author: Smith:

text:
    John Markle, Edward M. Robinson, Charles A. McKendree, and Ada Davis Siglar, as Executors of the Estate of Mary R. Markle, Deceased, Petitioners, v. Commissioner of Internal Revenue, respondent.
    Docket No. 50142.
    Promulgated May 31, 1933.

      Russell D. Morrill, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Smith:

Section 303 of the Eevenue Act of 1926 provides in part as follows:

Seo. 308. For the purpose of the tax the value of the net estate shall.be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
❖ * * * * *
(3) The amount of bequests * * * to a trustee or trustees * * * exclusively for * * * charitable purposes, * * *

The respondent has disallowed the deduction of the bequest paid to the Knickerbocker Hospital under article eighth of the decedent’s will for the reason that it was not limited to charity and therefore did not come within the provisions of section 303 (a) (3) of the Revenue Act of 1926.

A cardinal principle in the interpretation of wills is that they shall be construed to effectuate the intention of the testator. It has been said that “ what is a charitable gift” has been given “ an amount of discussion that probably no other one question in our jurisprudence has received.” Reeves v. Reeves, 73 Tenn. (5 Lea) 644. The books are replete with definitions of widely varying terms and scope, no one of which has yet received general acceptance. A definition quoted with approval as frequently as any other is:

A charity, in the legal sense, may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government. It is immaterial whether the purpose is called charitable in the gift itself, if it is so described as to show that it is charitable in nature. [St. Louis Union Trust Co. et al., Executors, 21 B.T.A. 1201.]

The Supreme Court said in Perrin v. Carey, 24 How. 465: “ Charity is rather a matter of description than definition.” In any event, one element common to definitions as to descriptions of charitable gifts is the implication of public utility. In re MacDowell, 217 N.Y. 454; 112 N.E. 177.

Undoubtedly the law favors charitable bequests. Ould v. Washington Hospital, 95 U.S. 313. Likewise Congress intended to encourage bequests for the purposes mentioned in the quoted statutory provision. St. Louis Union Trust Co. et al., supra, reversed in part on other grounds by the United States Circuit Court of Appeals, Eighth Circuit, St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922; Herron v. Heiner, 243 Fed. (2d) 745. So that, if a general charitable purpose is manifest within the limits of the testator’s language, a broad and liberal construction should be applied to that language and the gift upheld. In re MacDowell, supra; In re Dubrow's Estate, 245 N.Y. 469; 157 N.E. 747.

Nevertheless, liberal as the courts generally are in such cases, a real intent of the testator to make a legally charitable bequest must be found in order to validate it. Thus, “ as to the purpose, it is not enough that the founder has cherished or even disclosed a charitable intent. It is not the mere benevolence of a lover of his kind which will infuse vitality to this provision. There must be derivable from the instrument of gift a purpose ' charitable ’ within the measure which the law has imposed upon that word.” Matter of Davis, 77 Misc. Rep. 72; 137 N.Y.S. 427. Also see Owens v. Methodist Episcopal Ghurch Missionary Society, 14 N.Y. 380.

Much of the stipulation refers to extrinsic facts and testimony intended to establish them. In so far as this extrinsic testimony of record tends to place this Board in the situation in which the testator stood, when the will was made, we hold it entitled to consideration, if the will was latently ambiguous or has been made so by extrinsic testimony. Gilmer v. Stone, 120 U.S. 586.

However, we believe the intention of the testator in reference to the challenged bequest, as expressed in the will itself, is sufficiently clear and unambiguous, under the foregoing rules of construction, to bring it within the stated exemption. Nor have we overlooked the rigidity of the rule in construing exemptions from taxation. Cf. J. W. Perry Co. v. Norfolk, 220 U.S. 472; Great Northern R.R. Co. v. Minnesota, 216 U.S. 206; 2 Cooley on Taxation, 4th Ed., sec. 672.

The amount of the bequest is legally sufficiently certain. Speer v. Colbert, 200 U.S. 130. The actual use to which the gift was appropriated by the executors is not determinative of the issue. St. Louis Union Trust Co. et al., supra, reversed on other grounds. Unless the discretion of’ the executors is limited, exclusively, to the expenditure of the fund for a legally charitable purpose it will not be upheld. In re Beekman's Estate, 232 N.Y. 365; 134 N.E. 183; St. Louis Union Trust Co. v. Burnet, supra.

Here, under any circumstances, although the form of the memorial was left to the discretion of the executors, if not completed or at least selected by the testator before her death, it was, in any event, to fill the description of “ suitable memorial ” to her mother. In its reversal of this Board in St. Louis Union Trust Co. et al., supra, the Circuit Court of Appeals for the Eighth Circuit, by way of dictum, held that a bequest in trust for the establishment of a fitting memorial to a person excludes the concept of private benefaction and is therefore legally charitable. Cf. Bates v. Bates, 134 Mass. 110, possibly contra.

The controverted clause before us adds the preference that the gift be used “ for a distinctive purpose such as the erection of a building or other permanent improvement which shall bear my mother’s name.” Persuasive of a generally charitable purpose as the objects of the controverted clause are said to be, they do not sufficiently identify the testator’s intention as legally charitable. But the disputed paragraph then proceeds “ If, in the exercise of their judgment, it seems advisable to use only a portion of the amount stated for the erection and equipment of the memorial, they may set aside the remaining balance in an Endowment Fund, the income to be used for the maintenance of the memorial.” Thus, not as a mandate for the disposition of the fund at all events, but as definitely descriptive of the use to which this sum shall be appropriated, the testator clearly limits the discretion of the executors to “ a suitable memorial ” to her mother, to which the income of an endowment fund for its maintenance would be effectual.

Webster defines endowment as:

1. An act of endowing, or bestowing a power, fund, or permanent provision for support.
2. That which is bestowed or settled on a person or an institution; property, fund, or revenue permanently appropriated to any object; as, the endowment of a college.
3. That which is given or bestowed upon the person or mind; gift of nature; natural capacity or power; talents; usually in plural.

Bouvier states that its generally accepted meaning is that “of a permanent provision for any public object, as a school or hospital. By the endowment of such institutions is commonly understood, not the building or providing sites for them, but the providing of a fixed revenue for their support. 25 L.J. Ch. 82; 6 De G., M. & G. 87; State v. Lyon, 32 N.J.L. 361.” Bouvier’s Law Dictionary (Rawle’s Revision), vol. 1, p. 1039. Cf. Saltonstall v. Saunders, 11 Allen, (Mass.) 446. Circumscribed by its context, “ Endowment Fund,” as here used, obviously meant merely a fund the income from which was to maintain the memorial. Even so limited, unless such bequest was legally charitable, it would fail as a violation of the rule against perpetuities. Bates v. Bates, supra; cf. ch. 42, Personal Property Law of New York; Jones v. Habersham, 107 U.S. 174; In re Olmstead's Will, 131 Misc. Rep. 238; 226 N.Y.S. 637.

We conclude that the $200,000 bequest in issue is a legal deduction from the gross estate under section 303 (a) (3) of the Revenue Act of 1926.

Reviewed by the Board.

Judgment will be entered under Rule 50..

