author: Smith :

text:
    The Nashville, Chattanooga & St. Louis Railway, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33799.
    Promulgated November 23, 1931.

      Chester A. Gtoiwn, Esq., for the petitioner.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Smith :

1. The petitioner admits that our decision in Chicago & North Western Railway Co., 22 B. T. A. 1407, is controlling with respect to its contention that $3,980.31 of the aliquot part of the premiums in issue for each of the years 1921, 1922, and 1923 should be included in gross income of those years. In that decision we held that amortization of premium on bonds issued subsequent to March 1, 1913, shown by petitioner’s books of account as an accrual of 1920, constituted taxable income of 1920. The petitioner contends, however, that no portion of the premium received in 1915 from the sale of petitioner’s boncks should be added to the petitioner’s gross income for the years 1921, 1922, and 1923, or, what amounts to the same thing, that no.; portion of such premium should be deducted from the discount permitted as a deduction from gross income by the Commissioner’s regulations, article 545 of Regulations 62. \

Since this proceeding was submitted and since briefs were filed, the Circuit Court of Appeals for the First Circuit, on June 10, 1931, decided the case of Commissioner v. Old Colony R. R. Co., 50 Fed. (2d) 896. The court stated:

The question to be solved in the case ?:t bar is whether profit arising from the sale of the bonds [sold between 1803 and 1904] may be taken into account in determining the expense to be allowet. the Old Colony as a deduction [for 1921]. If the books were kept on a cash basis the deduction allowable would be the interest paid on the bonds, and o' ly that, as that would be the cash disbursement for the year. The Commissioner contends, however, that the real expense in connection with the payment ¾ the interest on the bonds is the amount of it less an aliquot part of the profit, apportioned to the year 1921, amounting to $6,060.64, as the bonds cost .the company less than the amount represented by the rate of interest.
* * * In Western Maryland Ry. Co. v. Commissioner, 33 F. (2d) 695, a corporation whose bonds were sold at a discount was allowed to figure the proportionate part of the discount as an expense for the year. The same principle applies to the case at bar. If a corporation is allowed to show a greater expense for a given year by add ng a proportionate part of a loss on the sale of bonds, there seems no reason to deny to the taxing authorities the right to show a smaller expense by deducting the proportionate part of a. gain on a sale of bonds.
Such a result may seem contrary to the case in this circuit of Commissioner v. Old Colony Railroad Company, 26 F. (2d) 408, which involved a similar state of facts. The decision was that a profit made in 1904, before the passage of the Sixteenth Amendment to the Constitution of the United States, could not be taxed. The court’s attention was not called to the fact that the profit made in the early years was not being taxed, but that it was being used only to determine the expense for the year 1921 of the payment of interest on the bonds. This is not a tax but an allocation, under proper accounting methods for books kept on the accrual basis, of the expense chargeable to the year 1921. See Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 989, 1029.

Tlie above cited case is confirmatory of the Commissioner’s regulations, article 545 of Regulations 62. By including in the gross income of the taxable years 1921, 1922, and 1923 an aliquot part of the premiums received by the petitioner in the years 1915 and 1916 the respondent is not attempting to again tax as income an amount of income upon which the petitioner has already paid income tax, but is simply attempting to reach a correct net income under the methods of accounting employed by the petitioner in keeping its books of account for 1921, 1922, and 1923. Clearly, from an accounting standpoint, it is as correct to include in the gross income an aliquot part of the premium upon bonds issued many years before us it is to permit a deduction from the gross income of an aliquot part of the discount upon bonds which may have been issued many years before. The Commissioner has not attempted to disallow the deduction from gross income of any part of the discount upon the petitioner’s bonds outstanding, regardless of the date of issue. The contentions of the respondent upon this point are sustained. See Connecticut & Passumpsic Rivers Railroad Co., 24 B. T. A. 394.

2. The second issue involved is whether or not the respondent erred in arriving at the net loss of the petitioner for 1921 by including in petitioner’s gross income for that year $121,289.72 received by the petitioner from the Director General of Railroads in final settlement of the matters growing out of the period of Federal control of petitioner’s properties, as rental interest on the cost of additions and •betterments made to the petitioner’s properties by the Director General during the period of Federal control.

The agreement between the Director General of Railroads and the petitioner, dated April 10,1919, provided in section 7 (d) that:

Upon the cost of additions and betterments, less retirements in connection therewith, and upon the cost of road extensions, made to the property of the Company during Federal control, the Director General shall, from the completion of the work, pay the Company a reasonable rate of interest, to be fixed by him on each occasion. In fixing such rate or rates he may take into account not merely the value of money but all pertinent facts and circumstances, whether the money used was derived from loans or otherwise, provided that to the extent that the money is advanced by the Director General or is obtained by the Company from loans or from the proceeds of securities the rate or rates shall be the same as that charged by the Director General for loans to the Company or to other companies of similar credit.

Pursuant to the provisions of the agreement, and subsequent to the relinquishment of the petitioner’s property by the Director General, and on JanUary 22, 1921, the petitioner filed a claim with the Director General setting forth the amount claimed to be due to and from the petitioner from and to the Director General, among which was a claim of $155,956 due to the petitioner on account of rental interest on the cost of additions and betterments made to petitioner’s property by the Director General during the Federal control period. On November 16, 1921, petitioner filed a revised claim in which it made no change in its claim for rental interest. On December 5, 1921, petitioner and the Director General entered into a final settlement of all matters set forth in the claim of the petitioner, by which the Director General allowed to the petitioner the amount of $121,289.72 on its claim for rental interest. In the computation of petitioner’s tax liability for 1921 the respondent included in the petitioner’s gross income the above amount of $121,289.72. The record does not show whether this amount was taken up on the petitioner’s books of account as income of 1921 or of prior years. The petitioner claims that such an item was not income to it in 1921 but that the amount thereof should be spread over the period of Federal control during which the interest was earned by the petitioner.

This issue is decided in favor of the petitioner, in accordance with Texas & Pacific Railway Co., 9 B. T. A. 365; Chicago, Rock Island, & Pacific Railway Co., supra; Old Dominion Steamship Co., 16 B. T. A. 264; affd., 47 Fed. (2d) 148; Indiana Harbor Belt Railroad Co., 16 B. T. A. 279; Kansas City Southern Railway Co., 16 B. T. A. 665; Missouri Pacific Railroad Co., 22 B. T. A. 267.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Estate of T. S. Martin, Deceased, J. Earle Martin, Jules T. Martin and Howard V. Martin, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent. T. S. Martin Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43739, 44583, 45001.
    Promulgated November 23, 1931.

      William D. Harris, Esq., and William J. Neale, Esq., for the petitioners.

      Miles J. O'Oonnor, Esq., for the respondent.
   OPINION.

Van Fossan:

In the case of Julia Butterworth et al., 23 B. T. A. 838, the Board, in an exhaustive opinion, reviewed the decisions applicable to the facts here presented. In that case decedent’s widow elected to take under the will in lieu of dower. In the taxable years the trustees under decedent’s will paid over to the widow the sums to which she was entitled under the will and claimed deductions therefor in computing net income of the testamentary trust. The amounts so paid to the widow, plus the amounts similarly paid to her in previous years, were not equal to the value of the dower interest that she relinquished by electing to take under the will. We held that the amounts paid to the widow were paid to her in satisfaction of her dower right and not distributions of income within the meaning of section 219 (b) (2) of the Bevenue Act of 1924, and hence are not deductible in computing net income of the trust.

In the instant case the same principles govern. The record does not establish the value of decedent’s estate or permit us to determine as a fact that the payments made in any of the taxable years, together with all payments made in previous years, exceed the value of the widow’s dower interest. If this be a fact it was part of the burden of proof assumed by petitioners and may not be left to presumption or assumption. In the absence of contrary proof our conclusion must be that the respondent was correct in disallowing the deduction claimed by the estate. Petitioner introduced no evidence to contradict respondent’s revised computation, which results in a deficiency for 1924 of $1,765.02.

By parity of reasoning we arrive at the same conclusion as to the deductions claimed by the corporation to which the property was transferred as of January 1,1925. The annuity provided by the will was a charge against a particular asset and, when that .asset was disposed of, was a general charge against the remainder of the estate.The three sons of T. S. Martin were the residuary beneficiaries of the estate. When they, as individuals, and not as trustees, organized the T. S. Martin Eealty Company and transferred all the income-producing assets of the estate to that corporation for its capital stock, they necessarily transferred such assets subject to the charge of the annuity. Agnes J. Martin, the widow, took no part in the organization of the corporation, received none of its stock and did not transfer to it the interest she had in the estate. Thus the corporation acquired the income-producing assets encumbered by the annuity charge, and the corporation to this extent stepped into the shoes of the estate. It follows that payments of the annuity by the corporation were stamped with the same character as when made by the estate. They represented capital expenditures made as part of the purchase price of the dower interest. The deductions claimed by the corporation in 1925, 1926 and 1927 on account of the annuity payments were properly disallowed by the respondent.

