate of Sarah F. Atkins, the prior decedent, at face value and interest unpaid, and the estate tax was duly paid thereon. The stock so purchased by Mary D. Gladding, which was of the value of $146,250 at the time of her death, has been included by the respondent in determining the deficiency herein involved against her estate. Mary D. Gladding died within five years of the death of the prior decedent.

By her will, Sarah F. Atkins devised and bequeathed one-fifth of her estate to her said daughter, Mary D. Gladding, which one-fifth interest exceeded in value $91,125.

Thereafter, the executors of the estate of Sarah F. Atkins, in the course of administration, charged the amount of the notes against the interest of Mary D. Gladding in her mother’s estate and canceled the notes and returned them to her, together with the original certificates representing 675 shares of stock.

On December 26, 1922, subsequent to the death of Sarah F. Atkins and prior to the death of Mary D. Gladding, E. C. Atkins & Company declared a stock dividend of 3% shares of stock for each outstanding share, and Mary D. Gladding then received a stock dividend of 2,250 shares by reason of her ownership of the original 675 shares, making a total of 2,925 shares of this stock owned by Mary D. Gladding at the time of her death.

The 2,925 shares of stock so owned by the present decedent at the time of her death were included in her gross estate, for the purpose of the Federal estate tax, at $50 per share, or a total valuation of $146,250.

The stock dividend received by Mary D. Gladding upon the 675 shares of E. C. Atkins & Company stock has no material bearing on the issue involved in this case. After the receipt of a stock dividend the aggregate number of shares of both the old and new stock represents the same interest in the corporation which was represented by the old stock alone prior to the declaration of the stock dividend. Archbold v. Blair, 30 Fed. (2d) 774.

The question here is whether or not Mary D. Gladding exchanged prior taxed property which she received from her mother’s estate for the shares of stock which the respondent has included in the gross estate of the present decedent. It is clear from the testimony that the value of the note of Mary D. Gladding representing her promise to pay for the stock was included in the estate of her mother, Sarah F. Atkins, the prior decedent. This note was satisfied out of funds of the prior decedent coming to Mary D. Gladding as a beneficiary of that estate, and as a result she received the stock relieved from any lien for the purchase price. In effect, she received funds from the prior decedent with which she paid the purchase price of the stock. The situation is not different from a case where a second decedent takes funds from a prior decedent on which the estate tax has been paid and purchases stock. We accordingly hold that the stock, to the extent of the value of $91,125, should be excluded from the gross estate of Mary D. Gladding as prior taxed property received as a gift, bequest or devise under the provisions of the section of the statute quoted.

Reviewed by the Board.

Judgment will be entered for the petitioner.


author: Leech:

text:
    Philip D. C. Ball, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40926.
    Promulgated December 21, 1932.

      Abraham Lowenhaupt, Esq., and Stanley S. Waite, Esq., for the petitioner.

      B. P. Hertzog, Esq., P. A. Sebastian, Esq., and John D. Kiley, Esq,, for the respondent.
   OPINION.

Leech:

1. The first issue is whether in 1925 petitioner realized a profit of $18,000, his one-fifth share of the net proceeds of the sale of 10,000 shares of common stock of the City Ice Company of Kansas City, which had been purchased by a syndicate in 1922, together with 1,370 shares of preferred stock of that company, for a lump consideration of $100,000. Petitioner’s one-fifth interest in the syndicate’s stockholdings cost him $20,000 in 1922. None of the preferred stock was sold in 1925. In his determination of the disputed deficiency the Commissioner allocated the total cost of the syndicate’s stockholdings to the preferred stock and included in petitioner’s ■ income the amount of $18,000 as a capital gain.

Sections 202 (a) and 204 (a) of the Revenue Act of 1926 are applicable, and provide that the gain from the sale of property shall be the excess of the amount realized therefrom over the cost of such property. This act does not establish a method for allocating the cost, or other basis for determining gain or loss, to each class of stock so acquired. However, article 39 of Regulations 69 covers the present facts and has' been applied by this Board in similar situations. Cf. Clifford Hemphill, 25 B. T. A. 1351. The rule so established is that, where two classes of stock are purchased in one block, the total purchase price shall be fairly apportioned between each class of stock for the purpose of determining the portion of the cost attributable to each class of stock, but if that be impracticable no profit shall be realized until the total cost shall have been recovered out of the proceeds of sales. The same principle of determining gain or loss on disposition by apportioning the total cost (or other proper basis) between respective classes of stock or rights acquired has been approved by the courts and this Board. Cf. Edgar J. Hesslein, 21 B. T. A. 61; affd., 53 Fed. (2d) 1081; Glenn H. Curtiss, 21 B. T. A. 629; affd., 57 Fed. (2d) 847; Edward Stephen Harkness, 21 B. T. A. 1068; Clifford Hemphill, supra; Alexander D. Falck, 26 B. T. A. 1359.