Arundell, Murdock, and Matthews concur in the result.

Van Fossan and Seawell dissent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Paraffine Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Reliance Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 24453, 28330, 28331, 29034.
    Promulgated May 31, 1933.

      Fred R. Angevine, Esq., for the petitioners.

      P. M. Clark, Esq., for the respondent.
   OPINION.

Smith :

We will first consider the issue as to whether the deficiencies are barred by the statute of limitations.

Regarding the Reliance Oil Co., the record shows that its returns for the year 1917 were filed on April 30,1918. The respondent, under section 250 (d) of the Revenue Act of 1921, had until April 30, 1923, to determine and assess any tax due, unless the parties consented to extend the time to a later date. The unlimited waiver filed February 26, 1921, extended such time to April 1, 1924. Henry M. Leland, 8 B.T.A. 974. Prior to April 1, 1924, and prior to each extended date thereafter, as set out in our findings, valid waivers or consents in writing were filed under the provisions of section 250 (d) of the Revenue Act of 1921, and section 278 (c) of the Revenue Acts of 1924 and 1926, extending the time for assessment past the date on which the deficiency notice was mailed. In accordance with the foregoing, together with the specific provisions of the waiver filed October 28, 1926, which we have quoted in our findings, and section 277 (b) of the Revenue Act of 1926, the assessment and collection of any deficiency against the Reliance Oil Co. for the year 1917 is not barred. Cf. Old Fanners Oil Co., 12 B.T.A. 203.

In the case of the Paraffine Oil Co. the situation is the same as in the Reliance Oil Co., except that as far as the record shows the respondent permitted the statute to expire on February 23, 1924, and again on April 30, 1924. However, the waivers executed on March 12, 1924, and February 10, 1925, being executed prior to the passage of the Revenue Act of 1926, were effective to revive and extend the statute which had theretofore tolled. Stange v. United States, 282 U.S. 270. We, therefore, hold that the assessment and collection of any deficiency against the Paraffine Oil Co. for the year 1917 is not barred.

On the merits petitioners contend that there were no sales of assets by petitioners to the Humble Oil & Kefining Co., as determined by the respondent, but rather that there were, in effect, distributions in kind of such assets to petitioners’ stockholders, resulting in no taxable gain to petitioners.

Petitioners concede in their brief that the resolutions adopted at the meeting of petitioners’ stockholders on April 3, 1917, refer to proposed sales by petitioners to the new enterprise, but contend that this plan was abandoned, as evidenced by the individual subscriptions to the stock of the new corporation by the stockholders of petitioners, and that the direct transfer by petitioners of the assets in question to the new enterprise was merely to avoid the expense and certain other inconveniences (such as probate court, trusteeship and guardianship proceedings where the stock of petitioners was held by trustees and minors) of a double transfer. Petitioners further contend that nothing was actually or constructively received by or accrued to petitioners from the transactions in question, citing in support of such contention W. P. Fox & Sons, Inc., 15 B.T.A. 115, where the Board had before it a situation somewhat similar to the one here involved.

We followed the Fox case in Lexington Ice & Coal Co., 23 B.T.A. 463, but renounced that holding in our more recent decision in Fred A. Hellebush et al., Trustees, 24 B.T.A. 660. The Lexington case was reversed by the Circuit Court of Appeals for the Fourth Circuit, Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906, in which the court said in part:

As recited above, the Board of Tax Appeals in the case of Hellebush et al. Trustees v. Commissioner, supra, has reversed this decision in the instant case and decided that a sale made under similar circumstances was a sale by the company. A similar question was before the Circuit Court of Appeals of the Fifth Circuit in Taylor Oil & Gas Co. v. Commissioner, 47 F. (2d) 108, (cer-tiorari denied, 283 U.S. 862), where the court said:
“ Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid, and the residue distributed to the stockholders. The profit on the transaction was earned by tire corporation, and the assessment of the taxes based thereon was valid.”
We agree with the conclusion reached in the Taylor Oil & Gas Co. case and by the Board of Tax Appeals in its more recent decisions that the sale was a sale by the taxpayer company and the profits were properly taxable.

To the same effect see Nibley-Mimnaugh Lumber Co., 26 B.T.A. 978; Boggs-Burnam & Co., 26 B.T.A. 988; Mrs. Grant Smith, 26 B.T.A. 1178; and S. A. MacQueen Co., 26 B.T.A. 1337.

In the instant proceedings the resolutions adopted on April 3, 1917, clearly indicate that petitioners contemplated selling the assets in question to the new enterprise. The resolutions adopted on May 15, 1917, recited that the new corporation was being formed “ upon the plan outlined and explained at a meeting of the stockholders * * * held * * * April 3rd, 1917 * * The instruments conveying the assets to the new enterprise recited that petitioners received good and valuable considerations for the assets granted, sold, transferred and assigned ” to the new concern. Each petitioner conveyed title to the assets sold to the vendees; that was the sale (Cf. Charles W. Dahlinger, 20 B.T.A. 176), the transaction producing the asserted gain. The assets of these petitioners were not distributed to or conveyed by their stockholders. The stockholders could cause the conveyance to be made, but they could not make the conveyance. Furthermore, there was no liquidation of either petitioner and we cannot ignore the formal corporate acts in making the conveyances, even although the consideration for the conveyance was distributed directly to the petitioners’ stockholders. Cf. E. H. Nielsen Co., 26 B.T.A. 223.

Upon the entire record, and in line with the more recent decisions referred to above, we think the substance of the transactions here involved is a sale by each petitioner of certain of its assets to the new corporation, rather than distributions in kind to petitioners’ stockholders. The respondent’s determinations are approved.

Reviewed by the Board.

Judgment will be entered under Bule 50.


author: Lansdon :

text:
    Iowa Guarantee Mortgage Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43247.
    Promulgated May 31, 1933.

      Clyde B. Charlton, Esq., for the petitioner.

      William E. Davis, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner’s major contention is that, in the circumstances as set out in our findings of fact, it properly changed its method of accounting for and reporting income from receipts on deferred payment contracts at January 1, 1924, and that thereafter it was entitled to report such income on tbe installment basis. If this contention is sound it follows that if it then comes within the provisions of section 105 (a) (2) of the Revenue Act of 1928 no deficiency can be determined against it in respect of the amount of $64,679.96 which was reported as taxable income in a prior year and income tax paid thereon. The respondent has determined that the petitioner is a money lender and is not a dealer in personal property and so is not entitled to the benefit of any of the statutory provisions relating to sales on the installment basis.

The Board has heretofore held in many cases that where the owner of installment contracts realizes his profits therein by sale to another party he loses his right to report income on the installment basis. Grace T. Mytinger, 4 B.T.A. 896; E. E. Chapman, 19 B.T.A. 878; Alworth-Washburn Co., 25 B.T.A. 140; Max B. Shubin, 25 B.T.A. 792. This principle was specifically applied to automobile dealers who sell their installment contracts to finance companies in Packard Cleveland Motor Co., 14 B.T.A. 118; and Lucius H. Elmer, 22 B.T.A. 224. It is clear, therefore, that under these cited decisions, an automobile dealer in the circumstances herein loses his right to report his income on the installment basis when he sells such contracts to a finance company. Whether the purchaser acquires an interest in the contract and the automobile that makes him a seller of personal property on the installment plan remains to be considered.