As to the deficiency of $205 asserted against the estate for the year 1925, the respondent was obviously in error. The assets out of which income grew were transferred to the corporation late in 1924 and thereafter the estate had no income. The annuity was paid by the corporation. Consequently the estate had no tax liability.

The deficiency originally determined against the estate for the year 1924 was $300. By proper pleadings respondent made claim for an increased deficiency for said year and submitted his revised computation thereof, the total deficiency now determined and claimed by the respondent for 1924 being the sum of $1,765.02.

Decision •will loe entered in Docket No. 44583 redetermining a deficiency in the amount of $1,765.02 for the year 1924 and of no deficiency for the year 1925. Decision will be entered for the respondent in Dochei Nos. 4-3739 and 45001.


author: McMahon:

text:
    Emil W. Carlson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43702.
    Promulgated November 23, 1931.

      L. F. Loux, Esq., for the petitioner.

      W. B. Laois ford, Esq., for the respondent.
   OPINION.

McMahon:

It is the contention of tbe petitioner that the full amount of $40,000 paid by him in 1926 to the Chicago Trust Company for its services in procuring a loan of $2,000,000 from the Metropolitan Life Insurance Company of New York to petitioner is deductible in that year as an ordinary and necessary business expense. The respondent has held that this expenditure was in the nature of a capital expenditure which is deductible pro rata over the term of the loan, and has allowed the petitioner a deduction in the year 1926 in the amount of $2,666.67.

Upon substantially similar facts the Board has heretofore held that expenditures made by a taxpayer in procuring a construction loan are not deductible in the year in which paid, but are deductible pro rata over the term of the loan. Julia Stow Lovejoy, 18 B. T. A. 1179.

The petitioner contends that Julia Stow Lovejoy, supra, is not in point, laying stress upon the fact that the expenditures made by the taxpayer in that case were paid to the same party that made the loan to the taxpayer. This is an immaterial distinction between that case and the instant proceeding. In the final analysis, the expenditure made by the taxpayer in the instant proceeding was made for the purpose of procuring the loan and the benefits of such expenditure will extend over the entire term of the loan. The expenditure is thus in the nature of a capital expenditure instead of an ordinary and necessary business expense and is deductible pro rata over the term of the loan.

See also James M. Butler, 19 B. T. A. 718; Central Bank Block Association, 19 B. T. A. 1183; A. W. Henn, 20 B. T. A. 1133; and Charles F. Bachman, 21 B. T. A. 36.

We approve the determination of the respondent.

Judgment will he entered for the respondent.


text:
    Jagerson Fuel Company, Successor to Defnet & Jagerson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19795.
    Promulgated November 23, 1931.

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

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

McMahon:

The petitioner contends that it should be permitted to take as a deduction from its gross income a loss of $25,574.25 which it claims it actually sustained within the taxable year upon the decline in the market value of certain merchandise which it, for all practical purposes, had in its inventory.

The books of account of the petitioner were not produced at the hearing and from the testimony we are unable to determine just how or at what time the purchases and sales were entered therein. It is apparent from the testimony, however, that no book inventory was kept. The quantity of merchandise remaining in the possession of the mills was ascertained by deducting the quantity ordered shipped to the customers of the petitioner from the aggregate total amounts shown on the agreements to purchase.

The petitioner contends that it had title to this merchandise and that, having title, it should be permitted to inventory it and deduct the loss due to the decline in price of the merchandise.

The respondent contends that the petitioner never adopted a proper method of inventorying; that title to the merchandise remained in the seller, and that the agreements were merely agreements to purchase.

All of the agreements were entered into with mills in Wisconsin except one, which was entered into with the Yon Platen-Fox Company of Iron Mountain, Mich., but accepted apparently by the petitioner at Neenah, Wis. Whether they are all Wisconsin contracts or one of them a Michigan contract is immaterial, as the Uniform Sales Act is in force in both States and the supreme court of each State has determined the same question before us, both before and after the enactment of the Uniform Sales Act.

All the purchases were made, as shown by the contracts, f. o. b. cars location of mill. A sale f. o. b. mill, or location of mill, passes title to purchaser when the merchandise is placed on the cars at the mill or other place provided. Schenning v. Devere & Schlregel Lbr. Co., 173 Wis. 20; 130 N. W. 136; State ex rel News Pub. Co. v. Park, 166 Wis. 386; 165 N. W. 289, and cases cited therein; F. W. Stock & Sons v. Capital Cooperage Co., 226 Mich. 405; 197 N. W. 529; Dow Chemical Co. v. Detroit Chemical Works, 208 Mich. 157; 175 N. W. 269; and Detroit Southern R. R. Co. v. Malcolmson, 144 Mich. 172; 107 N. W. 915. The Supreme Court of Michigan in the latter case states in its opinion: “ The words ‘ free on board ’ in such contracts have acquired a settled judicial meaning * * citing Vogt v. Schienbeck, 122 Wis. 491; 100 N. W. 820,

The contract in the Vogt case, supra, was similar to the contracts in this proceeding:

Received of Paul Vogt of Milwaukee, Wis. Five (5) Dollars on account of sale to liim by me, made this 15th day of November, 1902, of 100,000 feet more or less of pine one inch lumber at Eight Dollars per 1000 feet cull and Fifteen Dollars per 1000 feet common or better, now at Stadler’s Mill, f. o. b. cars Butternut, Wis., to be delivered upon demand within two months from above date. Inspection fees paid by both of us.

Therefore, as title to the merchandise covered by such contracts was in the sellers and not in the petitioner, the petitioner may not include such merchandise in its inventory. White Oak Transportation Co., 24 B. T. A. 307.

The determination of the respondent in disallowing the claimed inventory loss is approved.

As we have held that the merchandise purchased under the contract involved herein may not properly be included in the petitioner’s inventory, it is not necessary for us to determine other questions relating to the claimed inventory loss, raised by the respondent.

The petitioner’s alternative contention that, if it should be determined that the respondent properly disallowed the deduction, then the tax ought to be computed under provisions of section 328 of the Revenue Act of 1918 on account of abnormal conditions contemplated in section 327 of the same act, is, we think, without merit. There was some testimony of a slump in prices of wood in 1920 and 1921 ranging from $1 to $3 a cord, but this decline in prices affected all dealers in wood and was not a condition peculiar to the business of the petitioner. Mutual Oil Co. of Arizona, 14 B. T. A. 538. Abnormality is a fact which must be determined in each case and the burden of proof, in this respect is upon the petitioner. See Primrose Tapestry Co., 20 B. T. A. 702; Clark Brown Grain Co., 18 B. T. A. 937; Wright Lumber Co., 17 B. T. A. 814; and Robert Wise Co., 16 B. T. A. 494.

The respondent’s determination of deficiency as shown in the statement attached to its letter of May 22, 1926, is therefore approved.

Judgment will be entered for the respondent.


text:
    Fifth Street Building, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 16627, 29264, 45537.
    Promulgated November 23, 1931.

      Olarlc J. Miiliron, Esq., and Charles E. Wathinson, Esq., for the petitioner.

      M. B. Leming, Esq., for the respondent.
   OPINION.

McMahon:

As to the first error assigned in the proceeding in Docket No. 16627, the respondent in his answer, as amended at the hearing, admitted that the petitioner erroneously reported its net income for the year 1921 as $85,170.97 instead of $80,897.32, and that the net income on which the respondent determined a deficiency for the year 1921 was $87,361.96, having disallowed a deduction of $6,464.64 on account of depreciation of an alleged leasehold. We, therefore, approve this correction of error.

The first question presented for consideration is whether the value, if any, of a certain agreement for lease should be included in invested capital.

The petitioner contends that the contract for lease was, in fact, a ground lease and that from and after March 30, 1921, such leasehold interest was a part of its invested capital, and having issued 6,400 shares of its stock of the par value of $100, the invested capital should be the sum of $640,000 prorated over the remaining 276 days of 1921, or the sum of $483,945.20. It is to be noted that March 30, 1921, is the date of the incorporation of the petitioner and that it was not until May 18, 1921, that the stockholders of the petitioner authorized the purchase of the agreement from Clark J. Milliron and Milliron transferred all his right and interest in and to the agreement for lease to the petitioner.

Respondent eliminated the sum of $483,945.20 from invested capital under section 331 of the Revenue Act of 1921, which provides:

That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1017, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the 'previous owner shall, for the purpose of determining- invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation.

