author: Muedock:

text:
    O. Kenneth Hickman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103767.
    Promulgated August 13, 1941.

      William H. Bronson, Esq., for the petitioner.

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

Muedock:

The Commissioner determined a deficiency of $140.20 in income tax for the calendar year 1937. The petitioner inherited certain oil payments and royalties from his father and had his first receipts therefrom during 1937. The question for decision is whether those receipts are tax-free until they equal the value fixed for estate tax on the estate of the father, or whether they are to be included in gross income and deductions allowed for depletion. The Board adopts as its findings of fact the stipulation filed by the parties.

The father of the petitioner died on November 19, 1936. The following table shows an oil payment and royalties inherited by the petitioner from his father, the values at which they were returned for estate tax, and the amount received on each during 1937, the first receipts by the petitioner: ■

The petitioner did not report any part of the 1937 receipts on his return filed in Louisiana. The Commissioner added $1,401.64 to income on account of the royalties and $282.32 on account of the oil payment. He computed those amounts by deducting percentage depletion of 27½ percent from the royalties and cost depletion of 87.775 percent from the oil payment.

The petitioner contends that he is entitled to recover his capital, the value of each interest at the time he acquired it, before he is in receipt of taxable income from that property. The Commissioner argues that the entire receipts are income and the petitioner must recover his basis through deductions for depletion. The Revenue Act of 1936 provides in section 22 (b) (3) that the value of property acquired by inheritance shall not be included in gross income and shall be exempt from taxation, but the income from such property shall be included in gross income. Thus these interests could not have been taxed to the petitioner when he acquired them in 1936, but, in so far as the 1937 receipts are income, they are a part of gross income. The only published opinion directly in point which has come to our attention is that in Commissioner v. Laird, 91 Fed. (2d) 498, by the court to which this case would go upon appeal. That court held that oil payments were an inheritance of a specified amount of money and were not income when received by the heir until the value at date of acquisition had been recovered, but royalties were income from the inheritance and were a part of the gross income of the heir. See also Irwin v. Gavit, 268 U. S. 161, holding that income from a residuary estate was taxable to the recipient, and Paul & Mertens, Law of Federal Income Taxation, sec. 6.03. A purchaser of oil interests is taxable on the later receipts even though he has not recovered his cost through depletion. T. W. Lee, 42 B. T. A. 1217; cf. E. C. Laster, 43 B. T. A. 159. The Board will follow the decision of the court in the Laird case. The case of Burnet v. Logan, 283 U. S. 404, cited by the petitioner, was considered in the Ijaird opinion.

Decision will he entered under Bule 50.


source: Caselaw Access Project

author: MuRDOck:

license: Public Domain

text:
    Louisiana Iron & Supply Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97107.
    Promulgated August 13, 1941.

      Robert A. Littleton, Esq., for the petitioner.

      James L. Baolestrom, Esq., for the respondent.
   OPINION.

MuRDOck:

The owner of an oil payment has a depletable interest in the oil. T. W. Lee, 42 B. T. A. 1217. The respondent does not argue to the contrary. He confuses the receipts from the oil payments with collections on debts which he says were previously charged off. He is in error in stating that these receipts represent collections on bad debts and that the oil payments lost their bases by reason of deductions taken in prior years for bad debts. The partnership took the assignments of the oil payments in discharge of amounts due it for material furnished. The partnership later deducted the cost of the oil payments as losses, not as bad debts. Thenceforth, the oil payments had no cost basis in the hands of the partnership. The oil payments were transferred to the petitioner corporation in exchange for its stock and took the same basis in the hands of the petitioner as they had had in the hands of the partnership. See sec. 112 (b) (5) and sec. 113 (a) (8), Bevenue Act of 1934. Thus, the oil payments had no cost basis in the hands of the petitioner. But the petitioner had never taken a deduction in relation to the payments and was merely obliged to report as gross income any receipts which it had thereafter as owner of those oil payments. It has done that and, indeed, it could have done no more. The Board is not confronted with the question of whether some adjustment should be made because these oil payments were once charged off by a previous owner. The only question before the Board, is the right of the petitioner to percentage depletion under section 114 (b) (3). See, also, sec. 23 (m).

The substance of the argument of tlie respondent is that percentage depletion may not be taken on property which has no basis for gain or loss and for cost depletion in the hands of the taxpayer. He says that the whole purpose of the depletion deductions is to return the cost of the property tax free to the owner and when cost has been returned by any method, no further deductions for depletion are proper. Percentage depletion, however, as provided under section 114 (b) (3), is not based upon cost. It is an arbitrary allowance fixed at “27½ percentum of the gross income from the property during the taxable year.” The words of the statute and the legislative history do not justify the contention of the respondent that percentage depletion is no longer allowable after the cost of the property has been recovered tax free. He has cited no case in point. His rulings are to the contrary. I. T. 2327, C. B. VI-1, p. 18 G. C. M. 14448, C. B. XIV-1, pp. 98, 100. It is possible, and not unusual, for a taxpayer to recover tax free, through percentage depletion, an amount greater than the cost of the property. Commissioner v. Elliott Petroleum Corporation, 82 Fed. (2d) 193. Cf. Thomas v. Perkins, 301 U. S. 655; F. H. E. Oil Co., 41 B. T. A. 130, 134; Cook Drilling Co., 38 B. T. A. 291. It follows that a taxpayer may recover a larger amount tax free through depletion than he could through a sale or other disposition of the property. The statute ignores all such inequalities and allows the deduction regardless of whether or not cost has been recovered. Cf. Second Carey Trust, 41 B. T. A. 800, 807, 808, where no cost was proven. This petitioner had gross income from these properties during the taxable year and had a depletable interest in them. Therefore, it is entitled to the deduction of percentage depletion provided under section 114 (b) (3).

Decision will be entered under Rule 50.


author: MdRdock :

text:
    Loe M. Randolph Peyton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96759.
    Promulgated August 14, 1941.

      Robert L. Garrett, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

MdRdock :

The fact that the decedent was described in the notice as formerly of Colfax is of no consequence, since it was mere sur-plusage and misled no one. Also, it is immaterial here that the petitioner was a special beneficiary and the residuary estate was more than sufficient to pay the income tax. The petitioner and the residuary beneficiary each received a part of the estate and thereby became liable as transferees. The Commissioner could proceed against either or both. Sec. 311 (a) (1) and (f), Revenue Act of 1934. Grand Rapids National Bank, 15 B. T. A. 1166; Henry Cappellini, 16 B. T. A. 802; Sarah M. Hadley, 19 B. T. A. 74; Lehigh Valley Trust Co., Executor, 34 B. T. A. 528. The Commissioner has shown that the petitioner is liable for whatever tax and interest is due.

The net income as adjusted by the Commissioner amounted to $11,664.09 and a personal exemption of $1,250 was allowed. Thus, if all, or a substantial part, of the legal fee of $12,500 is eliminated because it was not “accrued up to the date of his death” within the meaning of section 42, there would be no deficiency. The facts in this case differ from those in the case of Helvering v. Enright, 312 U. S. 636. There the fees involved had been earned by the performance of services prior to the death of the partner and, where additional services were to be performed, an appraisal was made upon the basis of the portion of the total fee already earned. The Court said that the portion of the ultimate fees earned during the life of the deceased partner could be included in his income under section 42. But the fee here in question was not earned during the life of Randolph. It was earned after his death and was received after his death. Thus, it may not be included in his income as an amount “accrued up to the date of his death.”

The surviving partners did not regard it as an amount to which the decedent or his estate was legally entitled, but paid it “as a moral responsibility” or obligation. The respondent says it will escape income tax unless it is taxed here. All we need decide is that it is not taxable under section 42.

Decision will be entered for the fetitioner.


author: Murdock:

text:
    Frost Lumber Industries, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100486.
    Promulgated August 15, 1941.

      E. P. Lee, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner has devoted its brief to the law of real estate contracts in Louisiana. It argues that an irrevocable, binding contract for the sale of land resulted when the Government notified the petitioner on August 23, 1935, of the election to purchase undei the option; ownership passed at that time; title passed when the deed was executed and recorded in December 1935; the Government then became unconditionally bound to pay for the land conveyed; and the petitioner, using an accrual method of accounting, properly accrued the profit in 1935. It says the only thing left to be done was the fixing of the exact acreage by a survey and the examination and approval of title, but the Government was unconditionally bound to pay “in accordance with the acreage found from survey for such titles as were approved.” The petitioner has neglected that accounting question, except to distinguish one case, Lucas v. North Texas Lumber Co., 281 U. S. 11, upon which the Commissioner does not rely. Assuming the correctness of the petitioner’s argument in so far as it relates to the law of Louisiana, it nevertheless fails to support the accrual of the profit in 1935 for Federal income tax purposes.