. Although unsatisfactory in many instances, as here, where the introduction of probably available and admissible evidence would have assisted us materially, the determination of the Commissioner in allocating the entire cost of both classes of stock to the preferred alone is presumptively correct. Wickwire v. Reinecke, 275 U. S. 101; Avery v. Commissioner, 22 Fed. (2d) 6; Alexander D. Falck, supra.

Petitioner seeks to overcome this presumption by showing the common stock had some value, i. e., cost something when purchased, but that it is impracticable to allocate the cost to the respective stocks when purchased, and, therefore, there can be no gain realized .on subsequent sales until the entire original cost of both stocks is recovered. Petitioners are required “ to produce the best available evidence of value which the circumstances and nature of the transactions permitted.” Burnet v. Houston, 283 U. S. 223. The evidence in the present record is very limited. The testimony is that the stock in question was closely held from 1922 to 1925 and that the witness did not know of any sales. Such testimony is certainly not conclusive that there were not other sales at the time that the syndicate purchased the stock in 1922 or that the stock of the City Ice Company was not listed on the stock exchange at or about, that time. Even if there had been no other sale of the stock in 1922, .its market value at that time might be determinable on the basis of the actual or book value of the assets of the corporation. Cf. Warren C. Cartier, 11 B. T. A. 900; affd., 37 Fed. (2d) 894; Estate of Jeremiah Roberts Downing, 12 B. T. A. 1180; T. A. Potter, 14 B. T. A. 784; 8. L. Meyer, Executor, 23 B. T. A. 1201; Alexander D. Falck, supra.

Petitioner offers an unauthenticated balance sheet of the City Ice Company of Kansas City, given to him by the syndicate manager at the time of petitioner’s commitment to the transaction, which he believed to be correct, upon the admissibility of which the presiding Member of the Board at the hearing reserved a ruling. This offer is now refused and the tendered so-called balance sheet excluded. Clearly, this unauthenticated purported balance sheet was purely hearsay as to anything contained therein. However, it is offered for the additional purpose of showing upon what petitioner acted when he purchased the stock, and that petitioner intended to pay some part of the lump consideration for the common stock. The contract of purchase may have properly included an allocation of some part of the consideration to the common stock, but this can not be established by such ex parte intention not shown to have been a part of the agreement when the purchase was made. The undisclosed intention of the petitioner is incompetent to any issue involving a construction of the contract unless necessarily presumed to have been a part of the contract, a circumstance obviously absent in the record here. Lord & Hewlett v. United States, 217 U. S. 340; Farnum v. Whitman, 73 N. E. 473; Klock Produce Co. v. Robertson, 155 Pac. 1044. The only other evidence in the record on this question is the bare sale of this common stock for $100,000 some three years after its purchase. Such a sale is too remote to be alone determinative of value when so purchased. Hemlock Hollow Coal & Coke Co., 10 B. T. A. 1176; Premier Packing Co., 12 B. T. A. 637.

The record discloses nothing upon which we can disturb the Commissioner’s determination and it is sustained.

2. The second issue is whether petitioner realized any profit in 1925 upon the sale of 6,364 shares of stock of the Southland Life Insurance Company for the sum of $225,000. This stock had been acquired in the following manner: 3,884 shares having a fair market value of $128,172, were received in 1915 in exchange for 559.4 shares of the Sam Houston Life Insurance Company which cost petitioner $208,700.65 in 1908; 889 shares were purchased between 1916 and 1921 at a cost of $22,580; and 1,591 shares were received as a stock dividend in 1924.

The exchange of 559.4 shares of Sam Houston Life stock for 3,884 shares of Southland Life stock in 1915 was the result of a merger of those two corporations, in which transaction all of the stockholders of the former exchanged their stock for stock, solely, of the latter.

Such merger constituted a reorganization as that term is defined in section 203 (h) (1) (A) of the Revenue Act of 1926 and the exchange was one described in section 203 (b) (2) of that act, that is, stock was exchanged solely for stock in another corporation a party to the reorganization. Cf. Robert D. Green, 24 B. T. A. 719; W. A. Holt, 23 B. T. A. 804.