Clearly, since the previous owner, Clark J. Milliron, paid no consideration for the assignment to him of the agreement for lease, the cost of acquisition to him was nothing; and as Milliron received 6,400 shares of the 6,403 shares of the stock of the petitioner outstanding in payment for the assignment of the agreement, an interest or a control of more than 50 per centum of the property remained in him. In fact, he was practically the sole owner at that time, there being only 2 shares held by two other stockholders. He was also the president of the petitioner and was its counsel. There is no ambiguity in the provisions: “ That, if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner).” The statute applies not only to reorganizations and consolidations, but also to a change of ownership of a trade, business or property under conditions set forth therein. Una Gasoline Co., 22 B. T. A. 45; Simplex Engineering Co., 17 B. T. A. 504; Staub Coal Co., 16 B. T. A. 584; Northwestern Motor Car Co., 15 B. T. A. 1276; and East Market Street Hotel Co., 11 B. T. A. 796.

The action of the respondent in this respect is, therefore, approved.

The petitioner further contends that it is entitled to deduct in each of the year’s 1921, 1923 and 1926, on account of depreciation or exhaustion of the leasehold interest acquired by petitioner May 18, 1921, one ninety-ninth of the value of the leasehold, to wit, one ninety-ninth of $640,000. We agree with petitioner that, although no value could be included in invested capital by reason of the limitation of section 331 of the Revenue Acts of 1918 and 1921, the cost as determined from the fair market value of the property acquired for its stock may be used as a basis for computing deductions for exhaustion over the term thereof for the years 1921 and 1923. Ben T. Wright, Inc., 12 B. T. A. 1149.

As to the allowance of exhaustion for the year 1926, we must be governed by the provisions in that respect contained in the Revenue Act of 1926, which are as follows:

Sec. 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that * * * [Exceptions not material herein.]
Sec. 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; * ⅜ ⅜
(8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities,) then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;
sH ⅜⅞ * * * ⅜< ⅜
Sec. 208. (i) As used in this section the term “ control ” means the ownership of at least 50 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

The petitioner acquired the contract for lease on May 18, 1921; The provisions with respect to recognizable gain or loss in a transaction of the kind here involved are the same in the 1921 Act as in the 1926 Act, though stated differently.

Since the facts in this proceeding bring it squarely within the above quoted provisions of the 1926 and 1921 Acts, it follows that for the year 1926, no deduction for exhaustion of the lease is properly allowable.

As a deduction for exhaustion is allowable in 1921 and 1923 it remains for us to determine the fair market value of the property acquired by petitioner.

It appears that petitioner was incorporated March 30, 1921, pursuant to the contract for lease, for the purpose of acquiring this lease. The contract for lease was assigned to C. J. Milliron upon condition that he carry out the provisions of such contract, one of which was to cause the petitioner to execute the lease therein provided for. The lessor corporation had been incorporated, pursuant to the contract for lease, January 15, 1921. Practically, petitioner, although it did not actually execute the lease until May 20, 1921, acquired it May 18, 1921, the date of the transfer to it of the contract for lease by C. J. Milliron and wife. To hold otherwise would be to regard the form rather than the substance of the transaction. See William Penn Hotel Co., 23 B. T. A. 566; Hotel Waldorf Co., 22 B. T. A. 430; and Martha Realty Co., 22 B. T. A. 342. The term of the lease is 99 years commencing January 1, 1921.

As we have found the value of the leasehold to be $640,000, in our opinion, the value may be ratably exhausted over the term of the lease for the years 1921 and 1923. However, under the provisions of the Revenue Act of 1926, no deduction can be allowed on account of the exhaustion of the lease for the year 1926.

Judgment will be entered under Rule 50.


author: Seawell :

text:
    New Colonial Ice Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27726.
    Promulgated November 24, 1931.

      Josef h Sterling, Esg., for the petitioner.

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

Seawell :

In contesting the deficiencies proposed by the Commissioner it is the contention of the petitioner that in determining its tax liability for the period April 14, 1922, to December 31, 1922, it should have the benefit of the net losses sustained by the Colonial Ice Corporation (herein referred to as the “ old company ”) for the calendar year 1921 and the period January 1, 1922, to April 13, 1922, under the provisions of section 204 of the Revenue Act of 1921. In the first place, it is urged that the petitioner and the old company were affiliated and therefore under the principle laid down in Alabama By-Products Oorporation et al., 18 B. T. A. 919, the petitioner would receive the benefit of the old company’s net losses in determining consolidated net income for the period April 14, 1922, to December 31, 1922. We, however, fail to see any basis for affiliation of the two companies. What occurred was that the petitioner’s preferred stock was issued to the old company and its common stock to voting trustees, who in turn issued voting trustees’ certificates to the old company. The old company thereupon redelivered the preferred stock and voting trustees’ certificates so received to the new company, with directions to deliver the preferred stock and voting trustees’ certificates for common stock to such persons as it (the old company) might direct. Thereafter, the stockholders of the old company, with the exception of those owning 247 shares of each class of stock, surrendered their stock to the old company and received from the new company, on direction from the old company, share for share of preferred stock of the new company for preferred stock of the old company and voting trustees’ certificates of common stock in the new company, share for share, for the common stock of the old company. The old company thereupon canceled and retired the old stock so surrendered. The old company then had outstanding only 247 shares of stock and these old stockholders were in no sense stockholders of the new company. And, further, the preferred stock and trustees’ voting certificates for common stock of the new company, which were held available for exchange when the minority saw fit to turn in its stock, were not held by the old company, but by the new. Manifestly, we have here neither the semblance of ownership or control by one corporation of substantially all the stock of another corporation nor substantially all the stock of the two corporations owned or controlled by the same interests, as required by section 240 of the Revenue Act of 1921 in order to permit an affiliated status.

In the next place, as an alternative, it is contended that for the purpose of granting the relief sought the separate legal entities should be disregarded and the new company considered as if it were the “ taxpayer ” which sustained the “ net losses.” We are convinced that this can not be done. The mere fact that the new corporation was incorporated under the laws of the same State as the old corporation does not necessarily mean that each corporation has the same rights, franchises, powers, privileges and immunities. In fact, oue of the very apparent purposes of the formation of the new corporation was to create a corporation which was separate and distinct from the old corporation. In addition to the financial difficulties which faced the old corporation, it was found that a large number of shares of stock had been issued without consideration and that much of this stock had not been recorded on the books of the company. In this situation it was important from the point of view of both the creditors and the bona -fide stockholders that the new corporation to which the assets would be transferred would be something entirely different from the old corporation, spurious stock of which might still be in existence. The certificate of incorporation of the petitioner was submitted in evidence, but not that of the old company, and therefore we are unable to make proper comparison of their likenesses and/or differences. However, we are unwilling to say that because the assets and liabilities of the old company became those of the new and that the stockholders of the old company to whom stock was issued received stock of a like character and amount in the new company, the changes from the old to the new company were mere changes of form which would permit us to say that the petitioner is to all intents and purposes the same “ taxpayer ” as its predecessor. We are accordingly of the opinion that the petitioner may not have the benefit of the net losses sustained by its predecessor for 1921 and the period January 1, 1922, to April 13, 1922. Maytag Co., 17 B. T. A. 182; Standard Silica Co., 22 B. T. A. 97; Athol Manufacturing Co., 22 B. T. A. 105; and Clark Dredging Co., 23 B. T. A. 503.

The parties have stipulated the net income of the petitioner for the period April 14, 1922, to December 31, 1922, and for the year 1923, and the deficiencies should be computed upon that basis.

Judgment will he entered v/nder Bule 60.


text:
    Chicago City Bank & Trust Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13008.
    Promulgated November 24, 1931.

      Samuel B. Pack, Esq., for the petitioner.

      ArtJvwr Garnduf, Esq., and Allin H. Pierce, Esq., for the respondent.
   OPINION.

Seawell :

The principal error assigned in the petition was:

The failure of the Commissioner to find that the taxable net income of the taxpayer for the calendar year 1921 included certain discounts or so-called commissions on mortgage loans that were neither earned nor collected during that year.

However, other parts of the petition, the Commissioner’s answer, the proof submitted and the theory under which both parties have presented the case show that the error assigned improperly states the question at issue. The petitioner is engaged in making loans and when such loans are made the petitioner deducts the commission from the principal of the loan and then delivers to the borrower the balance. The petitioner is on the cash basis. The Commissioner included the commissions in taxable income for the year in which the loans were made, on the theory that the commissions were then received, whereas the petitioner contends that the commissions can not be considered as received until the loans are paid or sold and that therefore the Commissioner was in error in determining that the commissions should be considered as income received by petitioner prior to the time the loans were paid or, in the event the notes representing the loans were sold, when the notes were sold. However, in view of the acts and agreement of the parties and in view of the further consideration that permission might be given to amend the pleadings to conform to the proof, the question will be considered on the basis of the understanding of the parties as to the issue presented.