A taxpayer on a cash basis would not properly report his profit from this transaction until the purchase price was actually paid. That did not occur in 1935. But the date of actual payment is not decisive here, since the petitioner was using an accrual method of accounting. Section 42 provides that all items shall be included in gross income in the year of receipt, “unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.” Decision must depend upon whether or not the profit was properly accrued in 1935. It has been held repeatedly and consistently that amounts are properly accrued for income tax purpose, whether items of income or deduction, when, and only when all of the events have occurred which are necessary to fix the obligation and the amount thereof. United States v. Anderson, 269 U. S. 422; American National Co. v. United States, 214 U. S. 99; Lucas v. American Code Co., 280 U. S. 445; Lucas v. North Texas Lumber Co., supra; Commissioner v. Darnell, Inc., 60 Fed. (2d) 82; United States v. Amalgamated Sugar Co., 72 Fed. (2d) 755; Commissioner v. Union Pacific Railroad Co., 86 Fed. (2d) 637; United States v. Utah-Idaho Sugar Co., 96 Fed. (2d) 756; London-Butte Gold Mines Co., 41 B. T. A. 852; affd., 116 Fed. (2d) 478; Schoellkopf Aniline & Chemical Works, Inc. v. United States, 77 Ct. Cls. 529; 3 Fed. Supp. 417. See also Paul & Mertens, Law of Federal Income Taxation, sep. 11.72.

The above principle decides this case for the Commissioner. All of the events necessary to fix the obligation and the amount thereof, or upon which the calculation of the amount depended, had not occurred by the close of 1935. The record is silent as to the state- of the survey but it shows that the acreage had not been determined, title examination was not nearly completed, approval of any particular acreage was still absent and uncertain, and the amount later to become due as purchase price had not been determined and was not determinable as of the close of 1935. The Weeks Law, brought to the attention of the petitioner in the notice of August 23, 1935, provides that no payment may be made for forest lands until the title shall be satisfactory to the Attorney General. Cases involving the sale of a definite amount of goods for a stated price are hot in point. Cf. Walter M. Hort, 39 B. T. A. 922 (affd., 112 Fed. (2d) 167, and 313 U. S. 28, on another issue). Here, there was in 1935 a possibility, no doubt remote, that the title to none of the acreage would be approved. The amount entered upon the books in 1935 as purchase price was incorrect and based upon the false and unwarranted assumptions that there were 53,947.13 acres in the tract and title to all would be approved. But the petitioner had no way of knowing how much land would be sold and how much would be due it when the transaction finally would be completed. Thus the petitioner had no right to accrue any amount in 1935 as an obligation due it for income tax purposes.

These uncertainties were provided for in the option and acceptance and were fully realized by both parties to the transaction. The option contains statements that the acreage upon which payment should be based was to be determined by a survey to be made by the Government and deeds were to be furnished as the petitioner should be advised by the Government. The notice of election advised the petitioner that the Government was not going to be bound to take or pay for any acreage until it had established the boundaries, had determined the accurate acreage, had examined the title and had had the title approved by the Attorney General as required by law. The deed was not recorded in 1935 at the request of the Government and the recording bound the Government in no way at that time. Later, of course, it accepted the deed as sufficient for the purpose of transferring record title. Even so, the deed purported to convey more acres than were actually sold. The entry by the Government was in accordance with its rights under the option and is not inconsistent with the conclusions reached herein. The fact that the Louisiana authorities collected no taxes on the property fot 1935 loses all significance in the light of the determinative factors already discussed. The condemnation proceeding detracts from the petitioner’s case rather than adds thereto. It is not necessary to determine just what kind of a contract resulted from the acts of the parties, since it is clear that certain essentials for income tax purposes were completed in 1936 and not in 1935. Cf. Number Nine Plantation, 23 B. T. A. 974.

Decision will be entered for the respondent.


author: Hill:

text:
    Estate of A. M. Berry (Also Known as A. Marcellus Berry), Deceased, Hope C. Berry, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Hope C. Berry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102116, 102117.
    Promulgated August 15, 1941.

      George W. 'Williams, Esq., and Wallace O. Greig, G. P. A., for the petitioners.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

The sole issue before us.is whether or not amounts credited to decedent’s account in the .fund are taxable to decedent and his surviving wife, Hope C. Berry, for 1936, the year in which decedent died.

Petitioner contends that the credits to decedent’s account were taxable to decedent in the years credited to his account by the trustees of the fund and not .in 1936. She urges that those amounts were “made available” to decedent and could have been withdrawn by him at any time subsequent to 1926, the year in which decedent completed his tenth year of participation in the fund. Petitioner further contends that, in any event, the shares of Sears, Roebuck & Co. stock were made available to decedent when he pledged the stock to the bank in 1931 or to the trustees of the fund in 1934 and 1935. Petitioner contends, in the alternative, that the fund was in fact a plan for the purchase of stock so that decedent merely obtained the benefit of a bargain purchase. Petitioner asserts that the death of decedent did not cause the stock and cash credited to him to become available to or be distributed to his surviving spouse within the meaning óf section' 165 of the Revenue Act of 1936. finally, petitioner maintains that, since a .portion of the stock which was credited to decedent’s account was derived from stock dividends, that portion could not be taxed to decedent or to Hope 0- Berry because stock dividends were not taxable prior to the year 1936.

Respondent argues that the amounts credited to decedent’s account in the fund did not become available to him and were not distributed to him prior to 1936. He argues further that petitioner is barred by equitable estoppel from claiming that the amounts credited to decedent’s account were taxable in the years credited rather than in the taxable year.

The question of whether the amounts credited to decedent’s account by the trustees of the fund were taxable in the years credited or in the taxable year must be determined by reference to section 219 (f) of the Revenue Acts of 1921, 1924, and 1926, and section 165 of the Revenue Acts of 1928, 1932, and 1934. Although there were minor changes in the phraseology used in the corresponding sections of those acts, we believe that the differences are of no moment so far as these proceedings are concerned. Section 165 of the Revenue Act of 1928 and section 165 of the Revenue Act of 1934 are set out in the margin below.

The same fund which we are here considering was previously before us in Dillis C. Knapp, 41 B. T. A. 23. In that case we held that a participant in the fund was not taxable on credits to his account in the fund until the amounts were actually distributed to him on severance of his employment with Sears, Roebuck & Co. Our holding was that no part of the credits was constructively received by him or “made available” to him so as to be subject to income tax in any year prior to the year in which he withdrew from the fund. After determining that the doctrine of constructive receipt was not applicable, we stated:

* ⅜ * ijijjg reC01.(j clearly demonstrates tliat his right to continue to participate was a Valuable one, the loss of which would have been a serious loss. It was unlike the ordinary investment. The company was' annually making and was required to make substantial contributions to the credit of each participant based upon the amount of his deposits. Only by surrendering his right to further share in such contributions could the petitioner withdraw all of his participation from the fund. He had to surrender his entire right in what was obviously to him a very profitable and desirable opportunity as long as'he could possibly remain a participant in it. It is difficult to conceive of a more important limitation or condition upon a right to receive money than the one which attached to the right of this petitioner.
* * * * * * *
Congress, in enacting section 219 (f) and section 165, above cited, relieved the participants in employees’ trusts of income tax until they had actually received their profits in cash or its equivalent. Prior to that time they might not have had any funds with which to pay the tax. Although the tax upon the entire profit at final distribution may be in excess of what the tax would have been if imposed upon the annual accretions, this circumstance is unimportant in view of the clear language of the statute. * * *

Petitioner, however, contends that the instant proceedings differ from the Knapp case in that here decedent exercised control over the credits to his account in the fund so that they, may be said, to have been “made available” to decedent in the years 1931, 1934; or 1935. Thus, although we said in Dillis C. Knapp, supra, that the credits were not “made available” to the participant while the right to withdraw credits from the fund was subject to a condition that upon withdrawal he could never become a participant in the fund again, petitioner here claims that such condition did not obtain under the facts of this case. In other words, petitioner here claims that the credits to decedent’s fund account were available to him prior to the taxable year without a forfeiture of his right to continue participation in the fund. In support of this contention petitioner cites the fact that decedent pledged the credited securities in 1931, 1934, and 1935 as security for loans and continued to participate in the fund.