The principal question to be determined is the proper basis to be used in ascertaining gain or loss. The applicable provision of the Revenue Act of 1926 is section 204 (a) (6). Cf. W. A. Holt, supra, David B. Gann, 23 B. T. A. 999; affd., Gann v. Commissioner, 61 Fed. (2d) 201; certiorari denied, 287 U. S. 650. This section provides:

Seo. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
* * 5}! * * * V
(6) If the property was acquired upon an exchange described in subdivision (b) (d) (e) or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. * * *

It is immaterial that the exchange occurred prior to the effective date of the Revenue Act of 1926, because section 204 (a) (6) expressly provides that, in determining the basis thereunder, there shall be taken into consideration gains or losses recognized upon the exchange under the law applicable thereto, that is, prior revenue acts. Section 203 is referred to only for the purpose of describing exchanges within the purview of section 204 (a) (6).

Upon the exchange in 1915 petitioner received stock having a f ait-market value in an amount of $80,528.65 less than the cost of the stock exchanged. That part of the above quoted provision which prescribes that the basis shall be “ decreased in the amount of loss * * * that was recognized * * * under the law applicable to the year in which the exchange was made,” necessitates reference to the Revenue Act of 1913, which was “ the law applicable ” in 1915. Section II B of the Revenue Act of 1913 provides “ That in computing net income for the purpose of the normal tax there shall be allowed as deductions: * * * fourth, losses actually sustained during the year, incurred in trade * * *.”

Was the loss of $80,528.25 sustained upon the exchange in 1915 one “ incurred in trade ” and thus recognized by the Revenue Act of 1913 as a deductible loss ? If so, the Commissioner’s computation, as set out in our findings, is correct, for therein the cost basis of the stock exchanged is “ decreased in the amount of loss to the taxpayer,” as provided in section 204 (a) (6) of the 1926 Act. If not, the taxpayer must prevail. The evidence proves conclusively that petitioner was not engaged in the trade or business of buying and selling or trading in stocks or securities. He was engaged in engineering-projects and more particularly the business of building and operating ice and cold-storage and power plants. He never engaged in the insurance business and the purchase of the Sam Houston Life Insurance Company stock was merely an isolated investment. Upon the merger of the Sam Houston Life with the Southland Life in 1915, the exchange of stock in the former for stock in the latter corporation, by petitioner, was merely incidental to that investment and constituted an isolated transaction not “ incurred in trade.” Cf. Mente v. Eisner, 266 Fed. 161; Isabelle H. Bonbright, 22 B. T. A. 668. Accordingly, the loss of $80,528.25, sustained upon the exchange, was not “recognized * * * under the law applicable to the year in which the exchange was made,” within the purview of section 204 (a) (6) of the 1926 Act. Cf. David B. Gann, supra. The Commissioner erred in decreasing the cost basis of the stock exchanged by’the amount of $80,528.25.

On brief the Commissioner contends that even though petitioner prevailed as to the questions above discussed, he has failed to establish a necessary factor, namely, the March 1, 1913, value of Sam Houston Life stock. The sale occurred after the effective date bf the Revenue Act of 1926 and section 204 thereof provides the method for determining the basis to be used in ascertaining gain or loss. We have discussed the application of subdivision (a) (6). Its effect in the instant case is that the result ,is the same as if petitioner had sold in 1925 the original stock acquired in 1908, and the basis fox-determining gain or loss would be the cost or March 1, 1913, value, whichever is greater, as provided in subdivision (b) of section 204. Here, it .is immaterial that the March 1,1913, value of the Sam Houston Life stock is not proven, for, if less than cost, the latter is the correct basis, and, if greater than cost, the only result would be an increase in the loss now claimed by petitioner.

Petitioner’s gain or loss on the transaction involved in this issue should be computed as follows:

Cost of 559.4 shares of Sam Houston Life exchanged for 3,884
shares of Southland Life-$208,700. 65
Add:
Cost of 889 shares purchased 1916 to 1921- 22, 580. 00
By stock dividend of 1,591 shares in 1924_
Total cost of 6,364 shares (basis)- 231,280.65
Subtract:
Selling price 6,364 shares in 1925- 225, 000. 00
Capital loss sustained in 1925_ 6,280.65

3. The third issue is whether petitioner realized in 1926 a taxable profit of $342,635, as determined by the Commissioner, when in that year he received 15,350 shares of common stock of the City Ice & Fuel Company in exchange for 8,223 shares of common stock of the Federal Cold Storage Company and $10 in cash. The latter stock was purchased by petitioner in 1922 at a cost of $41,115 and had a value of $383,740 at the date of exchange. The City Ice & Fuel Company stock received by petitioner had a present value of $383,-750. The transaction involving this exchange was one by which the City Ice & Fuel Company acquired from the stockholders of the Federal Cold Storage Company all of the latter’s outstanding common stock in exchange for 19,575 shares of its own common stock and $210,625 in cash. The City Ice & Fuel Company did not acquire any of the outstanding 10,000 shares of nonvoting preferred stock of the Federal Cold Storage Company, which retained its charter and all of its properties and continued to do business as a separate corporation.