We are unable to distinguish the question here presented from that considered by us in First Trust & Savings Bank, 11 B. T. A. 1034 (affd., Blair v. First Trust & Savings Bank, 39 Fed. (2d) 462; certiorari denied, 282 U. S. 85), wherein we held that a taxpayer on the cash basis did not receive taxable income to the extent of commissions deducted from the principal in making loans until the loans were paid. The case of Columbia State Savings Bank, 15 B. T. A. 219 (affd., Columbia State Savings Bank v. Commissioner, 41 Fed. (2d) 923), to which the Commissioner refers, is distinguishable from the aforementioned case as well as the case at bar in that the taxpayer there concerned was on the accrual basis, whereas the petitioners in the case at bar and in the First Trust & Savings Bank case were on the cash basis. The contention of the petitioner is accordingly sustained.

Errors were also assigned with regard to certain adjustments to invested capital, but no evidence was offered in those respects and therefore the invested capital as determined by the Commissioner will not be disturbed.

Judgment will be entered under Rule 50.


author: Landson :

text:
    Hailey-Ola Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30962.
    Promulgated November 24, 1931.

      Charles H. Garnett, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Landson :

The petitioner alleges that it is entitled to a deduction for depreciation of its plant, equipment and development in an amount greater than that allowed by the respondent and that such deduction should be computed on a unit-of-production basis. In this record there is no evidence whatever as to the remaining useful life or the salvage value of petitioner’s depreciable assets, which are necessary elements for a computation of deductions for depreciation on either a unit-of-production basis or by the straight method. Kehota Mining Co., 3 B. T. A. 885; Grand River Granel Co., 22 B. T. A. 1124. The respondent’s determination must be approved. Bishoff v. Commissioner, 27 Fed. (2d) 91; Rouss v. Bowers, 30 Fed. (2d) 628; certiorari denied, 279 U. S. 852; Rieck v. Heiner, 25 Fed. (2d) 453; Atlantic Casket Co. v. Rose, 22 Fed. (2d) 800.

The respondent has allowed a deduction for depletion based on cost of petitioner’s coal leases in 1905. The petitioner contends that it is entitled to compute such deduction on the fair market value at March 1, 1913, which it alleges was greatly in excess of cost. The evidence of March 1, 1913, value consists of the petitioner’s net earnings, both prior and subsequent to March 1, 1913, a valuation schedule filed by the petitioner with the respondent for the taxable years 1918, 1919 and 1920, and the testimony of six expert witnesses, whose opinions of value ranged from nothing to $450,000. After careful consideration of all competent evidence, we are of the opinion that on March 1, 1913, petitioner’s leases had a fair market value of $150,000. Since the law under which the petitioner acquired a lease on an additional 640 acres in 1918 had not been enacted at March 1, 1913, such acquisition has been disregarded as an element of value as of that date.

In his brief, counsel for the respondent argues that we must affirm his computation of depletion for lack of proof, inasmuch as the petitioner has failed to establish the estimated recoverable coal reserve of the additional 640-acre lease acquired on December 4, 1918, which the respondent says makes it impossible to determine the estimated reserve of recoverable coal as of the beginning of the taxable year. The Revenue Act of 1918 provides, in section 234 (a) (9), that in computing net income there shall be allowed as a deduction “ a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case.” We do not think the respondent has made “ a reasonable allowance ” for depletion. Depletion deductions are never exact, but are based on an estimate of the recoverable mineral. We have in the record sufficient facts to enable us to estimate the recoverable coal in the additional 640 acres, and since it is clear that petitioner is entitled to a deduction for depletion greatly in excess of that allowed by the respondent, we feel justified in making such an estimate.

The parties have stipulated the estimated recoverable reserve at March 1, 1913, and the production from that time to the end of the taxable year. We have found the March 1, 1913, value to be $150,000. The record contains exhibits showing total production of the original leases, covering approximately 4,000 acres, from the time mines were opened until March 1, 1913, in the approximate amount of 2,042,000 tons. The estimated recoverable' reserve at March 1, 1913, was 2,740,000 tons. Combining the production prior to March 1, 1913, with the reserve at that date, we have a reasonable estimate of the recoverable tonnage contained in the 4,000 acres before any mining was done thereon. Applying such reserve per acre of 1,195 tons, computed for the 4,000-acre tract, to the 640 acres acquired in 1918, we arrive at a figure of 765,000 tons as the reserve to be added in December, 1918. We think a reasonable allowance for depletion may be computed on the value which we have found by using for the reserve at the beginning of the year a figure determined by adding to the stipulated reserve at March 1, .1913, the estimated reserve for the’ 640 acres, and deducting therefrom the number of tons produced from March 1, 1913, until the beginning of the taxable year.

The respondent has reduced petitioner’s invested capital by $36,884.62, which amount, he says, represents a deficit resulting from the payment of dividends in excess of earnings. The only evidence introduced by petitioner on this issue consists of transcripts from its general ledger of the surplus and dividend accounts covering the period from January 1, 1919, to December 31, 1921. As of January 1, 1919, the surplus account shows neither a deficit nor a surplus. Unexplained entries in the account for 1919 leave a balance as of December 31 of $303,127.05. There is nothing to explain the nature of such entries — whether they represent earnings or appreciation of assets. In the deficiency letter it is clear that the surplus account was not accepted by the respondent as being correct. In the absence of other proof the respondent’s determination must be approved.

Prior to the taxable year the petitioner made advances to the Texas Coal Company which exceeded that company’s paid-in capital and surplus. On July 15, 1920, it acquired the capital stock of the Texas Coal Company in payment of such advances and in consideration of the assumption by petitioner of the liabilities of the Texas Coal Company. The consideration moving from petitioner exceeded the paid-in capital and surplus of the Texas Coal Company. Accordingly, the petitioner’s invested capital was not affected. Grand Rapids Dry Goods Co., 12 B. T. A. 696.

Decision will be entered under Rule 50.


author: Lansdon:

text:
    Martin Hotel Company and Affiliated Corporations, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16275.
    Promulgated November 24, 1931.

      R. M. O'Hara, Esq., for the petitioners.

      B. M. Goon, Esq., for the respondent.
   OPINION.

Lansdon:

The waivers adduced in evidence by the respondent prove that the time for the assessment of additional taxes against each of the three members of the affiliated group here involved was extended as provided by law to December 31, 1926. The deficiency notice was mailed on March 23, 1926, which was within the time limit as extended by such waivers. The asserted deficiencies have not been barred by the statute of limitations.

In its report in this proceeding, at page 826, 18 B. T. A., this Board held that the deficiencies asserted against the affiliated group for the year 1919, in the amount of $40,149, had been extinguished by the statute of limitations. The Commissioner erroneously excluded the amount of such deficiencies from the petitioners’ invested capital for 1920. Lancaster Lens Co., 10 B. T. A. 1153; National Products Co., 11 B. T. A. 511; Green River Distilling Co., 16 B. T. A. 395; S. Davidson & Bros., Inc., 21 B. T. A. 638.

Decision will be entered under Rule 50.


author: Murdock :

text:
    The Consolidated Gas Company of the City of Pittsburgh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29050.
    Promulgated November 24, 1931.

      Franli G. Miller, G. P. A., for the petitioner.

      J. L. Bachstrom, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined deficiencies of $289,-351.86 and $53,827.91 in the petitioner’s income and profits taxes for the calendar years 1921 and 1922, respectively. The petitioner alleges that the Commissioner erroneously included in its income for the respective years the sums of $986,625 and $472,404.16, representing the difference between the prices at which it acquired and retired certain of its bonds, and interest coupons attached thereto, and the par value of such bonds and coupons.