Prior to the effective date of the Revenue Act of 1926, there was no express statutory authority for reporting income from installment sales as and when realized. Early in the history of the present system of income taxation profits from such transactions were returned on' the accrual basis, but as early as 1919 in Regulations 45, article 42, the Commissioner authorized returns on the installment basis and later incorporated practically identical language in Regulations 45, 62 and 69 interpreting the Revenue Acts of 1921, 1924 and 1926. In 1926 the Congress for the first time included in the Revenue Act of that year a provision expressly authorizing the report of income from installment sales as and when realized in the following language:

Sec. 212. (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when payment is completed bears to the total contract price. * * *

Section 1208 of the Eevenue Act of 1926 provides as follows:

The provisions of subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such Acts as amended.

A change of accounting from the accrual to either the cash or the installment basis necessarily results in an overlapping period in which accruals theretofore made in one period become cash receipts in another. To relieve this situation in so far as it applies to dealers in personal property and real estate, Congress included section 705, heretofore set out in the margin of this report, in the Revenue Act of 1928. Certainly it was within the legislative power to make this provision broad enough to cover the situation of all taxpayers changing from the accrual to the cash basis, but Congress saw fit to limit the relief to a change from the accrual to the installment basis, probably because installment merchants and real estate dealers through their own organized efforts asked for such legislation in their own interests.

The petitioner is entitled to the relief sought in this proceeding if it is the seller of personal property on the installment plan. In our opinion it is not a merchant but is a money lender. It sells no automobiles except in the very few instances in which it is compelled to take over those upon which purchasers have defaulted in their payments. The record does not disclose the plan upon which such cars are disposed of, which is immaterial since the sale thereof is merely the disposition of property pledged as security for the loans made by the petitioner and therefore is only a minor incident of its business. It may be true, as argued by counsel, that petitioner acquires some sort of legal title to the automobiles covered by the contracts, but that title is similar to the rights acquired by a money lender in a mortgage or deed of trust made to secure payment of loans on real estate. The petitioner is not entitled to relief under the provisions of section 705 of the Eevenue Act of 1928. On this issue the determination of the respondent is affirmed.

The inclusion of $64,679.96 in the petitioner’s income for 1924 results in a net profit instead of a loss for that year. Accordingly, the claim for a net loss must be denied.

The parties have stipulated that “ One-half of one per cent of the face amount of the purchasers’ notes acquired is approximately the collection loss experienced by petitioner during the years 1920 to 1924, inclusive.” Petitioner therefore contends that it should be allowed to include in a reserve for bad debts one half of one percent of the face value of the contracts purchased in the taxable year. Under the method of accounting which it adopted as of January 1, 1924, no income results from the purchase of contracts until the profit therefrom is realized in cash. Since there is no proof that collections were made in 1924 on any of the contracts acquired in that year, it is obvious that there is no income from which the amount claimed on account of bad debts can be deducted.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sue. 705. (a) If any taxpayer by an original return made prior to February 26, 1926, changed tbe method of reporting his net income for the taxable year 1924 or any prior taxable year to the installment basis, then, if his income for such year is properly to be computed on the installment basis—
      *******
      (2) No deficiency shall be determined or found in respect of any such taxes unless the taxpayer has underpaid his taxes for such year, computed by excluding, in computing income, amounts received during such year on account of sales or other dispositions of property made in any year prior to the year in respect of which the change was made.


author: Trammell :

text:
    Franklin Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55302.
    Promulgated May 31, 1933.

      J. Robert Sherrod, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Trammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $4,926.62. The sole issue is whether or not the respondent erred in failing to allow the sum of $101,706.87 as a loss or bad debt deduction from gross income for the taxable year, or in the alternative as losses resulting from embezzlement in the years 1925, 1926 and 1927, as more fully stated below.

The petitioner is a South Carolina corporation, with its principal place of business at Greenville. Its manufacturing plant is located at Greer. During the years 1925, 1926 and 1927, one W. E. Mason owned 50 percent of the petitioner’s stock, was president and treasurer of the corporation, and was in charge of its financial affairs. During those years one E. H. Shanklin owned 50 percent of the petitioner’s stock, was vice president and manager of the corporation, and looked after the manufacturing end of the business. Shanklin, who is now president of the petitioner, first became connected with the corporation as a stockholder in 1917.

In addition to his interest in the petitioner corporation, Mason was also engaged in buying and selling cotton, and sold some cotton to the petitioner. He also owned a seat on the New York Cotton Exchange. During the years from 1924 to 1927 Mason borrowed money from the petitioner and had other transactions with it which were recorded in open accounts and on the corporation’s books, entitled “ IV. E. Mason ” and “ IV. E. Mason & Company.” This company was a corporation which was controlled by Mason.

At the end of the year 1924 the account of Mason & Co. showed a credit balance of $7,711. The corporation owed this amount to Mason. At the end of 1925, 1926 and 1927, Mason’s account showed debit balances of $42,729.82, $85,365.44 and $101,706.87, respectively. At the end of each of those years, Mason owed to the petitioner the amount of the debit balance stated.

Mason was never formally authorized by the directors to borrow or withdraw money from the corporation for use in his personal or private business transactions or speculations, nor did he have authority to do so under the bylaws of the corporation.

The petitioner contends, first, that the withdrawal of its funds by Mason for his personal use aggregating $101,706.87 at the end of the taxable year 1927, constituted a bad debt which it is entitled to deduct from gross income for that year. However, it is affirmatively shown, and the facts on this point admitted, that the indebtedness was not ascertained to be worthless until some time in the year 1928, and was not charged off the corporation’s books until subsequent to the close of the year 1928. Since the debt was neither ascertained to be worthless nor charged off during the year 1927, it is not an allowable deduction from gross income for that year. Sec. 284 (a) (5), Revenue Act of 1926; American Photo Player Co., 2 B.T.A. 419; Warren-Smith Hardware Co., 7 B.T.A. 292; Rufus H. Syfers, 22 B.T.A. 736; S. G. Armstrong, 24 B.T.A. 321; Robinson-Davis Lumber Co. v. Crooks, 50 Fed. (2d) 638.

Petitioner contends in the alternative, and it is mainly upon this theory that petitioner rests its case, that the withdrawal of the corporate funds by Mason for use in his personal business, being unauthorized, constituted embezzlement, and that the amount so embezzled during each of the years 1925, and 1926 and 1927 represents a loss to the corporation which it is entitled to deduct from gross income for the respective years. On this phase of the case, we are confronted at the outset with lack of proof sufficient to show our jurisdiction to determine whether or not the petitioner is entitled to such deductions in respect of the years 1925 and 1926.

The appeal before us is for the redetermination of the deficiency in respect of the taxable year 1927, and in that connection we may only consider such facts with relation to the petitioner’s taxes for 1925 and 1926 as may be necessary correctly to redetermine the amount of the deficiency for 1927. We have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid. Sec. 274 (g), Revenue Act of 1926.