Petitioner contends that the profit was not recognized for tax purposes under section 203 (b) (2) of the 1926 Act, since the term “ reorganization ” as defined in section 203 (h) (1) is broad enough to include the transaction by which the City Ice & Fuel Company acquired all of the voting stock of the Federal Cold Storage Company.

The pertinent provisions of the Revenue Act of 1926 are as follows:

Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * * * * * *
[(b)] (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan or reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* * * * * * *
(h) (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) the mere change in identity, form, or place or organization, however effected.
* * * * * * *
[Sec. 2.] (b) The terms “includes” and “including” when used in a definition contained in this Act shall not be deemed to exclude other things otherwise within the meaning of the term defined.

Under sections 202 and 204 of the 1926 Act, petitioner realized a gain, amounting to the difference between $41,115, the cost to him of the Federal Cold Storage Company stock plus $10 paid in cash at the time of the exchange, and the amount of $383,750, the fair market value of the City Ice & Fuel Company stock received in exchange. .Section 203 (a) provides that the entire amount of such gain of $342,625 “shall be recognized,” that is, taxed, unless the transaction in which the exchange was made was one described in section 203 (b) (2). As to petitioner, there was an exchange of stock for stock except for the payment of $10 merely for the purpose of avoiding the issuance of a fractional part of a share. But the question is, Did the transaction involving such exchange, constitute a reorganization? The above quoted section 203 (h) (1) specifically defines the term “reorganization” in four subdivisions, (A), (B), (C), and (D), each of which includes a different type or method of reorganization. Clearly subdivisions (B), (C), and (D) are not applicable. Subdivision (A) defines one type of reorganization as “ a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation).” Congress used the words “merger” and “consolidation ” in their ordinary, accepted and well known meanings. In the instant case there was neither a merger nor a consolidation. Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188. Petitioner urges that the parenthetical clause does not exclude other acquisitions of stock by a corporation which are otherwise within the ordinary meaning of the word “reorganization,” and that the present transaction constituted such an other acquisition. However, the parenthetical clause is not applied directly to the term “reorganization,” but only to “ merger ” or “ consolidation,” and, for the purpose of the taxing act, enlarges the ordinary meaning of the two latter terms by including instances where one corporation acquires at least a majority of the voting stock and also at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all of the properties of another corporation. Pinellas Ice & Cold Storage Co. v. Commissioner, supra; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d), 937.

In the present controversy, there being neither a merger nor consolidation of the Federal Cold Storage Company and the City Ice & Fuel Company, nor an acquisition by the latter of at least a majority of the former’s preferred stock in addition to the common stock acquired, the transaction in which the exchange was made did not constitute a “ reorganization ” and section 203 (b) (2) is not applicable. We conclude that the entire amount of the petitioner’s gain must be recognized and taxed. Cf. Thomas H. Redington, 25 B. T. A. 707.

4. The fourth issue is whether petitioner received in 1926 an ordinary dividend in the amount ox $46,262.57, representing, the undivided profits of the Mountain Ice Company of Delaware on January 3, 1926, on which date petitioner received that corporation’s net current assets in the amount of $95,306.07, pursuant to the terms of the agreement in which he sold all of the capital stock of such corporation to the City Ice & Fuel Co.

Petitioner relies upon paragraphs (a) and (b) of section 201 of the Revenue Act of 1926, which provide in part, (a) that the term “ dividend ” means any distribution made by a corporation to its stockholders, whether in money or in other property, out of its earnings, or profits accumulated after February 28, 1913, and (b) that every distribution is made out of earnings or profits, to the extent thei'eof, and from the most recently accumulated earnings or profits. He urges that, as sole stockholder of the Mountain Ice Company of Delaware, he was able to take out the quick assets or cause that company to distribute them to him, and that, under section 201 (a) and (b), this $95,306.07 constituted a dividend to the extent of that company’s earnings or profits and was therefore taxable only at surtax rates. Petitioner cites Rosenbloom Finance Corp., 24 B. T. A. 763, as controlling. In that case the taxpayer sold all of the stock of the Finch Company and the agreement of sale provided that prior to the sale certain assets of the Finch Company should be distributed to the taxpayer, as a stockholder, and such dividend was duly declared and paid by the board of directors of the Finch Company. After the transfer of the stock, the Finch Company continued in business and did not liquidate. The Board held such dividend to be an ordinary dividend, taxable at surtax rates, and not a liquidating dividend taxable at both normal and surtax rates. In that case it was clear from the records of the company that a dividend had been declared and paid to the taxpayer as a stockholder of the Finch Company. The case is not decisive of the issue here involved.