The facts were stipulated, as follows:

The petitioner is a corporation of the Commonwealth of Pennsylvania, having its office and principal place of business at 436 Sixth Avenue, Pittsburgh, Pennsylvania. Its business consisted of the manufacture and distribution of gas. On June 16, 1898, it issued for cash at par bonds having an aggregate par value of $5,000,000. The proceeds from the issuance of the bonds were used in-refunding an existing debt, which existing debt was used in the acquisition of properties connected with the business of manufacturing and distributing gas.
On October 1, 1921, the petitioner acquired said bonds of the par value of $1,350,000, with unpaid interest coupons totaling $365,625, for a price of $729,000.
On October 18 and November 17, 1922, the petitioner acquired said bonds of the par value of $005,000, with unpaid interest coupons totaling' $194,104.16, for a price of $326,700.
These bonds were coupon bonds calling for interest at the rate of five per centum per annum. The paper marked “ Petitioner’s Exhibit No. 1 ” is a copy of one of the bonds issued by petitioner. All of the bonds were in the same form. No interest was paid subsequent to that due and payable on February 1, 1916.
The bonds and coupons purchased by the petitioner as aforesaid were retired and cancelled in the years in which acquired.
At the time of purchase for retirement the prices paid for the bonds represented the market value of the bonds outstanding. The decrease in the value of the bonds as compared to the par value was primarily the result of the loss in value of the company’s properties due to the business of manufacturing and distributing gas being terminated as the result of the development of natural gas.
In determining the petitioner’s tax liability set forth in the deficiency notice, and upon which the deficiency in tax set forth in the deficiency notice was based, the respondent, for the year 1921, included as a part of the petitioner’s income the sum of $986,625.00, representing the difference between the par value of the bonds purchased of $1,350,000.00 and accrued interest thereon of $365,625.00, or a total of $1,715,625.00, minus the price paid therefor of $729,-000.00, or the net sum of $986,625.00.
And for the year 1922 the respondent included as a part of the petitioner's income the sum of $472,404.16 representing the difference between the par value of bonds purchased of $605,000.00 and accrued interest thereon of $194,-104.16, or a total of $799,104.16, minus the price paid therefor of $326,700, or the net sum of $472,404.16.

Tlie question in this case, as to whether or not the corporation had income from purchasing its bonds at less than the price at which they were issued, is almost identical with a similar question decided by the Board for the first time in Independent Brewing Co. of Pittsburgh, 4 B. T. A. 870. The principal difference between the two cases is that the Independent Brewing Company suffered a loss for

the taxable year from transactions other than that in which the bonds were repurchased, while in this case there is no proof of any such loss. Despite the fact that a good many Members of the Board never agreed with the majority and at various times indicated their dissents, the Board has heretofore uniformly held that no gain results from such a transaction. In the Independent Brewing case, Bowers v. Kerbaugh-Empire Co., 211 U. S. 170, was cited as authority for the decision. On November 2, 1931, the Supreme Court decided the case of United States v. Kirby Lumber Co., 284 U. S. 1, and it now becomes necessary to determine which of the two decisions of the Supreme Court is controlling in the present case.

In Bowers v. Kerbaugh-Empire Co. the court summarized the facts as follows:

The essential facts * * * ate the loans in 1911, 1912, and 1913, the loss in 1913 to 1918 of the monies borrowed, the excess of such losses over income by more than the item here in controversy, and payment in the equivalent of marts greatly depreciated in value. The result of the whole transaction was a loss.

In the present case there were loans in 1898. However, the evidence does not show the loss of the monies borrowed or the excess of such losses over income by more than the item in controversy. The only evidence on this point is the sentence in the stipulation, The decrease in the market value of the bonds as compared to the par value was primarily the result of the loss in value of the company’s properties due to the business of manufacturing and distributing gas being terminated as the result of the development of natural gas.” The bonds were repurchased at less than the price at which they were issued. But it does not appear that the result of the whole transaction was a loss.

In United States v. Kirby Lumber CVo., supra, the facts were: A loan in 1923 at par, a repurchase later in the same year of some of the same bonds at less than par. The court quoted the Treasury regulations, which provide that if a corporation purchases and retires any of its bonds at a price less than the issuing price, the excess of the issuing price over the purchase price is gain or income for the taxable year, and said: “ We see no reason why the Regulations should not be accepted as a correct statement of the law.” It next discussed the Kerbaugh-Empire Co. case, stating that in that case there had been a borrowing of money repayable in marks or their equivalent for an enterprise which failed. The marks had fallen in value at the time of payment, “ which so far as it went was a gain for the defendant in error,” but the transaction as a whole was a loss. The court then said:

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. We see nothing to be gained by the discussion of judicial definitions. The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here. Burnet v. Sanford & Brooks Co., 282 U. S. 359, 364.

In Burnet v. Sanford & Brooks Co. the Supreme Court pointed out that gain or profit, which is the subject of the tax, must be ascertained on the basis of fixed accounting periods and not on the basis of particular transactions when brought to a conclusion, unless the completed-contract method is used. In that case from 1913 to 1915 the taxpayer was working under a contract with the United States for dredging the Delaware River. In those years it reported the payments made under the contract as gross income and deducted the expenses paid in performing the contract. The total expenses exceeded the payments and the tax returns showed net losses. The work under the contract was abandoned in 1915 and the taxpayer sued to recover for breach of warranty of the character of the material to be dredged and recovered. The question then arose whether, when in 1920 the petitioner received the amount by which its expenses under the contract had exceeded receipts from it, it should report the amounts thus received as gross income. The Supreme Court held that it should report this amount as part of its gross income for 1920, the year in which it received it, even though the amount equaled and in a loose sense was a return of expenditures made in performing the contract. In the opinion of the court such receipts are a part of gross income regardless of whether the particular transaction results in net profit, for only by including these items in gross income for 1920 would it be possible to determine the taxpayer’s net income for the period covered by the return. “ The excess of gross income over deductions does not any the less constitute net income for the taxable period because respondent, in an earlier period, suffered net losses in the conduct of its business which were in some measure attributable to expenditures made to produce the net income of a later period.” The court further held that losses from particular transactions are not to be set off against gains from others unless perchance the two are properly to be accounted for in the same taxable year. In distinguishing Bowers v. Kerbaugh-Empire Co. the court pointed out that in that case the taxpayer had neither made a profit on the transaction nor received any money or property which could have been made subject to the tax.

The facts in the present case differ from those in Kirby Lumber Co. in that in the latter case the repurchase was made in the same year that the money was originally loaned, while in the present case

the repurchase was made in a much later year. But it does not appear that this fact made any difference in the opinion of the Supreme Court for the regulations, which were approved as the correct statement of the law, do not make any distinction in this connection. Nor did the court find any difficulty in the fact that the taxpayer received no money or property in the year. In the Kirby Limber Co. case the court remarked that there was no shrinkage of assets. In the present case the stipulation shows that there had been a shrinkage or loss in value of the company’s properties and that this loss or shrinkage was the primary cause for the decrease in value of the bonds which enabled the taxpayer to repurchase the bonds at less than the issuing price. The repurchase at less than the issuing price was a gain so far as it went, and, as we read the authorities, it was also a part of the taxpayer’s gross income for the year of the repurchase, unless it appears that the money borrowed was lost in an enterprise that failed. So far as we know the present petitioner did not lose the borrowed money in an. unsuccessful enterprise, has suffered no losses in prior years, and may never suffer any loss even though its properties had shrunk in value at the time when the bonds were repurchased. Here as a result of its dealings the petitioner made available assets previously offset by the obligation of bonds now extinct. Therefore, it seems to us that the Commissioner was correct in determining that this petitioner had a gain on the repurchase of its bonds. United States v. Kirby Lumber Co., supra; Burnet v. Sanford & BrooJos Co., supra. The scope of the decision in the Kerbaugh-Empire Co. case is not as broad as was thought in deciding the line of cases beginning with Independent Brewing Co. of Pittsburgh, and that line of cases is no longer authority for a situation such as exists in this case.

If this petitioner kept its books and made its tax returns on an accrual basis, then it must have deducted the face amount of the unpaid interest on its bonds as that interest accrued. In the taxable years it extinguished its obligation to pay this interest for less than the face amount of the coupons. As a result of this deal it made available assets previously offset by an obligation now extinct, and, under the Kirby Lumber Co. and Sanford & Brooks cases discussed above, it has had a gain which should be reported in its gross income. Furthermore, since it had previously deducted the full amount of the interest, it should restore to income the difference between that amount and the amount which it actually had to pay. Cf. Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988; affirmed as to this point in 47 Fed. (2d) 990; Charleston & Western Carolina Railway Co., 17 B. T. A. 569; affd., 50 Fed. (2d) 342. If the petitioner used the cash receipts and disbursements basis, the result might be different, but this fact does not appear from the stipulation. Thus, we must affirm the action of the Commissioner in respect to the interest, rather than reject it without knowing whether or not it was wrong.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Smith:

text:
    Edward D. Untermyer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18836.
    Promulgated November 24, 1931.

      Eugene Untermyer, Esq., Charles 8. Cuggenheimer, Esq., Louis Marshall, Esq., Louis Malthaner, Esq., and Henry Braeh,' Esq., for the petitioner.