The petitioner alleges in its amended petition and argues on brief that the deductions claimed for 1925 and 1926, if allowed, would result in net losses for those years “ which are claimed as deductions or credits against petitioner’s 1927 income under section 206 of the 1926 Revenue Act.” But no proof was offered to establish the amount of petitioner’s net income, computed without the claimed deduction, for either of said years, and we do not know whether the allowance of the deductions would result in net losses which would affect the petitioner’s tax liability for 1927. We, therefore, confine our consideration to the facts which are shown to be necessary in order correctly to redetermine the deficiency in controversy.

During the taxable year 1927 Mason withdrew $16,341.43 from the corporation’s funds, which amount the petitioner claims as a deduction on account of a loss resulting from embezzlement. Early in 1928 Mason became hopelessly insolvent and was unable to pay any part of the indebtedness which he owed to the corporation. Upon the facts disclosed, the debt then might properly have been ascertained to bé worthless and charged off, and a deduction claimed from gross income for 1928. As before stated, that was not done, and no deduction for a worthless debt is allowable from income for 1927. If the petitioner is entitled to deduct from income for the taxable year the amount withdrawn by Mason in that year, it can only be on the ground that it represents a loss from embezzlement.

Embezzlement, larceny after trust, larceny by bailee, and similar offenses all embrace the idea of fraudulent intent, which we think the facts of this case wholly fail to disclose. During the years from 1927 as far back at least as 1924, Mason borrowed or withdrew money from the corporation for personal uses and charged the same to his account or to the account of W. E. Mason & Co., which accounts appear to have been treated substantially as one account. At the end of 1924 this account showed a credit balance, and for each of the three succeeding years, a debit balance. Mason and Shanklin each owned 50 percent of the corporation’s stock, and it is shown that-Shanklin knew of the existence of Mason’s account, which he referred to in his testimony as a “ pro and con ” account. These transactions were carried on prior to 1928 not only with the knowledge of Shank-lin, but with his consent or at least not against his objection. It is further indicated that Shanklin also had a personal account with the corporation on its books, and that whenever he desired to withdraw money from the corporation it was charged to such account.

Mason’s account was included in the total accounts receivable shown on the balance sheets of the corporation which were furnished to Shanklin, and while he testified that he did not know that Mason was withdrawing large sums from the corporation, this lack of specific knowledge resulted solely from his indifference to the matter. He readily admitted that he could have ascertained the detailed facts at any time by inspecting the corporation’s books.

When the financial collapse of Mason occurred in the early part of 1928, Shanklin made a complete investigation of the situation, and thereafter took no steps to bring about a criminal prosecution of Mason for embezzlement or other offense, nor did he institute bankruptcy proceedings. Shanklin testified that he refrained from such action out of sympathy for Mason, and because it would result in no benefit to himself or the corporation.

However, we are unable to conclude from the evidence before us that the petitioner sustained any loss in 1927 as the result of the embezzlement of its funds by Mason. While it is true that the withdrawals were unauthorized by formal corporate action or the 'bylaws, yet they appear to have been made with the knowledge and consent of the holders of 100 percent of the corporate stock, and no circumstance is disclosed which would indicate criminal intent. It is our opinion, therefore, that the petitioner is not entitled to any deduction from its gross income for the taxable year, as claimed.

Judgment will be entered for the respondent.


text:
    Langford Investment Company, Trustee for Pierce P. Langford, Jr., Ben H. Langford and Sarah E. Langford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43333, 57203, 62214.
    Promulgated May 31, 1933.

      Harry C. Weeks, Esq., for the petitioner.

      S. S. Faulkner, Esq., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Lansdon :

At the hearing the parties filed the following stipulation in settlement of issues (b) and (c) :

There shall he deducted from net income for 1926, as determined by respondent, the following sums:
For depletion erroneously disallowed_$6, 379. 85
For disbursements from capital made by American Refining Company, Inc., and erroneously treated as dividends_ 5, 250.00
xnd for the year 1926 for the same reasons:
Depletion_ 8, 666.26
American Refining Co., Inc., dividends_ 7,000. 00

In so far' as the deficiencies for 1925 and 1926 are affected by the above, they will be adjusted in a recomputation under Rule 50.

In the proceeding at Docket No. 43451, J. C. Wynne et al., Trustees, 28 B.T.A. 125, there was exactly the same question, based on a trust deed substantially similar to that upon which petitioner relies to support the contention stated in issue (a). In that proceeding we affirmed the determination of the Commissioner. Accordingly, on the authority of that decision we hold that the deed here in question created a single trust estate with three beneficiaries, and affirm the determination of the respondent.

Issue (d) raises the question as to whether the amount of $836,-089.94 by which the corpus of the trust estate was reduced in the circumstances set out in our findings of fact should be regarded as a loss to the petitioner, an ordinary expense, or additional capital cost of the assets remaining in the corpus for the purpose of computing depletion and depreciation of the properties of the trust in the years 1928 and 1929. The determination of the respondent is adverse to all the contentions of the petitioner.

There is nothing in the record upon which we can base a finding of fact that the amount in question was a business expense incurred or paid by the petitioner in 1928. This expenditure was not in connection with any business which the trustees, under the terms of the trust deed, were authorized to transact. In our opinion petitioner’s first claim as to this disbursement must be denied. In the circumstances it is also impossible to discover any legal or factual basis for allowing the amount in controversy as a loss sustained in the taxable year. It satisfied none of the conditions of that section of the Revenue Act of 1928 which defines deductible losses. In our opinion the reduction of the corpus of the trust in 1928 as set forth above was not a loss deductible from petitioner’s income for that year.

Petitioner contends if not allowable as a deduction from income either as an expense paid or a loss sustained in the taxable year, then the amount in question should be capitalized and added to petitioner’s bases for the depletion and depreciation of the remaining property. The basis for this theory is the allegation that the amounts paid to the receiver of the American Refining Co., Inc., constituted cost of defending title to the property of the petitioner. The threatened suit, however, was not for the purpose of attacking title to any of the petitioner’s property, but to secure the invalidation of the trust deed, apparently upon the theory that such instrument had been executed for the purpose of fraudulently avoiding payment of debts owed by the trustors. No attack on the title of the petitioner to its property was contemplated and it is clear that if the deed was executed lawfully and in good faith the title of the petitioner to the property conveyed was perfect.

The more reasonable hypothesis is that at the time the property was transferred it was then, in equity at least, impressed with a trust in favor of the creditors of the trustors and that the petitioner, having acquired such properties without consideration, was liable as a transferee for the debts of the trustors. If this is true, then the assets acquired by the petitioner were in substantially the same position that any property is when transferred subject to a mortgage or other lien. We think this is the true situation here. It is stipulated that the trustors were heavily in debt at the date of the transfer of these properties to the petitioner. There is no evidence that such debts were not greater than the value of the property retained by the trustors. In the circumstances herein we think it was part of the burden of proof of the petitioner to show that the transfers to it did not render the trustors insolvent. There is nothing to show that all the property so transferred was not subject to execution under the laws of Texas for the debts of the trustors. The transaction in question was no more than the discharge of obligations which the trust estate assumed when it received property subject to liens. It merely reduced the corpus of the trust to its unencumbered value and should not be regarded as a capitalizable item.