In the instant case the record does not disclose that petitioner actually did take out the quick assets of the Mountain Ice Company of Delaware or cause that company to distribute them to him while its stockholder, nor does it appear that this company declared or paid any ordinary dividend to petitioner as a stockholder prior to the transfer of the stock to the City Ice and Fuel Company. The evidence indicates that, pursuant to petitioner’s agreement with the City Ice and Fuel Company, he took over the current assets and liabilities of the Mountain Ice Company of Delaware as part consideration for the latter’s stock. Cf. Charles L. Coughlin, 15 B. T. A. 515; William B. Aull, Jr., et al., Executors, 26 B. T. A. 862. Thus the income realized would be taxable as ordinary income at both normal and surtax rates, because it is not shown that the gain was a capital gain. The record is silent as to anything from which we can make a definite finding that the amount of $95,306.07, or any portion thereof, was received by petitioner as an ordinary dividend, paid by the Mountain Ice Company of Delaware to petitioner as its stockholder. Accordingly, the Commissioner’s determination as to this issue must be affirmed.

5. The last issue is whether petitioner realized, in 1926, a capital net gain of $24,930, as determined by the Commissioner, or one of $19,781.40, as contended by him. In that year the petitioner, as a former common stockholder of the Federal Ice Befrigerating Company, received $24,930 upon the final distribution of a trust fund, established out of a portion of the proceeds from the sale of all the outstanding stock in 1922 and held by him as trustee for the stockholders for the purpose of paying. the company’s liabilities and distributing the balance, if any, to the former common stockholders. The amount of $5,145.60 constituted petitioner’s pro rata share of the income realized from the trust fund during the years 1922 to 1925, inclusive, and on which the trustee paid income taxes. His pro rata share of the balance of the consideration for the stock left in his hands, as trustee, after payment of the Refrigerating Company’s liabilities, amounted to $19,784.40. 3STo question has been raised as to the taxability of the latter amount as a capital gain realized in 1926 from the sale of stock in 1922. Petitioner contends that the $5,145.60 did not constitute taxable income when distributed to him by the trustee in 1926.

Sections 219 of the Revenue Acts of 1921, 1924, and 1926, in effect during the life of the trust in question, impose an income tax upon the income received by a trust or estate and provide that the fiduciary shall be responsible for making a return and paying the tax thereon, except that under certain conditions income may be deducted from the gross income of the trust or estate and be included in the income of the beneficiary or distributee. In the instant case the facts do not disclose what the terms of the trust were with regard to the disposition of income derived from the corpus of the trust during the period pending settlement of the liabilities of the Refrigerating Company. However, the facts do disclose what actually transpired. The trustee received the income, accumulated the same, and paid the tax thereon. There is no evidence of record that this tax was not properly paid. No contention is made that income was properly distributable by the trustee and taxable to the former stockholders in each of the years in which it was realized. It has been stipulated that of the amount of $24,980 received by petitioner in 1926 upon final distribution of the trust, $5,145.60 represented his pro rata share of the net income of the trust. Necessarily, we assume that the latter amount was distributed to him as a portion of the accumulated net income of the trust which had theretofore been taxed.

In the case of Elnora G. Haag, 19 B. T. A. 982, we said:

* * * The scheme of taxing income under the revenue acts does not contemplate that income of an estate be taxable both to the estate and to the beneficiary in the same year. Furthermore, we think that it was not intended to tax such income to the estate in one year and to the beneficiary in another. The Commissioner has so interpreted the law in Regulations 65, article 344. We are therefore of the opinion that when income received by an estate is properly included in the gross income of the estate under the provisions of the Revenue Act and is not permitted to be deducted from the gross income of the estate and charged to the beneficiary for income tax purposes under the provisions of the Revenue Act, such income may never be included in the gross income of the beneficiary.

Article 344 of Regulations 65 is to the same effect as article 344 of Regulations 69, which provides in part: “Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries.”

The Commissioner erred in including the amount of $5,145.60 in petitioner’s income for the year 1926, either as a capital gain or otherwise.

Reviewed by the Board.

Judgment will be entered pursuant to Bule 50.