The pledging of the credited securities as collateral for loans did not operate to distribute or make available to decedent the securities pledged within the meaning of section 165, supra. The pledged securities remained in the fund until decedent’s death. Only by withdrawal of such credits could they have been distributed or made available to decedent in his lifetime. Decedent at no time made or applied for partial withdrawal under section 7 of article V of the articles governing the fund and there is no provision in such articles which would entitle him totally to withdraw the credits of his account without forfeiting his right to future participation, in the fund. This limitation led us to our decision in the Knapp case. • Decedent elected to continue his participation in the fund and not until his death did he cease to so participate. So long as that election stood, he could not withdraw the amount of his credit and hence while such election stood his credits of cash and securities were neither distributed nor available to him.

Decedent could have exercised, but did not, 'the right of partial withdrawal under section 7 of article Y of- the articles governing the fund without losing his right to further participate in the fund. However, such partial withdrawal would have reduced the quantum of his future participation in the fund and consequently would have required the surrender of such economic or financial advantage as the reduction in participation should entail. Also, such partial withdrawal could have been made only upon his making application therefor. He made no such application. Such right of withdrawal, unless exercised, did not effect a segregation or setting apart from the fund of any part of decedent’s prorated credits therein.. The right was not self-executing to effectuate such result. The credits, in the absence of an application for their withdrawal, remained in the fund as a part thereof under the control and operation of its trustees. The fund was administered as a whole, regardless of the credits therein of individual participants, and the earnings and profits in a current year plus the contributions to the fund in such year, inured to the fund as a whole, but were credited to the participants to designate their respective pro rata interests.therein. The fund remained intact, notwithstanding the wdiole thereof was credited pro rata to participants, until a withdrawal was made by a participant of all or part of the amount of his credits. The trustees had no power to distribute the fund, or any part of it, oh their own initiative. Hence, until a participant exercised his right of withdrawal from the fund, his credit therein represented only a pro rata equitable interest which was not available to him.

We hold that there was no withdrawal of any part of decedent’s credit prior to his death and that prior' to such time no part thereof was distributed or made available to him.

Petitioner’s contention that the fund was in fact a stock purchase plan is unfounded. Reference to the articles governing the operation of the fund will demonstrate that the fund is specifically directed at savings, profit sharing, and pensions and' that the investment in Sears stock was merely to further the accomplishment of this triple purpose.

We see no merit in petitioner’s contention that decedent’s death had no effect in determining the time or the fact of the taxability to the petitioner, Hope C. Berry, of the credits in decedent’s fund account. Under section 2 of article Y of the articles of the fund the death of the decedent ipso facto effected a withdrawal from the fund of the amount of decedent’s credits therein ' and thereupon the securities and cash so credited became available to decedent’s personal representative and his surviving wife, Hope C. Berry. To the extent that the 758 shares of stock and cash credited to decedent at the túne of his death represented income, it was community income of decedent and Ms surviving wife, realized for tax purposes during the lifetime of decedent, and was taxable one-half to each of the spouses individually in the year of decedent’s death. The fact that the stock and' cash credited to decedent at his death was community property properly includable in the community estate of decedent and Hope C. Berry for administration under the laws of Washington in no way affects the taxability of the income represented thereby as above indicated. ■ .

Petitioner’s contention that decedent’s credits had their source in part, in nontaxable stock dividends and ,to that extent .are not taxable is without merit in view of our holding that the income here taxable is that realized .from decedent’s participation in the fund. The amount of the cash plus the value of the stock made, available to petitioner by the death of decedent, less the total of the amounts contributed by him to the fund, is taxable income under section 165, supra, regardless of its derivation.

In view of our holding as hereinabove indicated, it is 'unnecessary to consider the question of estbppel presented by respondent.

Decision will be entered for the respondent.

       SBC. 165. [Rev. Act 1928.] EMPLOYEES’ TRUSTS.
      A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount contributed to such fund by the employer and all earnings of such fund shall be taxed to the distributee in the year in which- distributed or made available to him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25 (a) and (b).
      SEC. 165. [Rev. Act 1934.] EMPLOYEES’ TRUSTS.
      A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25 (a).


text:
    Estate of Felicie Gumbel Keiffer, Carl M. Keiffer, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104991.
    Promulgated August 22, 1941.

      Justin V. Wolff, Esq., and Leon Gahn, Esq., for the petitioner. Donald P. Moyers, Esq., for.the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $1,191.96 in estate tax. The Board adopts the stipulation of the parties as its findings of fact. The only issue for decision is whether' there should be included in the gross estate the value of property which the decédent gave to her husband in 1930. . . •

The decedent and her husband have resided in Louisiana at .all times material hereto. They were married in 1909. The decedent, on July 23, 1930, gave to her husband 210 shares of stock which were her separate property.. She made no reservations in the gift. He held the shares thereafter. She died in 1938. The Commissioner, in determining the deficiency, included the value of the 210 shares in the gross estate. The return was filed with the collector in Louisiana.

The laws of Louisiana gave the decedent the absolute right to revoke the gift at any time but, aside from this law-given right of revocation, she had no right to alter, amend, or revoke the transfer to her- husband. Although she did not expressly reserve any right, the- law gave her the right to revoke her gift. She never exercised it. Furthermore, there was no way by which she could surrender the right given by law. The correctness of these statements is conceded by both parties. The Commissioner contends that the value of the donated shares must be included in the gross estate under section 302 (d) (1) of the Revenue Act of 1926 as amended by section 805 (a) of the Revenue Act of 1936. The petitioner correctly points out that the 1936 amendment is made inapplicable to a gift, such as this, made before June 22, 1936, the date of enactment of the Revenue Act of 1936. See section 805 (b) of that act. Thus the question for decision is whether section 302 (d) (1) of the Revenue Act, of 1926, as amended by section 401 of the Revenue Act of 1934, applies. That provision requires that there shall be included in the gross estate the value of any property “To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, * * *

The petitioner reviews the legislative history of this provision in an effort to show that the purpose of various changes was, in each case, to plug some loophole which permitted avoidance, but the loophole resulting from a law-given right of revocation was neither closed nor intended to be closed until the 1936 amendment, which does not apply retroactively to this gift made before its enactment. He argues that the amendments prior to 1936 were all designed to cover cases where the right was purposely reserved when it could have been, surrendéred, whereas here the donor not only failed to reserve any right but could not avoid or relinquish the right given her by- latv.

The applicable statutory provision requires the inclusion of this property in the gross estate. It is not restricted to the case of a power expressly reserved by the donor. The case of Commissioner v. Allen, 108 Fed. (2d) 961; reversing 88 B. T. A. 871; certiorari denied, 309 U. S. 680, is in point. There it was argued that section 501 of the Revenue Act of 1932, imposing a tax on gifts, did not apply where a minor had made a gift prior to the enactment of the gift tax and had become of age after the enactment. The law gave the minor the right to revoke her gift after attaining her majority. The statutory language of section 501 is not materially different from that of section 302 (d) (1) as amended by the Revenue Act of 1934, on the question of whether it covers a law-given power of revocation. The Board concluded that the language did not cover a gift made prior to enactment of the gift tax and complete except for the law-given power of revocation. The Third Circuit reversed and the Supreme Court denied certiorari. The Circuit Court there discussed and distinguished Helvering v. Helmholz, 296 U. S. 93, relied upon by the present petitioner, and other cases. It said that the difference in the inception of the power to revoke (one retained, the other given by law) was entirely immaterial, since the existence of the power rendered the original transfer incomplete and the transfer was only completed when the power terminated. The same may be said here. This gift remained incomplete and was only completed by the death of the donor. Cf. Emily Trevor, 40 B. T. A. 1241; Marrs McLean, 41 B. T. A. 1266. The decedent made a transfer in 1930, but the enjoyment of the property by her husband was subject at the date of her death to a complete change through the exercise of a power by the decedent alone to revoke. Thus it comes within the statutory language of the 1934 amendment and must be included in her gross estate. Cf. Hughes v. Commissioner, 104 Fed. (2d) 144.