Attorneys’ fees in the amount of $4,000 were paid in connection with the settlement of the controversy with the receivers of the American Refining Co., Inc. Since we hold that such fees were not paid in defense of title to property, but were incurred in connection with the handling of petitioner’s affairs, it is our opinion that this amount is an' allowable deduction from income in 1928 as a business expense.

Since the effect of our conclusion above is to affirm the Commissioner’s determination that petitioner had taxable income in 1928, the claim for the deduction of a net loss carried forward from that year to 1929 must be denied.

Decision will be entered under Rule 50.

       Sec. 23. (e) Losses ~by individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
      (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.
      Sec. 169. The benefit of the special deduction for net losses allowed by section 117 shall be allowed to an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary.


author: Murdock :

text:
    Edward J. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50050.
    Promulgated May 31, 1933.

      Robert Ash, Esg., and A. J. Nauman, C. P. A., for the petitioner.

      D. P. Kimball, Esg., for the respondent.
   OPINION.

Murdock :

The Commissioner has determined deficiencies in income tax for the years 1927 and 1928 in the respective amounts of $1,200 and $1,250. The only error assigned is the determination of the Commissioner that the petitioner’s salary as president of the board of water works of the city of Louisville, Kentucky, is subject to income tax.

The petitioner is an individual who resides in Louisville, Kentucky. During the years 1927 and 1928 he was a member of the board of water works of the city of Louisville. He was appointed to this office by the mayor and confirmed by the board of aldermen. He took the oath of office prescribed for all city officials. Not only was he a member, but he was also president of the board, having been elected by the other members. As president he received a salary of $5,000 in each year. He had general supervision of the water system supplying water used in Louisville and nearby districts. He did not report for either year his salary of $5,000 above mentioned. In determining the deficiency for each year the Commissioner added the $5,000 to income.

The Louisville Water Co. was chartered by a special act of the General Assembly of Kentucky, approved March 6,1854. Originally the capital stock of the corporation consisted of 10,000 shares of the par value of $100 each. The number of shares was later increased to 25,000. The city of Louisville had authority to purchase the property of the corporation at any time and also to subscribe for its stock. The corporation constructed waterworks and supplied water to the city and other users in and near Louisville. From time to time the city purchased capital stock of the corporation. By April 19, 1907, the city of Louisville had acquired all of the shares of the capital stock of the corporation. Until March 6, 1906, the affairs of the corporation were conducted by directors elected by the stockholders. A board of water works of the city of Louisville was created by a Kentucky statute approved on March 6, 1906. Shortly thereafter all of the directors of the Louisville Water Co. resigned and thereafter the properties of the corporation were managed and controlled by the board of water works. In 1908 the board of directors of the Louisville Water Co. was reorganized, and on July 22 of that year jit adopted a resolution authorizing the conveyance by the Louisville Water Co. of the title to all of it-s properties to the city of Louisville. On the same day the transfer was made. Since that time the Louisville Water Co. has not had aboard of directors. The corporation has not been dissolved. Bills to customers are sent in the name of Louisville Water Co. Since 1918 the Louisville Water Co. has paid a “ dividend ” of $191,000 in each year to the city of Louisville. These “ dividends ” go into the sinking fund from which interest and principal on the bonded indebtedness of the city are paid. Water for municipal purposes, that is, for schools, parks, swimming pools, public libraries, hospitals, fire, police, streets and sewers, is furnished to the city free of charge. All income from water rents over and above that paid to the city of Louisville is used for extensions, improvements, and betterments.

The question is whether or not the petitioner’s salary, as president of the board of water works of the city of Louisville, for the years in controversy, is part of his gross income for Federal income tax purposes. The Revenue Acts of 1926 and 1928 do not contain any express provision that such income shall not be subject to tax. In this respect this case differs from cases arising under the Revenue Act of 1924 or prior revenue acts. See section 1211 of the Revenue Act of 1926 and Leland Powers, Executor, 26 B.T.A. 1381. Obviously, the definition of gross income applicable to the year in question is broad enough to include the petitioner’s salary as president of the Board of Water Works of the city of Louisville. “A municipal corporation has two classes of powers, one legislative and governmental, in the exercise of which it is a sovereignty and governs its people, and one conferred upon it for the purpose, not of government, but for the private advantage of the city and its inhabitants.” Flutmus v. City of Newport, 175 Ky. 817; 194 S.W. 1039. This distinction is generally recognized. City of Winona v. Botzet, 169 Fed. 321. If the petitioner’s salary is not to be included in his gross income, it must be because of the principle early established in the United States that the Federal Government may not interfere through taxation with the states and municipal subdivisions thereof in their exercise of their governmental powers. The immunity does not extend beyond the means and agencies used to perform governmental functions. Indian Motorcycle Co. v. United States, 283 U.S. 570. The difficulty is to determine on which side of the line a particular case falls. The Court of Appeals of Kentucky, in Flutmus v. City of Newport, supra, has held:

When a state gives to a municipality the power to maintain a waterworks system, it parts with none of its sovereignty and confers no power of government, but merely authorizes the municipality, in its private capacity, to do that which any individual or corporation having the requisite franchise would he authorized to do.

There is a statement in Flint v. Stone Tracy Co., 220 U.S. 107, that it is no part of the essential governmental function of a state to provide water. This seems to be the general rule. Blair v. Byers, 35 Fed. (2d) 326; City of Winona v. Botzet, supra; Woodward v. Livermore Falls Water District, 116 Me. 86; 100 Atl. 317. Cf. South Carolina v. United States, 199 U.S. 437, and Burnet v. Jergins Trust, 288 U.S. 508, reversing 61 Fed. (2d) 92, which reversed 22 B.T.A. 551. Furthermore, the case of C. S. Denman, 27 B.T.A. 256, is not distinguishable from the present case. We there relied upon some of the cases above referred to and held that income similar to the income here in question is subject to tax. We see no reason why that case should not be followed here.

Decision will be entered for the respondent.


author: GOODRICH:

text:
    J. D. Varnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58011, 58012.
    Promulgated May 31, 1933.

      Mabel Walker Willebrandt, Esq., and William Montgomery Smith, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

GOODRICH:

This is another case in which the question is, Who is the taxpayer? The income on which the tax is to be levied consists of the dividends paid upon the stock owned by petitioner’s wife at the time of her death and outstanding in her name until, at the time of final settlement of her estate, more than seven years afterwards, it was surrendered and reissued equally to petitioner and his two daughters. Petitioner contends that there should be included in his income, not the full amount of the dividends as respondent has determined, but only one third thereof, and that the remainder should be divided between his daughters. The basis for his contention is his claim that he had given two thirds of the stock to his daughters and therefore, they being the owners of the property, the income arising from it by way of dividends belongs and is taxable to them. The issue which we must determine from the evidence before us is, therefore, whether petitioner’s acts constituted a completed gift of a part of the stock to his daughters. We need not closely consider the situation prior to 1926, for it was only then that petitioner can claim to have made a gift to his daughters. Prior to that time he believed they were each entitled to a part of the estate by operation of law.