      J. Arthur Adams, Esq., and Frank A. Swrine, Esq., for the respondent.
   OPINION.

Smith:

The Revenue Act of 1921 includes in income dividends received and provides:

Sec. 201. (a) That the term “dividend” when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922.
(b) For the purposes of this Act every distribution is made out of earnings or profits, -and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulaled or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares; and (2) the aggregate amount of such distributions received by him thereon.

It is petitioner’s contention that the surplus accumulated by the Canadian corporation and available for distribution in dividends was, in the year of this distribution, insufficient to cover the payment made and accordingly a portion of such distribution was paid out of a depletion reserve representing 50 per cent of its net income for each year since organization, and to that extent did not represent a dividend taxable to him.

The Canadian corporation here in question was incorporated in 1919, and all of its income was derived subsequent to 1913, and there is no issue in respect to the time during which corporate earnings were accumulated.

Petitioner’s contention is based upon the provisions of the Canadian income-tax law, which governs the tax liability of the corporation in question. It appears that under this law, stock dividends are treated for purposes of tax in the same manner as cash dividends. It further appears that under the Canadian law the allowance for depletion made to a corporation engaged in mining is not one based upon the cost of the property or one computed on discovery value, as under the income-tax laws of this country, but is an allowance granted by the Minister of Finance, determined in amount at his discretion, and that it is customary to grant an allowance of 50 per cent of the net income after deduction of depreciation.

A stock dividend of $300,000 was distributed in the year preceding the taxable year here in 'question, and petitioner contends that such distribution reduced the corporate surplus by this amount. It further appears that from the,time of its organization through the calendar year here involved the corporation was allowed, as a deduction from its income for depletion, 50 per cent of its net operating income after allowance of depreciation.

It is petitioner’s insistence that because the corporation is subject to Canadian law we must accept, in determining the corporate surplus available for dividend distribution, the amount of surplus shown upon the corporate books and give full effect to the reductions effected by the stock dividend distribution and by the depletion allowances granted by the Canadian Minister of Finance. It is insisted that, the corporation being subject to Canadian law alone, we must accept the determination of net income as computed and set up on the corporate books in accordance with allowances and requirements of the taxing laws of that country, as a failure to do so would be in violation of the rule of comity.

We do not think that the authorities cited by counsel for petitioner are controlling. We can not see that the doctrine of comity is here involved. We are called upon to make no determination as to the corporation. The effect of our decision is in no way reflected in the corporate business or affairs. Our purpose is solely to determine what portion of a payment made to an American citizen .by this corporation, received by him, and in which the corporation has now no interest, is subject to tax by this Government under the provisions of its laws. The subject matter of the controversy here is the distribution made by the corporation to a citizen of this country, but che question does not arise until after that distribution is effected, and the corporation no longer has any right or interest in the funds. It appears to us to be a wholly unjustified application of the rule of comity to hold that the character of this payment, in the hands of this recipient, an American citizen, is to be determined by application of the Canadian taxing act, merely because the source of the income was in that country.

Petitioner contends that the accumulated and undistributed profits representing the corporate account of existing surplus should be accepted as it stands upon the books, but asks, in the event that the adjustment made by reason of the payment of the stock dividend be disregarded and this amount be restored to surplus, that the depletion reserve as set up be recognized as recovered capital and the deficiency be redetermined by elimination from petitioner’s gross income of that portion of the dividend distributed to him from such reserve. It is insisted that an adverse decision upon the question of the reduction of accumulated profits by payment of a stock dividend does not decide the question in respect to the depletion reserve.

With this contention we can not agree. It appears to us that a decision upon each of these issues is determined by the same question — whether, in determining the character of dividend distributions made by a foreign corporation to a citizen of the United States to ascertain the tax thereon due under the provisions of our laws, we should accept the corporate account of accumulated earnings, as correctly computed for purposes of the taxing laws of the foreign country, or recompute such account to show corporate earnings in the sense in which that term is used in the applicable revenue law of this country by which the tax is imposed. If petitioner is correct in his contention that the reserve for depletion set up under the Canadian Act must be accepted for the purposes of the determination here to be made, we think it must follow that the surplus account as computed under that act must also be accepted.

In this connection we must bear in mind that the stock dividend distributed to petitioner did not represent income under the provisions of our laws, as it did not in fact effect a distribution of corporate earnings. Eisner v. Macomber, 252 U. S. 189; Walker v. Hopkins, 12 Fed. (2d) 262; Hugh R. Wilson, 3 B. T. A. 957; Marion H. Kennish, 4 B. T. A. 303; George W. Megeath, 5 B. T. A. 1274. To accept petitioner’s theory would be to permit him to receive distributions of stock representing the capitalization of all corporate earnings and then to receive distributions of cash to the full extent of his capital investment exempt from tax as a return of capital.

The respondent, in determining to what extent the distribution here in question is taxable under the American Act, has readjusted, for this purpose alone, corporate earnings by elimination of the reduction effected by the $300,000 stock dividend paid, and by inclusion of the amount represented by the excess of the allowance for depletion made by the Minister of Finance of the Dominion of Canada over the depletion allowance based upon cost of the property and allowable under the taxing laws of this country.

Under the applicable revenue act of this country, an American citizen is taxable upon amounts distributed to him by a corporation which represent earnings accumulated by it subsequent to February 28, 1913. For purposes of that act, we think the terms earnings ” and “ profits are to be construed in the sense in which there used. It has been repeatedly held that in construing the Federal taxing acts the terms used are to be considered with the meaning intended by Congress in their use and -not changed or modified by provisions of law of the local jurisdiction. Cf. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110; New York, New Haven & Hartford R. R. v. United States, 269 Fed. 907; Boston & Maine R. R. v. United States, 265 Fed. 578; Rosenberger v. McCaughn, 25 Fed. (2d) 699; James R. Parkey, 16 B. T. A. 441. This rule applies with equal force in case of a foreign corporation in respect to the laws of its domicile.

The depletion reserve in question represents an allowance granted the corporation under the laws of its domicile of a portion of its income exempt from tax, but a portion of this tax-exempt allowance represents corporate earnings in the sense in which that term is used in the taxing act of this country, and, when such earnings are distributed to a stockholder who is a citizen of this country, their character in his hands and for purposes of tax by this Government, is to be determined under the provisions of its laws.

The allowances granted by Canadian law to the corporation are for the purpose only of ascertaining the amount of the exaction by that country from the corporation for purposes of that Government. The provisions of that law can not, we think, be invoked as a basis for determination or in limitation of a liability for tax under the laws of this country in the situation shown here to exist. The action of the Commissioner is approved.

Reviewed by the Board.

Judgment will he entered for the respondent.


author: Lansdon :

text:
    Henry Turrish, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44742.
    Promulgated November 25, 1931.

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

      O. H. Gurl, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent asserts a deficiency in income tax for the year 1926, in the amount of $2,714.04. All errors alleged by petitioner are abandoned except the claim that certain losses sustained in 1924 and 1925 were net losses within the meaning of section 206 of the Revenue Act of 1926, and, therefore should be carried forward to reduce taxable income for the year 1926. The amounts of such losses have been proved or stipulated. In 1925 petitioner sustained a loss in the sale of the stock of the Potlatch Lumber Company, in the amount of $209,160, and other losses in 1924 and 1925, in the respective amounts of $40,016.46 and $118,290.33. The only question at issue is whether he was engaged in a trade or business regularly carried on for profit.

The petitioner is an individual residing at Duluth, Minn., where he maintains an office through which his business affairs are conducted. Before he was twenty-one years old he became interested in the timber and lumber business and for about forty years has been engaged in buying and selling timber lands and, to some extent, in the production of lumber, as disclosed by the following excerpt from his testimony at the hearing:

I started in on the Chippewa River when I was 18, at $15 a month and they paid me off in scrip which I had to discount when I got through at 25 per cent, and I worked in logging camps on a salary for several years on the Chippewa Indian Reservation. Then I went into business myself on a small scale. My means were limited and I speculated a little in land, and I worked in that way and liad quite a thorough knowledge of the woods, and lumber and logging and everything pertaining to the operation and I did not seem to have much difficulty in getting capital to go into it. I started in that way and I was in.the woods a great deal and had men employed in the woods, and we had to look over a great deal of country, several times before we purchased anything. It required very close designation as to quality and quantity of timber. Often times we would find the quantity , and the location would not be accessible and there were a great many things taken into consideration, and I acquired a great deal of the timber and formed corporations, and I formed corporations in other places, and I was called in as an advisor and always took stock in the corporations. I was always a stockholder and I made it a rule early in life that I never took a salary or a commission. I never got a commission for buying or selling stock or timber in my life. The largest salary I ever got was $100 a month when I worked in the office. I worked up to $100 a month and then I went into operating myself. I operated in Wisconsin, Minnesota, Idaho, Washington and Oregon, and also was interested in Florida in two lumber companies— in three lumber companies. One was a lumber company and the other was a timber company. I was a stockholder and an officer in two. The Putnam Lumber Company I was the largest stockholder in. That is in existence yet, that is in Florida. That covers the ground pretty fairly.