The statutory language here relied upon was the same in the 1926 Act as in the amendments up to' and including that of 1934. The changes made in section 805 (a) of the Revenue Act of 1936 need not be invoked. Futhermore, that amendment did not change the law in respect to a case like this. The amendment retains all of the words of the prior provision relied upon here and adds parenthetically, after “the exercise of a power”, “in whatever capacity exercisable” and, likewise, adds later the words “without regard m when or from what source the decedent acquired such power.” The words “in whatever capacity exercisable” add nothing for the purposes of this case. These changes were “made necessary largely by reason of the decision of the United States Supreme Court in the case of White v. Poor * * *.” House Committee Rept. No. 2818, on H. R. 12793, 74th Cong., 2d sess. The legislators believed that the chaliges were to some extent declaratory of existing law, as shown by the report just cited. We think they were purely declaratory so far as the issue here is'concerned. The loophole “suggested” by White v. Poor, 296 U. S. 98, is wholly unrelated to the present issue. It was that a donor, who had retained no power' for herself but had given the power to trustees, might acquire the :power by becoming a trustee. While the changes may have clarified, they: added nothing to the law as it applied to the present case. ...

Decision will be entered for-the respondent.

       Art'iclft 3749 of the Revised Civil Code of Louisiana provides that “All donations made between married persons, during marriage, though termed inter vivos, shall always be revocable.’* ,
      “The revocation may be made by the wife, without her being authorized to that effect by the husband, or by a court of justice.”


author: Leech :

text:
    Leonhard Felix Fuld, Petitioner, v. Commissioner of Internal Revenue, Respondent. Florentine M. Fuld, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 98205, 98206.
    Promulgated August 22, 1941.

      O. B. Folsom-Jones, -Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Leech :

In their tax returns for 1933, petitioners offset losses sustained from the sale of securities held more than two years against profits made from the sale of securities held less than two years, on the ground that all of such securities were being held in 1933 primarily for sale in the course of a trade or business. Respondent refused to allow the offset, claiming that these losses resulted from the sale of capital assets and were subject to the limitations of section 101 of the Revenue Act of 1932.

Petitioners apparently do not contend that they were engaged in a trade or business prior to their adoption of a new policy in the last quarter of 1930, and even though such a contention were raised, it would have to be rejected. Higgins v. Commissioner, 312 U. S. 212; Miller v. Commissioner, 102 Fed. (2d) 476. Petitioners argue, however, that they adopted a new policy in the last quarter of 1930 and thereafter engaged only in carrying out activities under it which constituted the business of trading in securities. They argue that all their securities which were acquired prior to as well as after that time were being held in 1933 as part of that business. The respondent contends that the petitioners were not engaged in a trade or business in 1933 and, even if they were, the securities purchased before the advent of their new policy were still being held for sale in 1933, in the course of the orderly liquidation of their investment activities and, as such, were capital assets.

The issue is whether or not the securities held for more than two years and sold in 1933 were being held in.that year, primarily for sale in the course of a trade or business.

Some of the securities sold by petitioners in 1933, and held for more than two years, were acquired subsequent to the advent of their new policy and some were acquired prior to that time. Undoubtedly the former were being held in 1933 for sale in the course of the activities of the petitioners occasioned by their new policy of trading in securities. Thus, the determination of whether or not these securities were capital assets is dependent upon whether such activities of the petitioners, in 1933, constituted a trade or business. To- determine this has been held to “require an examination of the facts in each case”, Higgins v. Commissioner, supra; and “a factor of more decisive importance than the volume of transactions lies in whether or not the taxpayer’s market activities consisted in dealing in securities for speculative purposes, or for investment purposes.” Sam J. Reckford, 40 B. T. A. 900.

Despite the investment status of all their activities before, the petitioners maintain that their activities in which they were engaged under their new policy constituted the business of trading or speculating in securities. We are convinced that they have sustained their burden of establishing this fact. Jackson v. United States, 25 Fed. Supp. 613; affd., 110 Fed. (2d) 574; see also Clinton Gilbert, Jr., Executor, 20 B. T. A. 765. The petitioners’ activities were not “limited to doing merely what was necessary from an investment point of view”, and their transactions “were substantial and frequent rather than occasional or isolated.” Alice duPont Ortiz, 42 B. T. A. 173. Moreover, besides devoting a large part of their time to their new activities of buying and selling securities for their own accounts, the principal source of their livelihood resulted from such activities. In our opinion, the petitioners’ activities constituted the business of trading in securities in 1933 and those securities acquired subsequent to the advent of their new business, October 9, 1930, were being held, in 1933, for sale' in the course of that business. Accordingly, we have so found. Commissioner v. Purdy, 102 Fed. (2d) 331, affirming 36 B. T. A. 572; Ignaz Schwinn, 9 B. T. A. 1304; Harriet Pullman Schermerhorn, 26 B. T. A. 1031; cf. Higgins v. Commissioner, supra. Therefore, we hold that the losses from the sale thereof in 1933 are not capital losses within, the meaning of section 101 of the Revenue Act of 1932.

With respect to the securities acquired prior to the advent of the petitioners’ business of trading, and held more than two years, the situation- is different. Gn October 9, 1930, the petitioners commenced activities under their newly adopted policy of trading as distinguished from investing in securities. It may be that some of the investment stock acquired before that date was appropriated to their trading business, but, if so, this record does hot disclose it. See Commissioner v. Purdy, supra. In fact, the record indicates the opposite. Under this new policy, they purchased securities, the price of which, analysis and information indicated, would enjoy a quick rise as distinguished from long term appreciation, which was a moving element in their purchases before October 9, 1930. Before the adoption of the new policy petitioners had purchased securities in “ten, fifteen or twenty share lots” for long term appreciation and interim returns, but thereafter fewer securities in blocks of 100 to 3,000 shares were bought for quick turnover at a small profit per share. Returns on the “new” securities were not as important as they had been under their investment policy.

In order to obtain funds to effectuate this new policy, they began disposing of their investment holdings acquired prior to October 9, 1930. This disposition continued through the taxable year 1933. Thus the question is whether or not the securities acquired for investment purposes prior to the beginning of the petitioners’ security trading business, October 9, 1930, were being held for sale in 1933 in the course of that business.

In our judgment these securities were not so held. They were being held in 1933 for the same purpose as they were held upon the advent of their new policy in 1930, viz., sale, to create a fund in order to purchase securities in which to trade under their new policy. In other words, these securities were being sold in order that the petitioners would have on hand the capital necessary to purchase securities in the course of their business of trading in securities. Despite the fact that petitioners’ security activities before October 9, 1930, did not constitute a business, the securities then purchased were bought for investment as distinguished from trading purposes. At the time they were sold in 1933, we do not think that those securities had lost their character as investment securities. In our opinion they were being held for sale in 1933, not “in the course of” their trading business but, “in the course of” liquidating their investment activities in which they were engaged prior to 1930 and, as such, still remained a part of such activities. We have so found. See Richards v. Commissioner, 81 Fed. (2d) 369; Commissioner v. Boeing, 106 Fed. (2d) 306; certiorari denied, 308 U. S. 619; Florence H. Ehrman, 41 B. T. A. 652; Robert C. Duff, 23 B. T. A. 1343; and George H. Peek, 19 B. T. A. 345. We conclude that the securities in question which were acquired prior to the advent of the petitioners’ new policy, October 9, 1930, were capital assets, and the losses sustained from their sale in 1933 were capital losses subject to the limitations of section 101 of the Revenue Act of 1932.

Since there appears no issue as to the dates on which the securities in question were purchased and their respective costs,

Decisions will be entered under Rule SO.

       Petitioner Leonhard Fuld testified: “In order to carry out this change in policy it became necessary for me to get the requisite funds by the sale of securities which I had acquired prior to 1930, and I went about it. It was a task of Hercules, because I had thousands of holdings, and what I did was take, every week, twenty or thirty holdings and sell them and create a fund, and then at the time I thought was opportune, I invested that accumulated fund in a single new security so that while prior to ,1930 I had purchased securities in ten or fifteen or twenty share lots, after 1930 I began tó purchasé securities in thousand or two thousand or three thousand share lots, with the idea of making a quick turnover and getting a profit on that quick turnover, even if the amount of profit was comparatively small. If I made a single point on a share and I had 3,000 shares, that would be $3,000."


text:
    Waldo W. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vesper Company, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101464, 101465.
    Promulgated August 28, 1941.

      R. H. McRoberts, Esq., for the petitioner.

      Carroll Walker, Esq., for the respondent.
   OPINION.