We are of opinion that the gift was not consummated prior to or during the taxable period here involved and, consequently, that the dividends paid on the stock were properly included by respondent in petitioner’s income, the latter’s division of them with his daughters being no more than a gift of income, which did not serve to relieve him of the tax on his receipt thereof.

Little citation is needed to accompany its statement, so well established is the rule respecting the ordinary requirements of a gift inter vivos. There must be (1) an intention on the part of the competent donor to give; (2) an acceptance by a competent donee; and (3) a transfer of title, accompanied by delivery amounting to a complete surrender by the donor of the domination and control of the property. Edson v. Lucas, 40 Fed. (2d) 398; (reversing Margaret M. Edson, 11 B.T.A. 621); Mary Katherine Dulin, 25 B.T.A. 1259; and cases there cited.

Here no question is raised concerning the competency of the parties and it is evident that the donees were willing to accept the gift. Nor do, we doubt petitioner’s honest intention to abide by his promise to his daughters, but the fact remains that delivery of the property was not made until in 1931 when the stock was issued to and turned over to the donees. Meantime it remained within petitioner’s possession and control and, as we see it, his statements to the donees amounted to no more than a promise to make a gift of the stock some time in the future. That promise he kept, and at that moment the gift was made, not before.

While the testimony is somewhat in conflict, we think this view adequately supported by statements of the witnesses respecting conversations with petitioner in 1926, after he learned he was the sole beneficiary of his wife’s estate, which indicate that his intention was to give to his daughters at some time in the future when the estate should be distributed the interest he had promised to them and which he had previously assumed belonged to them. We gather from the testimony that petitioner and his daughters all recognized that something further remained to be done, when the administration of the estate should be finally settled, to complete the matter and that, meantime, the daughters, through the generosity of their father, were receiving the income from the stock which he had promised to give them but had not delivered. Those payments, made from petitioner’s own bank account in which he deposited the dividends as received, we think can be regarded only as recurring gifts from his income, on the original receipt of which he is taxable.

Petitioner, on brief, calls attention to the fact that under the rule as so firmly restated in Brewster v. Gage, 280 U.S. 327, title to' the stock did not vest in petitioner immediately upon the death of his wife, but only a right to receive his distributive share of it after completion of proper administration of his deceased wife’s estate. It was a part of that right, not the stock itself, which he gave to his daughters, he argues, and thereafter he stood as a trustee of an oral trust to deliver the stock in accordance with that right. But the income arose on the stock itself, not on the right to receive it, and a gift of the right to receive the stock in the future, perhaps, does not carry with it ownership of the income arising in the interim. R. C. Kuldell, Administrator, 25 B.T.A. 800. Moreover, it matters little whether the promise was to give a part of the stock itself or to give a part of the right to receive the stock. The point is, there was no delivery. There is no affirmative act here to evidence a delivery, constructive or actual, of either the stock or the right to receive it in the future. There was no setting aside, earmarking or designating of the property or instruction to a third party, or acknowledgment of the receipt such as sometimes has been held to be the equivalent of a constructive delivery and the assumption of a trust sufficient to consummate a gift. Blanche S. Ross, 28 B.T.A. 39; J. T. Hedrick, 24 B.T.A. 444; Earl F. Smith, A dministrator, 23 B.T.A. 278; reversed, 59 Fed. (2d) 533; Kaufmann v. Commissioner, 44 Fed. (2d) 144 (modifying Karl J. Kaufmann, Administrator, 15 B.T.A. 141).

On the contrary, there is evidence that petitioner retained control of the stock and the dividends. On one occasion, without the knowledge or consent of his daughters so far as appears, he left the dividends with the company as a loan, accepting a promissory note therefor, the proceeds of which he distributed upon payment during the next year. On other occasions he distributed, not the cash dividends paid, but securities which he purchased therewith. Whether such purchases were made with the knowledge and consent of his daughters, or wholly upon his own judgment as to what was best for them to have, does not appear. Clearly, such acts negative the claim that petitioner had relinquished complete control and domination of the property, an essential element to the consummation of a gift. Nor does the record disclose any acts of the daughters beyond the acceptance of the money turned over to them evidencing the assertion of a claim to an interest in the stock, or the right to receive it, such as would show that the parties regarded the transaction as fully closed.

We are not told why petitioner permitted the estate to lie dormant for so long before his final accounting and distribution. It is conceded that, under the Tennessee statutes, he was the sole beneficiary, as well as administrator. The record shows that there were few debts of the estate, and no property other than the stock. Petitioner might easily have made distribution to himself and transferred and delivered to his daughters such part of the stock as he wished to give them, and thus completed the gift. It may be, as respondent on brief suggests, that he was content to delay delivery of the stock for the reason that his daughters were young and unused to business affairs and, consequently, he deemed it desirable to retain control of the stock for their protection. It may be, as petitioner on brief suggests, that the delay was due entirely to the fact that petitioner was without experience in matters of estate administration and, since he sought no advice, was entirely ignorant of the legal requirements of the consummation of the gift he intended to make. Whatever the cause, and without doubting in the slightest the honesty of his intentions, we are forced to the conclusion that he has failed to turn that “ square corner ” demanded of one seeking to escape the incidence of a tax upon the receipt of income ostensibly his own, and hold that the dividends should be included in his income, for the reason that he failed to dispose of the property from which they arose.

Judgment will be entered for the respondent.


author: Seawell :

text:
    Erle Gerard, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45221, 45265-45267, 45352, 45353, 45359-45363, 45368, 45392, 45393.
    Promulgated May 31, 1933.

      John A. Fleming, Esq., George Bouchard, Esq., and C. W. Hob-son, Esq., for the petitioners.
    J. R. Johnston, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Pearl E. Leeper ; Pearl E. Leeper, Executrix, Estate of Frank E. Leeper, Deceased; Mrs. Egerton Crispin; George Zohelein; Mrs. Edward Zohelein; Henry O. Feldman; Edward L. Keeys; J. E. Harrison; Earl W. Mueller; Mrs. S. Streefkerk; Albert Miller; Rose L. Carson; John E. Carson.

   OPINION.

Seawell :

The record shows that Walter B. Barham owned an oil lease and was required under the terms of his lease to drill a well thereon. In order to raise sufficient money to meet the expense incident to the drilling of the well, he sold interest units or shares in the prospective oil production from the well to be drilled. The purchasers of such interests or interest units were to bear the expense of operation and administration in the same proportion that they were to share in the proceeds from the sale of the oil produced.

After these interests were acquired as stated, the well was drilled, oil was struck, and the well became a producing and paying one. A meeting was held, at which certain of the interest holders, thereafter designated “ trustees ”, represented themselves and other interest holders and carried on the business of Barham Well #1 in a manner similar to directors of a corporation. These aforesaid trustees, the evidence indicates, were elected annually by the interest holders, approved expenditures, made decisions relating to deepening of the well, declared dividends, called meetings of the interest holders, arranged for the sale of Barham Well #1 and advised and recommended to the interest holders its sale to the Olympic Refining Co. on the terms and basis set forth in our findings of fact. Bar-ham Well #1 was not, however, incorporated, had no seal, issued no stock, and had no body always designated “ board of directors ”, though its board of trustees exercised powers and performed duties similar to those discharged by a board of directors of a corporation. The reports which the trustees sent the numerous interest or unit holders informed them of the progress of the project in which they were all interested and advised them of the action taken at the various meetings held in the interest of the unit holders. Such is disclosed in our findings of fact.