Petitioner was a stockholder in every company that he organized and, in most instances, was a director and officer. He controlled and directed the policies of each corporation that he formed. He never received any salary for his services and depended for his profits on the dividends received from the corporations and the gains realized from disposing of the same and subsequent liquidation of his stock-holdings. In almost every instance he financed the corporation which he formed either by the endorsement of corporate paper or direct advances of capital secured on his personal credit. In the years 1924 and 1925 he paid interest on money borrowed to finance his corporations in the respective amounts of $93,825.99 and $155,-169.03, and such payments, far in excess of any receipts from interest due him, resulted in the losses sustained in those years. In our opinion, this interest was paid in connection with the petitioner’s regular business.

The record here is convincing that during his entire business life the petitioner has operated in timber and lumber properties individually and through corporations organized by him for that purpose, and he has had no other major business interest. Timber and lumber operations have been his vocation and this is the test very early applied by the Board. J. J. Harrington, 1 B. T. A. 11. We are of the opinion that the losses sustained by the petitioner in 1924 and 1925 were incurred in the operation of a business regularly carried on and that his tax liability for 1926 should be settled by the application of such losses to his income for that year in conformity with section 206 of the Revenue Act of 1926. Ignaz Schwinn, 9 B. T. A. 1304; T. I. Crane, 17 B. T. A. 120; Harvey H. Ostenberg et al., 17 B. T. A. 738; Ebnore L. Potter, 18 B. T. A. 549; Glen M. Averill, 20 B. T. A. 1196; E. D. Anthony, 20 B. T. A. 5; Harry F. Harper, 20 B. T. A. 143; and J. L. Washburn, 51 Fed. (2d) 949.

Decision will he entered under Rule 50.


author: Marquette:

text:
    Maxwell Goldman, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. L. Cornwell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sam Hamburg, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30302, 30303, 30304.
    Promulgated November 25, 1931.

      Rhodes E. Game, Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Marquette:

Section 280 (a) (1) of the Revenue Act of 1926 provides for collection of income tax from the transferee of property of the original taxpayer. Petitioners contend that that sectioii is in violation of the Constitution. Their contention has been decided, adversely to them, in Phillips v. Commissioner, 283 U. S. 589.

The record shows that petitioner Sam Hamburg, Jr., was not a transferee, as he owned none of the capital stock and received none of the assets of the Maxwelton Amusement Company when its final liquidating dividend was distributed in 1923. But the other petitioners were stockholders and received their pro rata share of the company’s assets. Therefore, if the notices of liability were timely sent to petitioners Goldman and Cornwell, they are liable severally under section 280 (a) (1) of the Revenue Act of 1926 for the full amount of the deficiency against the Maxwelton Amusement Company, to the extent of the assets of the corporation received by them. Phillips v. Commissioner, supra; Grand Rapids National Bank, 15 B. T. A. 1166.

The deficiency here involved relates to income taxes for 1920 under the Revenue Act of 1918. By section 277 (a) (3) of the Revenue Act of 1926 it is provided that income taxes under the 1918 Act shall be assessed within five years after the tax return was filed. In the present instance the Maxwelton Amusement Company filed its return for 1920 on April 9, 1921. Within five years thereafter, on February 25, 1926, the respondent mailed to the company a notice of deficiency. Under section 274 (a) and section 277 (b) of the Revenue Act of 1926 the running of the five-year period of limitations as to assessments was suspended for 120 days from the date of mailing of the deficiency notice, or, in these proceedings, until June 25, 1926. Here, the assessment was made in May, 1926. Section 280 (b) (1) and (d) of the Revenue Act of 1926 limits the assessment of liability against a transferee to one year after the expiration of the period of limitation for assessment against the original taxpayer and suspends the operation of the statute of limitation for 120 days from the date of the mailing of notice of liability to the transferee.

The assessment against the corporation was made within the time prescribed by statute and notices of liability as transferee were mailed to these petitioners on June 13, 1927, which was within one year after the expiration of the period of limitation for assessment against the corporation. Within sixty days after June 13, 1927, the petitioners filed their petitions with this Board. . In view of these facts it is clear that the bar of the statute of limitations does not operate as to petitioners Maxwell Goldman and F. L. Cornwell. Cf. Moritz Hilder, 17 B. T. A. 1189. We therefore hold that petitioners Goldman and Cornwell are liable as transferees of the assets of the Maxwelton Amusement Company to the extent of the assets of said company received by them, and that the petitioner Sam Hamburg, Jr., is not liable as such transferee.

Decision will be entered under Rule 50 in Docket Nos. 3030% and 30303. Decision of no liability will be entered in Docket No. 3030J¡..


author: Marquette :

text:
    St. Louis Southwestern Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 13319, 27768, 33938.
    Promulgated November 25, 1931.

      Olaude W. Dudley, Esq., Chester A. Cwinn, Esq., and E. T. Carter, Esq., for tRe petitioner.

      E. C. Algire, Esq., for the respondent.
   OPINION.

Marquette :

The assignments of error which have been admitted by the respondent necessitate adjustments respecting the deficiencies as follows:

Docket No. 13319.

Taxable income should be reduced by: (1) $1,974.40, contributed to petitioner for construction of spur tracks for private concerns; (2) $1,544.50, with respect of profits on the sale of town lots; (3) $18,724.81, relating to increased inventory values of materials and supplies; (4) $142,799.78, partial reimbursement for cost of equipment retired during the Federal control period; (5) $68,359.78, expenditures for equipment repairs; (6) $2,348.07, a duplicate credit as to one of petitioner’s affiliated companies.

Petitioner’s tax upon income earned during the first two months of 1920 should be recomputed, at the rate of 8 per cent.

The amount of $10,807.58 representing taxes paid by the Director General of Railroads on behalf of petitioner and its affiliated companies should not be allowed as a credit against petitioner’s tax liability for 1920.

Dochet No. £7768.

There should be deducted from petitioner’s gross income for 1922: (1) The amount of $32,333.15, representing an uncollectible account; (2) $5,391.18, cancellation of bill, against the United States War Department; (3) $57 representing fines paid by petitioner; (4) $14,782.55 contributed to petitioner for construction of spur tracks for private concerns; (5) $1,840 contributed by petitioner to the Y. M. C. A.; (6) $326,314.40, the amount by which respondent in his deficiency determination overstated petitioner’s income.

Dochet No. 38938

The petitioner contends that the full amount of compensation allowed for the use of its properties during the period of Federal control was accrued, and constituted taxable income for that period, although the exact amount of such compensation was not determined and allowed until 1923. The respondent’s contention is that so much of the compensation allowed as was in excess of the amount certified as a standard could not be accrued during the Federal control period because such excess was not determined until later, after a long controversy between petitioner and the Director General of Railroads. Respondent’s theory is that the controversy as to the amount was a legal dispute and he cites decisions to the effect that where a taxpayer disputes an alleged liability against him the amount of that liability, as finally determined, can not be accrued prior to such determination.

We do not concur with respondent’s viewpoint. In the present instance the Government did not deny its liability to pay just compensation to the petitioner. That liability was never in dispute. The only question in controversy was one of fact, namely, what amount of money would be just compensation. That question was settled through conferences and negotiations.

The issue here presented has been decided by the Board, adversely to the respondent’s contention, in a number of cases. See Illinois Terminal Co., 5 B. T. A. 15; New Orleans, Texas & Mexico Railway Co., 6 B. T. A. 436; Old Dominion Steamship Co., 16 B. T. A. 264; affd., 47 Fed. (2d) 148; Kansas City Southern Railway Co., 16 B. T. A. 665; affd., 52 Fed. (2d) 372; Missouri Pacific Railroad Co., 22 B. T. A. 267; International-Great Northern Railroad Co., 24 B. T. A. 726. In each of those cases, with the possible exception of Illinois Terminal Co., supra, there was the same situation as that now before us, viz., a controversy between the taxpayer and the Government as to the amount of compensation to be paid, more or less lengthy negotiations, and a final agreement reached after the Federal control period had ended. In each of the above cited cases it was held that the full amount of compensation as finally determined constituted accrued income pro rata over the period of Federal control. In our opinion, the present proceedings can not be distinguished upon the facts, as respondent contends. We conclude, therefore, that the entire amount of compensation allowed to the petitioner and its affiliated companies by the Government should be prorated as income over the period of Federal control. -

What we have held, and the decisions cited, apply with equal force in respect of interest received from the United States upon the cost of additions and betterments. Such interest constituted a part of the just compensation due the petitioner and its affiliated companies and should be prorated over the Federal control period. Texas & Pacific Railway Co., 9 B. T. A. 365; Kansas City Southern Railway Co., supra.