Leech :

Petitioners contend that the distribution in 1936 was a liquidation of their canceled stock in the West Co. and that they sustained losses, respectively, measured by the difference between the cost of the stock and the payments received in its liquidation. Secs. 115 (c) and (i), Revenue Act of 1936. Respondent determined the present deficiency and now maintains that the contested distribution to the petitioners was taxable to them as an ordinary dividend, on the premise of fact that it occurred “at such time and in such manner as to [be] * * * essentially equivalent to the distribution” of such a dividend, under section 115 (g) of the same revenue act. Petitioners cite and rely particularly upon Kelly v. Commissioner, 97 Fed. (2d) 915. Whether or not the facts in that case and this are effectively distinguishable, it is true that the Second Circuit in the Kelly case stated that “section 115 (g) was intended to cover a situation where there is capitalization of earnings with no honest business object but merely to avoid taxes.” Petitioners therefore argue that the purpose of distribution here was an honest business one and not to evade taxes. But here an admitted purpose of the distribution was to avoid the corporate surtax on undistributed profits. Sec. 14, Revenue Act of 1936.

Did the premise exist upon which the disputed tax was imposed? In its last analysis, section 115 (g), supra, itself, has been said to be as “dispositive” of this question of fact as the decisions construing that section. A. E. Levit, 43 B. T. A. 1077 (on appeal, C. C. A., 9th Cir.).

The officers of the West Co. had been advised, since 1930, that their capitalization was too high. Despite this repeated advice nothing was done about its reduction until 1986. Then it was reduced although the volume of its business had consistently increased from 1932 and, in 3936, was more than double the amount of that earlier year.

However, of more significance, is the situation of the West Co. in 3936. Prior to that year the company had accumulated a capital deficit. During 1936, it enjoyed net earnings, though not in an amount sufficient to repair its deficit. Because of that situation no ordinary dividend could be paid under Missouri law, sec. 5347, Revised Statutes of Missouri 1939; Shields v. Hobart, 172 Mo. 491; 72 S. W. 669, and if the earnings were not distributed the company would be liable for surtaxes on those undistributed profits. Sec. 14, Revenue Act of 1936; Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46. The officers and stockholders of the West Co., upon advice of counsel, met this dilemma by declaring and paying the dividend in question. True, it was designated in the authorizing resolution as a “liquidating dividend.” Stock of petitioners was delivered to the company and was canceled upon its receipt of the stock. The stated capital of the company was formally reduced in the amount of the canceled stock. But, the real reason for all this, we think, was not a belated intent to reduce capital. It was done to legalize the distribution as a liquidating dividend under Missouri law. But that characterization is not effective here. See Gunby, Inc. v. Helvering, 122 Fed. (2d) 203, reversing 41 B. T. A. 884. The alleged price per share at which the stock is said to have been liquidated is not fixed upon any basis of its value, book or otherwise. This “price” was computed solely by dividing substantially all the net earnings for 1936, which it was desired to distribute, among the outstanding shares of capital stock. Thus, net earnings of the company for 1936, alone, were intended to be and' were distributed to petitioners. The company did avoid the imposition of surtax on these earnings, under section 27 of the Revenue Act of 1936. And, each of the three shareholders of the company owned the same proportion of its business and assets after the “liquidation” as before.

We think the distribution in dispute occurred “at such time and in such manner as to [be] * * * essentially equivalent to the distribution” of a taxable dividend. Respondent is sustained.

Decisions will be entered under Bule 50.

       SBC. 115. DISTRIBUTIONS BY CORPORATIONS.
      *******
      (c) Distributions in Liquidation.—Amounts distributed in complete liquidation of a corporation shall be treated as in lull payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. Bor the purpose of the preceding sentence, “complete liquidation” includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital accounts shall not be considered a distribution of earnings or profits.
      *******
      (i) Definition of Partial Liquidation..—As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

       (g) Redemption op Stock.—If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after Bebruary 28, 1913, shall be treated as a taxable dividend.


author: Arnold :

text:
    John C. Scully, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101992.
    Promulgated August 28, 1941.

      J. G. Korri&r, Jr., Esq., for the petitioner.

      David Altman, Esq., for the respondent.
   OPINION.

Arnold :

Petitioner claims as deductions from gross income in the respective years under section 23 (a) of the Revenue Act of 1936, set forth in the margin, the items listed in our findings of fact.

Respondent now concedes that petitioner’s farming activities constituted the carrying on of a trade or business during the taxable years and that the proportionate part of petitioner’s expenses which is attributable thereto, not exceeding 60 percent, is deductible. He contends that the remaining 40 percent is not attributable to ordinary and necessary expenses paid during the taxable year in carrying on a trade or business, and that the problem presented is primarily one of allocation, the formula for which has been approved by the Supreme Court in Higgins v. Commissioner, 312 U. S. 212.

He contends that Higgins v. Commissioner, supra, sets at rest the many confusing and conflicting conclusions reached by the Board and the courts in prior decisions as to what constitutes the carrying on of a trade or business. The questions we have for determination are (1) whether any part of the expenses not allocable to petitioner’s farming activities is attributable to a trade or business carried on by petitioner during the taxable years, and, if no part is so allocable, then (2) the portion of his expenses that is attributable to his farming operations. The Higgins case holds, in line with numerous Board and court cases, that what constitutes carrying on a trade or business depends upon the facts and circumstances in each particular case. While it does not lay down a controlling principle of law applying to cases generally nor define business, it does determine that collecting interest and dividends on securities, keeping accounts, and making limited shifts of securities from time to time in the interest of safety and returns, do not constitute the carrying on of a trade or business, regardless of the amounts involved.

There the taxpayer, in addition to his real estate activities in New York, which were held to constitute a business, owned approximately $16,000,000 of nontaxable securities and $10,000,000 taxable securities. He resided in Paris, France, and his activities were transacted through employees in a New York office maintained by him, and an office in Paris where duplicates of some of his records were kept. He was in almost daily communication with his New York office and personally directed the most important matters both as to his real estate and investment activities. His purchases of securities were small as compared with his total investments. The Commissioner disallowed the deductions claimed on the ground they were not necessary expenses paid in carrying on a trade or business, as the Commissioner did here. On review the Board, 39 B. T. A. 1005, likewise determined and the Second Circuit, 111 Fed. (2d) 795, affirmed, and the Supreme Court approved.

We think petitioner’s activities outside his farming operations did not constitute a trade or business carried on by him, under the authority of Higgins v. Commissioner, supra; City Bank Farmers Trust Co. v. Helvering, 313 U. S. 121, and United States v. Pyne, 313 U. S. 127. He received the royalties, but the gains and profits derived from investments thereof belong to him as life tenant. The re-maindermen had no interest in such earnings and profits. This was true as to the accumulated royalties in the form of securities in which petitioner had invested them. All such earnings and profits inured to the benefit of petitioner. Petitioner had ceased operating the lands included in the lease to him for oil prior to the taxable years and nothing thereafter remained to be done by him except to receive, as a matter of routine, the royalty proceeds from time to time as the royalty was produced and sold. They were his to invest and he invested them for his own use and benefit.

Petitioner kept records of all investments and the interest' and dividends received, keeping in separate lists the securities belonging to the remaindermen and himself. The securities of the remainder-men were in bonds,'while his own consisted of both bonds and stock. But five securities belonging to the remaindermen were sold or called for payment in 1936 and the same number in 1937, and it does not appear that any purchases were made out of funds belonging to the remaindermen in either year. Of his own securities but six were sold or called for payment in 1936 and four purchases were made, and in 1937, eight securities were sold or called for payment and eight purchases were made, and one exchange was effected. These shiftings of securities constituted a very small percentage of his entire holdings, and were not made for profit, but to conserve investments and get interest and dividends therefrom. In 1936 he received approximately $32,000 taxable interest and $65,000 nontaxable interest, and in 1937 his taxable interest was approximately $29,000 and his nontaxable interest $53,000. TIis investment activities were largely in long term securities, with a view to security and interest and dividend earnings.

Petitioner contends that, as he managed the trusts and conserved the estate for the remaindermen, he was engaged in trade or business. He received the royalty proceeds from time to time as paid, it is true, and kept a separate account of the investments belonging to the remaindermen, but as life tenant, entitled to their use and benefit and all the gains and profits therefrom, such management activities were in his own behalf and did not constitute carrying on a trade or business under the applicable revenue act. An impairment of the remaindermen’s assets would correspondingly reduce his own income, as all the gains and profits therefrom were his personal income and he was interested in conserving it and making it' yield as high returns as possible. In the cases above cited the taxpayers likewise managed and conserved the property involved and it was held that in so doing they were not engaged in carrying on a trade or business.