The Revenue Act of 1921 provides in part:

Sec. 2. That when used in this Act—
*#♦***$
(2) The term “ corporation ” includes associations, joint-stock companies, and insurance companies.

In Regulations 62 it is stated :

Art. 1502. Association. — Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders on the basis of the capital stock which each holds or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. * * *
Akt. 1504. Association distinguished, from, trust.- — * * * If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute.

The respondent determined Barham Well #1 was, within the meaning of the revenue act and regulations quoted, an association taxable as a corporation.

In the instant case, the record does not disclose any declaration of trust or any trust instrument and the manner in which the active operations of Barham Well #1 were carried on, in our opinion, brings it within the classification of an association and taxable as a corporation, as determined by the respondent.

In support of their claim that Barham Well #1 was taxable as a trust, the petitioners quote in their brief and rely on subsection (a) of section 704 of the Bevenue Act of 1928. That subsection appears to have been enacted to abrogate the retroactive effect of the decision in Hecht v. Malley, 265 U.S. 144, with respect to trusts that had reasonably relied on the prior interpretation of the law before that decision was promulgated. It had been previously ruled that control by the beneficiaries was essential in order that a trust should be classed as an association. In Hecht v. Malley, supra, it was held that where the trustees are actively carrying on business in quasi-corporate form, the trust is properly classed as an association, regardless of the control vested in the beneficiaries.

In filing its return for 1923 as a trust, Barham Well #1 did not rely on any ruling of the Bureau of Internal Revenue. Its claim to classification as a trust was directly contrary to the position taken by the Bureau, as expressed in article 1504, regulations 62, supra, which provides that if the beneficiaries have a voice in the conduct of the business of the trust through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute. The mere filing of a fiduciary return does not under section 704 (a) of the Revenue Act of 1928 entitle a taxpayer to classification as a trust where, as in the present case, under the law and regulations in force when the return was filed and at all times since, the taxpayer was classed as an association for income tax purposes.

Our determination that Barham Well #1 is taxable as an association is in accordance with the principle enunciated in Black Diamond Oil Trust No. 51S, 25 B.T.A. 142, 146, and in other cases therein cited. The petitioners cite and rely on Twin Bell Oil Syndicate, 26 B.T.A. 165, in support of their contention that Barham Well #1 should be considered as a trust and not as an association or corporation. The facts in that case and in the instant proceedings are . quite different, so dissimilar that the decision in the former is not applicable and controlling herein. In the former there was in fact a trust; the trustees alone could renew their numbers and couid alone alter or amend the trust. The beneficiaries had no voice in such matters and never held a meeting. It was controlled absolutely by the trustees and in this respect bore no resemblance to a corporation which is controlled and directed by its stockholders, acting through directors. The trustees were the real masters of the situation, unchecked by the veto of the holders of the beneficial interest. In the instant case, the record indicates that the interest holders elected the trustees annually; that the trustees asked “ authority ” of the interest holders before proceeding in certain matters and did not claim nor exercise absolute control as they did in Twin Bell Oil Syndicate, supra. As before stated, in our opinion the respondent did not err in considering Barham Well # 1 an association, taxable as a corporation within the meaning of the Revenue Act of 1921.

The respondent contends that the transaction through which the Olympic Refining Co. acquired the assets of Barham Well #1 for a consideration of $20,000 was a sale of the assets and not a sale of the units of interest or shares held by the sundry petitioners. It is true that the negotiations leading up to the acquisition of the well by the Olympic Refining Co. were largely carried on through the trustees, who were acting in a sense as a board of directors of the Barham Well #1, but the consummation of the deal was explicitly a purchase of the shares, and from the unit holders. The letter of the Olympic Refining Co. dated February 21, 1927, was addressed, not to Barham Well #1, but to the individual unit holders, and proposed to purchase from them, or such of them as agreed to sell, their shares of interest in the property at $10 per unit. The offer was accepted, and all previous negotiations were thereby merged into the contract thus formed. The shares were taken up from the individuals holding them and the individuals, not the association nor the trustees representing it, were paid therefor. -This is comparable to the sale by stockholders of a corporation of their individual stock to new stockholders, and cannot be said to be a liquidation of the assets of the association. The transaction was merely a transfer or assignment by the individual unit holders in Barham Well #1 to the Olympic Refining Co. of their interests or right to receive the future profits or dividends, if any, realized from oil production from Barham Well #1. The well thereafter still existed and the evidence fails to show its operation ceased or that the association was insolvent or that there was a liquidation of the association, termed Barham Well #1. So far as this transfer of shares or units of interest to the Olympic Refining Co. is concerned, we hold that the unit holders or shareholders who received the purchase price of their shares from the Olympic Refining Co. were not by reason thereof transferees under section 280 of the Revenue Act of 1926 and liable for the tax assessed against Barham Well #1.

This conclusion is not in conflict with the case of George M. Brady, 22 B.T.A. 596, relied on by the respondent. In that case it is said (p. 603) :

* * * As we interpret the evidence it appears to ns that the Bank of Hampden sold its assets to the Baltimore Trust Company. The resolutions of the stockholders of the bank are all to this effect, as well as the actual documents of conveyance. The corporation simultaneously witli the sale of assets passed resolutions of liquidation which were carried out before the end of the year by its own officers. While it is true that the original offers were made on the basis of a purchase of the shares of stock at $40 per share, as soon as there was an apparent acceptance of the offer the transaction was then placed in the hands of the attorney for the Baltimore Trust Company and from that time on every entry in the minutes of the Bank of Hampden is to the effect that the assets were being sold.

Other differences, if necessary, between the Brady case, supra, and the case at bar might be pointed out.

In the circumstances detailed in our findings of fact, we are of the opinion, and so hold, that none of the petitioners is a transferee of the association, termed Barham Well #1, within the meaning of the revenue statutes, and there is no liability on the part of any of them as transferees for the tax assessed against said Barham Well #1. This, of course, eliminates the third issue.

Reviewed by the Board.

Judgment of no deficiency will Toe entered in each case.

Trammell, Murdock, Goodrich, and Leech concur in the result.


author: Leech:

text:
    Helen B. Achelis and Frank D. Hendrickson as Executors of the Estate of Frederic G. Achelis, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52297.
    Promulgated May 31, 1933.

      George L. Shearer, Esq., for the petitioner.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Leech:

Petitioners appeal from a deficiency of $757.43 determined by respondent for the calendar year 1928. The facts in this proceeding were stipulated by the parties as follows:

I. Frederic G. Achelis died a resident of the State of Connecticut on September 18, 1926.

2. Helen B. Achelis and Frank D. Hendrickson, the petitioners herein, were duly appointed executors of the estate of Frederic G. Achelis and duly qualified as such.