Decision toill he entered under Rule 50.


text:
    Crowninshield Shipbuilding Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18987.
    Promulgated November 25, 1931.

      Philip Nichols, Esq., for the petitioner.

      John D. Foley, Esq., and James 0. Maddox, Esq., for the respondent.
   OPINION.

Smith :

1. The petitioner complains, first, that the respondent has erroneously held that the whole of the amount received by it on certain contracts with the Emergency Fleet Corporation during the years 1918, 1919, and 1920 was income taxable in 1920.

In its brief the petitioner contends as follows:

(a) When a government contract is cancelled and, by agreement between the parties, the contractor is paid his actual cost plus a percentage for profit, loss advances already made, in place of a fixed sum payable by installments as the work progressed, the instalments earned and actually paid in previous years while the contract was in force are not gross income of the year in which (he final settlement is made.
* * * * ⅜ * *
(b) When a government contract is cancelled and an agreement is entered into with respect to the compensation which the contractor is to receive, based on the actual cost incurred by him up to the date of cancellation, and all that remains to be done is an audit by a government agency of the cost of the work already performed by the contractor as shown by his books, the income arising from the agreement, in thé case of a taxpayer keeping his books and making returns upon the accrual basis, is not income in the year in which the audit is completed and the balance paid, if the work was done and the settlement was agreed upon in a previous year.

The respondent defends his computation of taxable net income for 1920 and his action in allocating to that year an alleged profit upon the completion of the contracts by citing articlé 51, Regulations 62, in which it is provided:

* * * Such items as claims for compensation under canceled Government contracts constitute income for the year in which they are allowed or their value is otherwise definitely determined.

In his brief the respondent submits that it is immaterial, so far as the present petitioner is concerned, whether the income from the contracts be allocated to the year 1919 or to the year 1920, for if such income were allocated to 1919, it would serve only to reduce but not to wipe out the net loss for that year, so that in any event the taxable net income of 1920 would not be affected. It is not clear, however, that this is so, for under the regulations of the Commissioner the amortization allowance is to be spread over the amortization period in accordance with the net income assignable to the taxable periods contained therein. See art. 185, Regulations 45.

In United States v. Anderson, 269 U. S. 422, tbe principle was laid down that where a taxpayer makes his tax return upon the accrual basis and all the events have occurred in the taxable year “ which fixed the amount of the [munitions] tax and determined the liability of the taxpayer to pay it,” the tax accrued within the year within the meaning of sections 12 (a) and 13 (d) of the Revenue Act of 1916. The same principle was applied by the Supreme Court in United States v. American Can Co., 280 U. S. 412; Lucas v. American Code Co., 280 U. S. 445; Niles Bement Pond Co. v. United States, 281 U. S. 357; Aluminium Castings Co. v. Routzahn, 282 U. S. 92; Fawcus Machine Co. v. United States, 282 U. S. 375. The Board has also held in numerous cases that the accrual of items of income or of expense is dependent upon whether events have occurred which fix the amount to be received or which fix the liability to pay. Peninsula Shipbuilding Co., 9 B. T. A. 189; Kentucky & Indiana Terminal Railroad Co., 19 B. T. A. 969; American Cigar Co., 21 B. T. A. 464; Brooklyn Union Gas Co., 22 B. T. A. 507.

The contracts which the petitioner had with the Fleet Corporation were fully completed in 1919. ’ The petitioner and the Fleet Corporation had entered into a final agreement in 1919 as to the compensation which the petitioner was to receive under its contracts. All that remained to be done at the close of 1919 was the making of an audit by the representatives of the Fleet Corporation of the petitioner’s books of account for the purpose of determining the cost to the petitioner of the construction of the vessels.

We are of the opinion that the contention of the respondent that all of the income from these contracts was income of 1920 is not sustained by article 51 of Regulations 62, above quoted; for the compensation to be received by this petitioner was fixed by the agreement of October 28, 1919, and the contracts were fully performed within that year. It is furthermore to be noted that the petitioner’s books of account, kept upon the accrual basis, show the income from the contracts as income of the years in which the monies were received from the Fleet Corporation, and not all as income of 1920, in which a small balance due the petitioner was paid. The contentions of the petitioner upon this point are sustained.

2. The amortization issue raised by the petition presents two questions — first, the amount to be amortized, and, second, the allocation or spread of that amount over the amortization period. It is stipulated that the cost of the amortizable facilities was $456,566.62; that the amortization period ended September 30, 1919; and that the facilities on that date had a residual value of $100,341.77. Under the agreement of October 28, 1919, the petitioner was awarded $120,000, which it concedes represents contractual amortization and therefore reduces the amount to be amortized to $236,224.85. The petitioner contends that this is the amount of the amortization to be spread over the amortization period and the respondent admits that this would be the case were it not for the fact that under the contract of July 13, 1922, $155,000 of the indebtedness of the petitioner to the Fleet Corporation was canceled. The respondent contends therefore that the only cost of the amortizable facilities borne by the petitioner was $81,224.85, or the difference between $236,224.85 and $155,000.

Section 234 (a) (8) of the Revenue Act of 1918 is as follows:

In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time within three years after the termination of the present war the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252.

The same section of the Revenue Act of 1921 provides in part as follows:

* * * At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined * * *

Under the above quoted provisions of the taxing acts there can be no question but that the respondent had the right to redetermine the amount of the amortization allowance in the case of this petitioner. In 1922, it was apparent that $155,000 of the cost of war facilities, advanced by the Fleet Corporation and secured by these mortgages, was borne by the Government, which amount was in addition to any amounts borne by the Government under the settlement of October 28, 1919. The respondent has computed the amortization allowance to be $81,224.85. We discover no error in such computation. The fact that the $155,000 cost of war facilities in question was allowed by the Government in settlement of a claim which the Government could not collect in 1922 by reason of the financial standing of the petitioner is not material. The facts are, in the final analysis, that the Government bore the cost of such facilities. In our opinion the decision of the Circuit Court of Appeals for the First Circuit in Tower Co. v. Commissioner, 38 Fed. (2d) 618, supports this proposition. In that case it was held that, in so far as one contracting with the Government under claim for damages by reason of cancellation of a war contract received compensation for obsolescence with respect to its war facilities, to that extent it has not, within the meaning of section 234 (a) (8) of the Revenue Act of 1918, borne the cost of such facilities. It is, therefore, held that the amount of the war facilities to be amortized is the amount determined by the respondent, namely, $81,224.85.

The second question presented with respect to amortization is the allocation or spread of that amount over the amortization period. Article 185 of Regulations 45 requires the amount to be spread in accordance with the net income of the taxable periods comprehended by the amortization period. This regulation has been approved by the Board. G. M. Standifer Construction Corporation, 4 B. T. A. 525; John Polachek, 3 B. T. A. 1051; Williams Harvey Corporation, 16 B. T. A. 752.

It is manifest that the method of allocating the amortization allowance used by the respondent in this case, namely, according to the sales reported by the petitioner’s tax returns for 1918 and 1919, is not in accordance with the Commissioner’s regulations. Furthermore, it is apparent that the income from the Government contracts has not been determined upon the accrual basis; for all of the income from all of the contracts has been allocated to the year 1920. With the correction indicated- in this opinion the amortization allowance should be allocated in accordance with the net income, and deficiencies, if any, determined accordingly.

The final point for decision is whether the petitioner should be allowed to deduct from its gross income of 1920 the cost of its plate and angle shop which it completed in that year and which it claims had lost its .useful value in 1920. The evidence indicates that this shop was started in 1919 and completed sometime in 1920. The petitioner built the plant in the hope that it might obtain contracts for the repair of steel vessels. It was induced to build the plant by statements made by one or more officials of the Fleet Corporation. It obtained no contract for the repair of steel vessels in 1920 and has never made any use of the plate and angle shop. The petitioner had hopes for two or three years that the Fleet Corporation would give it contracts which would enable it to utilize the shop, but after there had been a change of personnel of the Fleet Corporation the petitioner became convinced that it would never be able to utilize the shop which had been built. So far as the evidence shows, the plant was not obsolete in 1920 for the doing of the work for which it was constructed, nor was it any less valuable for that purpose at the close of 1920 than it was at the date of construction. Upon the record the claim of the petitioner to a deduction for the loss of useful value of the plate and angle shop is not sustained. Cf. United States Cartridge Co. v. United States, 48 Fed. (2d) 983.

Eeviewed by the Board.

Judgment will he entered wider Bule 50.