The association dues in the amount of $58.91 and business service in the amount of $58 are not shown to be necessary expense in connection with his business of farm management. These items should be eliminated from 1936 and 1937 deductions. They do not appear itemized as such in his 1937 return but, as we understand the evidence, expenditures were made for these purposes in 1937 and are reflected in the increased amount of miscellaneous office expenses in that year over that of 1936. Eliminating the sum of these two items, $116.91 for both years, and the $396.25 legal expense for 1937, which, petitioner concedes was improperly deducted, leaves total expenses for 1936 of $2,940.96 and for 1937 of $3,050.09 which should be allocated between business and personal expenses of the respective years.

We have found as a fact, based on the evidence in the record and the facts and circumstances deducible therefrom, that approximately 75 percent of petitioner’s time and activity was devoted to his farming operations and that percentage of the above amounts should be allocated to business expense, and the remainder should be disallowed as a deduction in each of the years. In redetermining the deficiency for 1936 effect should be given to the stipulation of the parties eliminating $728 from dividend income of that year.

Decision will be entered wider Rule 50.

       SBC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses.—All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while way from home in the pursuit of a trade or business; » * *


author: MtjRdock :

text:
    Estate of Francis Browne Grinnell, State Street Trust Company and Russell Grinnell, Administrators With Will Annexed, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105092.
    Promulgated August 28, 1941.

      Samuel H. Batchelder, Esq., for the petitioners.

      Mairtin M. Lore, Esq., for the respondent.
   OPINION.

MtjRdock :

The Commissioner contends that no deduction is proper because the claim was founded upon a promise or agreement for which there was not an adequate and full consideration in money or money’s worth. See section 303 (a) and (d) of the Revenue Act of 1926 as amended. He points to a recital in Exhibit B, a part of Exhibit 3 in this proceeding, to the effect that the parties, prior to the divorce decree, had entered into an agreement that the decree should require Francis to pay Elizabeth $1,000 monthly for life in full satisfaction of all rights as alimony or otherwise. The respondent cites cases wherein it was held that claims based upon agreements were not deductible under section 303 (a) and (d). Estate of Eben B. Phillips, 36 B. T. A. 752; Weiser v. Commissioner, 39 B. T. A. 1144; affd., 113 Fed. (2d) 486; Meyer's Estate v. Commissioner, 110 Fed. (2d) 367; certiorari denied, 310 U. S. 651. The petitioners argue that this claim was not based upon an agreement and the cases cited are not in point, since they were based upon agreements, not court decrees.

The petitioners contend that the claim of Elizabeth was based upon the decision of a Massachusetts court of competent jurisdiction in the divorce action. Obviously, this was an enforceable claim against the estate allowed by the laws of the jurisdiction. Cf. Farrington v. Boston Safe Deposit & Trust Co., 280 Mass. 121, holding that the payments go on after the death of the husband. The record does not show clearly the agreement of the parties prior to the decree. But the claim is not based upon any such agreement. It is based upon the decree. Edythe C. Young, Executrix, 39 B. T. A. 230. The judge was required to make his own decision in regard to alimony and was not bound by any agreement of the parties. Oakes v. Oakes, 266 Mass. 150; French v. McAnarney, 290 Mass. 544. He ordered the payments of $1,000 monthly. Since the claim is not based upon an agreement, the question of consideration is immaterial and a deduction is proper. Edythe C. Young, Executrix, supra; Estate of Silas B. Mason,, 43 B. T. A. 813. Cf. Estate of George Tuttle Brokaw, 39 B. T. A. 783; reversed sub nom. Helvering v. United States Trust Co., 111 Fed. (2d) 576.

The parties agree that they can settle the question of credit for Massachusetts taxes.

The claim at the date of death of the decedent was a claim for the payment of $1,000 monthly and the respondent states that the later change by agreement was immaterial. He does not contest the computation of the petitioners or the amount claimed except on one ground. He argues that the value or amount of the claim was necessarily indeterminable because it was to continue only so long as Elizabeth lived and remained unmarried, and there was no way of determining how long she would remain unmarried. The payments might continue as long as she lived even though she remarried. There was a valid claim and it entitled the estate to a deduction in some amount. The Commissioner raised doubts. He has allowed, and proposes to allow, nothing. The petitioners, using the Commissioner’s own tables, have done what they could to estimate the amount of the claim. Their estimate is the best in the record. The estate is entitled to the deduction in the amount of $156,473.04.

Decision will be entered under Rule 50.


author: TueneR:

text:
    Charles D. Ammon and Emah B. Ammon, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of John F. Ammon, Deceased, Charles D. Ammon, Special Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Cushman Motor Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96334, 96335, 96336.
    Promulgated August 29, 1941.

      Thomas S. Allen, Esq., and Harold J. Requartte, Esq., for the petitioners.

      Angus R. Shannon, Jy., Esq., for the respondent.
   OPINION.

TueneR:

We are here concerned only with that portion of Motor Works property purchased by Ammon at the sheriff’s sale on May 16, 1934, and thereafter transferred to Cushman under the contract of August 22, 1934, and our question is whether or not the said property was acquired by Cushman from Motor Works pursuant to a plan of reorganization as the term “reorganization” is defined in section 112 (g) (1) of the Revenue Act of 1934. If so, the property in question retained the same basis in the hands of Cush-man as it had in the hands of Motor Works. Sec. 113.

Counsel for petitioners have refused to rest their claim of reorganization on any specific definition of that term, but claim that the transaction or transactions fall within one or all of the provisions of section 112 (g) (1) (B) to (E), inclusive. They argue that either the stockholders of Motor Works exchanged their stock for the stock of Cushman under section 112 (b) (3) of the act, or that Motor Works exchanged its property, including the property purchased by Ammon at the sheriff’s sale, solely for stock and securities of Cushman under section 112 (b) (4).

The respondent, to the contrary, contends that the property in question was not acquired by Cushman from Motor Works pursuant to a plan of reorganization, but that Ammon acquired it by purchase at the sheriff’s sale and that he or the Cushman Corporation transferred the property to Cushman upon its organization and that the basis for such property in the hands of Cushman is the price paid by Ammon therefor.

The facts show that Motor Works had been dissolved some 17 months before the organization of Cushman and the acquisition by it of the property with which we are concerned and the rule generally is that the dissolution of a corporation ends its existence for all purposes unless by statute the life of the corporation is extended for the purpose of winding up its affairs. See the discussions with respect to the existence of corporations in Pio Crespi, 44 B. T. A. 990; Weber Flour Mills Co., 32 B. T. A. 181; affd., 82 Fed. (2d) 764; and George Wiedemann Brewing Co., 4 B. T. A. 664. Motor Works was a Nebraska corporation and we find nothing in the Nebraska statutes extending the life of a corporation beyond the date of its dissolution. The Nebraska statute provides that upon dissolution the directors or managers of the affairs of the corporation become trustees for the creditors and stockholders, and as such have authority to use the name of the corporation in winding up its affairs and to institute and defend suits necessary thereto, but there is no extension of corporate life.

It is claimed by the petitioners, however, that the dissolution of Motor Works was a part of a plan for its reorganization. A plan for the reorganization of Motor Works had been proposed by Ammon in December 1932, but had been opposed by a number of stockholders on the ground that the stockholders would realize more through the sale of the business as a going concern than through reorganization, and at the annual meeting on January 9, 1933, Fred D. Stone had been instructed to look for a buyer for “the complete assets and business” of the corporation. At the same meeting Ammon had been named chairman of a committee to consider further the idea of reorganization. At or prior to the adjourned meeting of the stockholders on February 18 following, Stone had reported that no buyer for the “complete business” had been found, and Ammon reported that no reorganization had been worked out. The plan as proposed had contemplated the consolidation or merger of Motor Works, the Easy Manufacturing Co., and .the McGrew Machine Co., but, as the result of litigation and disputes within Motor Works, the McGrew Machine Co. withdrew from participation in any plan or plans of reorganization. By February 25, 1933, the situation was such that some action with respect to Motor Works was considered essential, and a special meeting of its stockholders was called for March 6, the declared purpose being that of either reorganizing and raising at least $65,000 in cash, or of dissolving and liquidating. At the meeting so called the action taken was that of dissolution and there is nothing in the resolution of dissolution indicating that the dissolution was pursuant or in any way related to an existing plan of reorganization or that the stockholders, in taking such action, had any thought of reorganizing. The directors were instructed to sell the assets, wind up the business, and make distribution to the stockholders. There was some testimony by Ammon to the effect that his attorneys had advised him that the merger could best be accomplished through the dissolution of Motor Works, but in that connection the record shows that the resolution of dissolution adopted at the stockholders’ meeting of March 6, 1933, was prepared by Ammon’s attorneys and the letter from them transmitting the resolution to Ammon stated that they favored the selling of the property under Ammon’s judgment “rather than at dissolution sale.” Nevertheless the stockholders voted dissolution.

There seems to be no question that Ammon at all times hoped for and preferred the continuation of the business of Motor Works in a new corporation rather than dissolution and liquidation. The facts show however that this preference of Ammon’s remained a hope only and did not take definite shape or become a reality until long after Motor Works had ceased to exist and then only after efforts to sell the assets and business had failed, efforts in which Ammon himself had joined. It was not until these things had occurred, until judgment on Ammon’s stock redemption suit had been reentered on August 1,1933, the receivership proceedings had been dismissed in February of 1934, and the sheriff’s sale had been held on May 16,1934, that those who had been stockholders of Motor Works voted on June 15, 1934, to organize a new corporation to acquire the assets and business previously owned and operated by Motor Works. While the interests to be received by the former stockholders of Motor Works were substantially, if not exactly, the same as that which had originally been proposed by Ammon, the new corporation was different. His original proposition had contemplated the inclusion of the Easy Manufacturing Co. and the McGrew Machine Co. The new corporation as determined upon at June 15, 1934, included only the assets and business which had formerly belonged to Motor Works.

With respect to the applicability of the reorganization provisions of the revenue act, the situation here is very comparable to that dealt with in Huey & Philp Hardware Co., 40 B. T. A. 781, and much that was said there is equally applicable here.. When the plan which resulted in the organization of Cushman was finally agreed upon Motor Works had long since ceased to exist and it was not a party to any reorganization to which Cushman was or might have been a party. Accordingly Cushman did not acquire any assets from Moto : Works under or pursuant to a plan of reorganization and the assets with which we are here concerned did not carry with them into th 5 hands of Cushman the basis for gain or loss and depreciation which they had in the hands of Motor Works. Cf. Pio Crespi, supra. _J

In view of the conclusion reached above, it becomes unnecessary to consider whether Ammon’s purchase of assets at the sheriff’s sale should be treated as a purchase for his benefit, as the respondent contends, or whether he was merely acting for all Motor Works stockholders, as petitioners contend. The respondent in his determination of deficiency against Cushman has used $16,146.76 as the basis for the assets in question. We are not advised as to their fair market value when Motor Works was dissolved and they came into the hands of the Motor Works directors as trustees for the stockholders and creditors and, except possibly for some information as to the amounts at which they were carried on the Motor Works books and later entered on the Cushman books, the only information we have as to value or cost is their selling price at the sheriff’s sale and the stipulation of the parties that at the date of the sheriff’s sale their fair market value was $16,146.76.' There is nothing to show that the correct basis is different from that used by the respondent and his determination with respect thereto is- accordingly sustained.

Having determined that there was no reorganization to which Motor Works was a party within the meaning of the statute, deficiencies will be entered in the cases of Charles D. Ammon and Emah B. Ammon, husband and wife, and the Estate of John F. Ammon in the amounts as stipulated by the parties at the hearing.

Decisions in Docket Nos. 96331 and 96335 will he entered i/n the amounts as stipulated. Decision in Dochet No. 96336 will he entered wnder Rule 50.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      *******
      (g) Definition of Reorganization.—As used in this section and section 113—
      (1) The term “reorganization” means * * * (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of at least 80 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 another corporation; or of substantially all the properties of another corporation; or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or Its stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      *******
      (b) Exchanges Solely in Kind.—
      *******
      (3) Stock for Stock on Reorganization.—No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       (4) Same—Gain of Corporation.—No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

       24-107. Same, Dissolved, Affairs How Settled, upon tlie dissolution, by the expiration of the term of- its charter, or otherwise, of any corporation now existing, or hereafter created, and unless other persons be appointed by the legislature, or by some court of competent authority, the directors or managers of the affairs of such corporations, acting last before the time of its dissolution, by whatever name they may be known in law, and the survivors of them, shall be the trustees of the creditors and stockholders of the corporation dissolved, and shall have full power to settle the affairs of the same, collect and to pay outstanding debts, and divide among the stockholders the moneys and property that shall remain, in proportion to the stock of each stockholder paid up, after the payment of debts and necessary expenses; and the persons so constituted trustees shall have authority to sue for and recover the debts and property of the dissolved corporation, by the name of the trustees of such corporation, describing it by its corporate name, and shall be jointly and severally responsible to the creditors and stockholders of such corporation, to the extent of its property and effects that shall come into their hands; and no suit against any such corporation shall abate in consequence of such dissolution, and said trustees may be made parties by scire facias; and all liens of judgments and decrees of any courts of equity, existing at the' time of such dissolution, either in favor of or against such corporation, shall continue in force in the same manner as if such dissolution had not taken place: * * *


author: Van Fossan :

text:
    Kolor-Thru Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104016.
    Promulgated August 29, 1941.

      Fred L. Rosenbloom, Esq., and Joseph L. Lord, III, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Van Fossan :

Petitioner claims a credit tinder section 26 (c) (1) of the Bevenue Act of 1936, by reason of a contract executed prior to May 1,1936, prohibiting the payment of dividends during 1936. The contract in question was executed by the promoters of petitioner prior to petitioner’s incorporation and is said to have been adopted by petitioner immediately upon its incorporation in December 1932. The question presented is whether a contract executed by the promoters of a corporation and subsequently adopted or ratified by that corporation can be said to have been executed by the corporation within the meaning of section 26 (c) (1) of the 1936 Act.

There is some doubt in the case at bar whether petitioner ever actually adopted or ratified the contract entered into by Armstrong and Sandura. No formal action was ever taken. The only evidence of adoption or ratification is the testimony that petitioner’s directors considered petitioner bound by the contract and hence did not declare dividends until the required $25,000 surplus had been accumulated. Assuming, however, that the contract was adopted by it, petitioner is not entitled to the credit claimed.

Since section 26 (c) (1) is a provision granting a special credit, strict compliance with its terms must be shown. Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; see New Colonial Ice Co. v. Helvering, 292 U. S. 435. Petitioner has failed to show such strict compliance.

In Airtherm, Manufacturing Co., 43 B. T. A. 736, the petitioner was set up by the Machinery & Welder Corporation as the result of a written agreement between the principal creditor of the prior owner of petitioner’s assets and the Machinery & Welder Corporation. We held that that agreement could not possibly satisfy the requirement of section 26 (c) (1), since Airtherm was not in existence at the time the contract was entered into. Likewise, in Boeckeler Lumber Co., 43 B. T. A. 804, we held that a contract entered into by the lumber company’s predecessor did not entitle the lumber company to a credit even though it had orally assumed the predecessor’s'liabilities under the contract. In Union Telephone Co., 44 B. T. A. 607, we held that a contract entered into by the taxpayer’s parent corporation did not entitle the subsidiary to a credit even though the parent customarily acted for the subsidiary in such matters. With respect to the fact that the officers of the subsidiary considered it bound by the contract, we said: “The testimony to the effect that an officer of petitioner who was also an officer of the several holding companies considered the petitioner as bound by the contract to which it was not a party, is in no way controlling.”

In the case at bar the contract in question was never executed by petitioner. The most that can be said is that petitioner by its actions ratified or adopted the contract and considered itself bound by it. That is not sufficient to entitle petitioner to the credit claimed.

Decision will he entered, for the respondent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall he allowed to the extent provided in the various sections imposing tax—
      * * * * * * *
      (e) Contracts Restricting Payment of Dividends.—
      (1) Prohibition on payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Tyson:

text:
    Estate of Austin C. Brant, Deceased, Joseph M. Blake, Administrator de Bonis Non with the Will Annexed, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Harriet Frances Whiting, Deceased, Joseph M. Blake, Administrator de Bonis Non with the Will Annexed and Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92816, 92817.
    Promulgated August 29, 1941.

      Joseph M. Blake, Esq., for the petitioners.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Tyson:

Pursuant to the mandate of the United States Circuit Court of Appeals for the Sixth Circuit, and upon authority of Helvering v. Bruun, 309 U. S. 461 (see also Lewis v. Pope Estate Co., 116 Fed. (2d) 328), we hold that the net fair market value of that, part of the new building erected by the lessee on the leased premises of the Brant estate and the Whiting estate trust, at the time of their repossession of such premises in 1934, constituted taxable income to them, respectively, in the taxable year 1934.

The first issue having been so decided, we must now consider the several alternative allegations of error, in both proceedings, herein-before designated (a) to (f), inclusive, and also the allegation of error in Docket No. 92816 in the respondent’s determination of a 25 percent delinquency penalty.

The question of value raised by alternative issue (a) has been settled by stipulation of the parties. The fair market value of that part of the new building erected by the lessee on the leased premises of the Brant estate was $79,945.02 at the time of the repossession of such premises in 1934. The fair market value of that part of the new building erected by the lessee on the leased premises of the Whiting estate trust was $53,296.68 at the time of the repossession of such premises in 1934.

The principle involved in alternative issue (b) is controlled by Helvering v. Bruun, supra, wherein it was held that an offset of the unamortized cost of old buildings at the time they were removed to make way for the erection of a new building by the lessee, was allowable to determine the net fair market value of the new building to the lessor at the time of repossession and thus the amount of the net gain realized by the lessor at that time. As to the Whiting estate trust the parties have stipulated that the depreciated value of the old buildings removed from its premises by the lessee was $2,875.25. Accordingly, we hold that the net fair market value of the part of the new building erected on the premises of the Whiting estate trust was $50,421.48 (i. e., $53,296.68 less $2,875.25) at tbe time of that trust’s repossession of its leased premises. As to the Brant estate there is no proof of the removal of any old buildings from its premises by the lessee. Accordingly, we hold that the net fair market value of the part of the new building erected on the premises of the Brant estate was $79,945.02 and thus the amount of the net gain realized by the lessor at that time. However the parties have stipulated that the Brant estate is entitled to an allowable deduction of $50,000 from such income.

While in their assignments of errors (c) and (d) petitioners claim the taxes and attorneys’ fees merely as an offset against the value of the new building in arriving at the net fair market value thereof, they nevertheless, on brief, apparently claim in the alternative that the attorneys’ fees and taxes constitute ordinary deductions from gross income for the taxable year 1934. We are of the opinion that there is no merit in either of those claims. In Mary E. Evans, 42 B. T. A. 246, 254-256, it was held that attorneys’ fees incident to the forfeiture and cancellation of a lease did not constitute an offset against the value of the building erected by the lessee, as contended by respondent, but instead constituted an ordinary deduction from gross income for the year in which paid. In the same case it was held that taxes accrued prior to forfeiture of the lease, which under the terms of the lease the lessee was obligated to pay and which were paid by the lessor subsequent to forfeiture, constituted an ordinary deduction from gross income for the year in which paid. Upon authority of that case, we hold that the attorneys’ fees and taxes incurred and paid by petitioners under the circumstances herein are deductible, if at all, only as ordinary deductions from gross income for the year in which paid or accrued, and, further, that such fees and taxes do not constitute an allowable offset in arriving at the net fair market value of the building for determining the net gain realized at the time the building was acquired by petitioners. In the instant cases the record is devoid of any showing as to the accounting basis used by either of the petitioners. If each petitioner was on the cash basis the taxes and legal expenses involved herein, not having been paid during the taxable year 1934, would not be deductible from gross income in that year, and, since it is not shown that petitioners were on the accrual basis, we need not discuss the question of when the taxes and legal expenses may have accrued as liabilities of petitioners. On.this record we hold that petitioners are not entitled to deduct from gross income for the taxable year 1934 the taxes and legal expenses involved herein.

Alternative issue (e) involves petitioners’ claim that the taxable income realized in 1934 through their acquisition of the new building upon the forfeiture of the lease, should be taxed as a capital gain instead of ordinary income, it being alleged that the lease agreement and the new building erected on the leased premises by the lessee constituted a capital asset held by petitioners for a period of over ten years.

In Helvering v. Bruun, supra, the Supreme Court held that upon forfeiture of the lease a new building erected by the lessee was not merely an accretion to the lessor’s original capital asset, but, instead, constituted a realized measurable gain taxable to the lessor. In Hort v. Commissioner, 313 U. S. 28, where the lessor owned both the land and the building thereon subject to a lease and in consideration for the agreed cancellation of the lease the lessee made a cash payment to the lessor, the Court held that the full amount of such cash payment was in substitution of rent and constituted ordinary income to the lessor.

In the Bruun case, supra, the cancellation of the lease resulted in the lessor’s acquisition of property, the value of which constituted income. In the Hort case, supra, the cancellation of the lease' resulted in the lessor’s receipt of cash, which constituted the amount of gain realized. In neither case was there a sale or other disposition by the taxpayer of a capital asset; instead, the lessor was in receipt of “a substitute for rental payments” constituting ordinary income and the same is true in the instant proceedings. We hold that the gain here in question was taxable as ordinary income as determined by respondent.

Alternative issue (f) involves petitioners’ claim for a deduction of the amount of income, realized through the acquisition of the new building, distributable to the beneficiaries under the respective wills of Austin C. Brant, deceased, and Harriet Frances Whiting, deceased, notwithstanding petitioners’ inability to actually distribute such income because it was represented by the value of the new building which was attached to the realty.

The applicable portions of section 162 of the Bevenue Act of 1934 are set out in the margin. Where the terms of a will or trust provide for a distribution of current income, the payment of which can be enforced by the beneficiary as a matter of right, a deduction is allowable to the fiduciary under section 162 (b), supra, whether the distribution is made or not. Where under the terms of a will or trust the income thereof may be, in the discretion of the fiduciary, either distributed to the beneficiary or accumulated, a deduction is allowable to the fiduciary, under section 162 (c), supra, only in the amount actually paid during the year or credited during the year by an allocation so definite as to be beyond recall. Commissioner v. Stearns, 65 Fed. (2d) 371; certiorari denied, 290 U. S. 670, and Thomas N. Perkins, 33 B. T. A. 606, 624.

In the case of the Brant estate, and with reference to this issue (f), the record shows only that on its return Form 1040 for the year 1934 it took a deduction for the amount of its net income, exclusive of the gain realized from the acquisition of the building, distributed in that year to the beneficiaries of that estate. The fact that certain amounts of income of the estate were distributed is not determinative of the question of whether the Brant estate is now entitled to a deduction for the amount of the income here involved which was not actually distributed. The record fails to disclose .the terms of the will of Austin C. Brant, deceased, governing the distribution of the income of that estate and fails to establish that its income was currently distributable and thus deductible under section 162 (b), supra, whether distributed or not. Accordingly, we hold that the income in question is taxable to the fiduciary of the Brant estate.

In the case of the Whiting estate trust and with reference to this issue (f), the decedent’s will gave her executor and trustee no discretion to either distribute or accumulate the net income of the trust, but directed the distribution thereof equally to designated living beneficiaries. The net income of the trust for the taxable year 1934 was so distributed by Joseph M. Blake, acting as trustee of that estate, except as to income here involved, which was derived, upon the trust’s acquisition of the new building at termination of the lease, as “a substitute for rental payments.” Hort v. Commissioner, supra.

We conclude that the net income of the Whiting estate trust was currently distributable by the fiduciary to the beneficiaries within the meaning of section 162 (b), supra, and pursuant to that section the fiduciary- is entitled to a deduction of the amount of the net income realized by the trust from the acquisition of the new building-in 1934. The fact that such income was not severable from the land owned by the trust did not prevent its recognition as taxable gain, and likewise its inseparability for purposes of distribution is immaterial, for, under section 162 (b), supra, the deduction is to be allowed whether the income is distributed or not.

In the case of the Whiting estate trust the respondent determined a 25 percent delinquency penalty, under section 291 of the Revenue Act of 1934, for failure to file a return. Since no return has ever been filed by that petitioner for the taxable year 1934, the statutory provision as to “reasonable cause” for failure to file a return has no application and the imposition of a delinquency penalty of 25 percent of any income tax due for that year is mandatory. Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698, 702; affd., 80 Fed. (2d) 519, certiorari denied, 297 U. S. 723.

In the case of the Brant estate, the respondent determined a 25 percent delinquency penalty, under section 291 of the Revenue Act of 1934, for failure to file a return, Form 1040, within the time prescribed by law. The parties have stipulated that the Brant estate did file timely returns, an income tax return Form 1040 and a fiduciary return Form 1041, for the calendar year 1934. The respondent erred in determining a 25 percent delinquency penalty as to the Brant estate.

Decisions will be entered vmder Bule SO..

       SBC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      (a) * * *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
      (e) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. '