3. There is attached hereto and marked “ Exhibit A ”, a letter received by the estate on April 14, 1927. Pursuant to the demand contained in the letter the petitioners on April 25, 1928, paid the amount of $4,793.34 shown thereon together with interest in the amount of $262.43. The figures shown in the letter under the column headed “ number of years taxable ” represent the number of years decedent held the designated property immediately prior to his death without paying tax thereon or (if he held the property for a greater number of years than shown) such figures represent the number of years immediately preceding his death for which he had paid no tax.

4. In arriving at the net income taxable to the estate for 1928 there was deducted on the returp $5,055.77 representing the sum of the above items paid to the State of Connecticut as aforesaid.

5. In determining taxable net income of the estate for 1928 the Commissioner disallowed as a deduction the sum of $5,055.77.

Exhibit A

State of Connecticut,

Office of the Tax Commissioner,

Tax on Untaxed Property.

Estate op Frederic G. Achelis,

Late of Greenwich, Ct. Date of Death: September 18, 1926.

Administrator: Helen B. Achelis

Executor: % Frederick C. Taylor, Atty.

Address: Stamford, Connecticut.

Please Remit Amount op This Tax to the State Tbeasubeb.

This tax upon the untaxed property of this estate is not the succession or inheritance tax but is in addition thereto. In the absence of an extension of time within which to pay, the tax is due within twelve months of the date of death of the decedent. The amount of tax ascertained to he due is subject to interest at the rate of 9 per centum per annum from the time when such shall become payable until the same shall be paid. Before your final account can be accepted the State Treasurer’s receipt for this tax must be filed with the court.

I find the amount of the tax on untaxed property due from this estate to the State of Connecticut, under Sections 1189 to 1195 G.S., as amended amounts to Forty seven hundred ninety three and 34/109 Dollars ($4,793.34). Checks should be made payable to the Treasurer of this State.

s William H. Blodgett,

Tax Commissioner.

By Fakkeix Knapp,

First Asst. Tax Com.

Habtpobd, Conn., April IS, 1927.

There is but one issue involved, this being whether the sum of $5,055.77 paid by petitioners to the State of Connecticut represented a penalty or a tax. If a tax, the item is deductible under section 23 of the Revenue Act of 1928. If, however, the payment represents a penalty for nonpayment of taxes, it is not deductible. Burrows Building Material Co. v. Commissioner, 47 Fed. (2d) 178; Chicago, Rock Island & Pacific Ry. Co. v. Commissioner, 47 Fed. (2d) 990; Great Northern Ry Co. v. Commissioner, 40 Fed. (2d) 372; Kansas City Southern Ry. Co., 22 B.T.A. 949. The payment in question was exacted under section 1190 of the Connecticut General Statutes which provides:

All taxable property of any estate upon which no town or city tax lias been assessed as provided in section 1189 or upon which no tax has been paid to the state during the year preceding the date of the death of the decedent, shall be liable to a tax of two per centum per annum on the appraised inventory value of such property for the five years next preceding the date of the death of such decedent, provided, the executor or administrator of any estate may, by furnishing evidence to the satisfaction of the tax commissioner that a state, town or city tax has been paid on any of such property for a portion of said five years or that the ownership of such property has not been in the decedent for a portion of said period, obtain a proportionate deduction from the tax hereby imposed, and provided, the administrator or executor of such estate may furnish evidence to the tax commissioner that the appraised value of the estate is not in excess of two thousand dollars and a portion of the same passes by will or pursuant to the provisions of the statutes relating to the distribution of intestate estates, to the widow or minor children, as provided in section 1189.

We think the question is controlled by Bankers Trust Co. et al., Executors, 96 Conn. 361; 114 Atl. 104, which decision of the Supreme Court of Errors of Connecticut was affirmed by the Supreme Court of the United States, 260 U.S. 647. The Supreme Court of Errors of Connecticut, in its opinion, said:

This tax may or it may not represent what the decedent would have been required to pay had he paid the state or local tax. The entire five years’ tax may be compelled when in fact nothing over one year is due, but the representative of the decedent cannot prove the fact. The state presumes it is unpaid for the five-year period and requires the executor or administrator to disprove this. This is not the compulsory payment of a defined tax, but is the infliction of a punishment for a violation of a public duty. The authors of his statute intended it as and for a penalty tax, and such we esteem it to be. The right of the state vests at the death of the decedent to the transfer tax or the penalty in the nature of an estate tax.

Tbe Supreme Court of the United States, in its opinion affirming the decision of the Connecticut court, said:

The payment of taxes is an obvious and insistent duty, and its sanction is usually punitive. The Connecticut statute is not, therefore, in its penal effects, unique, nor are they out of relation or proportion to a decedent’s delinquency.
The Court of Errors recognized that the tax of the statute “ may not represent what the decedent would have been required to pay had ” she “ paid the state or local tax.” And, as we have seen, the tax may be upon the appraised inventory value for the five years next preceding the death of the decedent with a proportionate deduction if a tax has been paid on any of the property for a portion of the five years, or if the ownership of the property has not been in the decedent for a portion of that period. The provision, however, is but a way of fixing a penalty for the delinquency, which It is competent for the State to do. We said in Western Union Telegraph Co. v. Indiana, 165 U.S. 304, 310, that the amount of a penalty is a matter for the legislature of a State to determine in its discretion. * * *

In the case before us the payment made represents a charge of 2 percent per annum upon the value of certain securities of the estate only for the years preceding decedent’s death in which he had actually held the property and paid no tax thereon. We are not advised as to the amount of the unpaid taxes on this property and cannot determine to what extent the amount received exceeds such taxes, but in any event it is not measured by the sum of the unpaid taxes and is imposed only upon failure of decedent to report the property for assessment and pay the tax thereon. We think the payment represents a penalty rather than a tax. These petitioners as executors received the estate subject to this liability in the nature of a penalty. It represents a proper deduction in arriving at the net estate subject to estate tax, but not a deduction as taxes paid in determining the net taxable income of the estate for the year 1928.

Judgment will be entered for the respondent.


text:
    R. T. Buzard, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. T. Dusenbury, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42793, 43017.
    Promulgated May 31, 1933.

      James P. Quigley, Esq., for the petitioners.

      J. R. Johnson, Esq., and L. M. Berrien, Esq., for the respondent.
   OPINION.

Seawell :

The petitioners admit that if the case of Navarro Lumber Co., 10 B.T.A. 690, involving the taxpayer’s liability for the taxes, ivas properly before the Board, assessment of the taxes is not barred. The issue thus turns upon whether or not that proceeding was an appeal of petitioners’ transferor within the meaning of section 277 (b) of the Revenue Act of 1924. The issue involves our assumption of jurisdiction in the taxpayer’s case.

The substance of the argument of the petitioners is that the proceeding relied upon by the respondent to extend the five-year limitation period was not instituted by the taxpayer because from the time of its dissolution in 1922 there was no one to represent or act for it. They rely on numerous cases to support their contention.

We have been called upon to decide a number of cases instituted to redetermine deficiencies asserted against dissolved corporations. In some our jurisdiction was challenged and in others we decided the question on our own motion. Our decisions generally turned upon the status of the corporation in dissolution, as defined by the laws of the state of incorporation, due to the well established rule that in the absence of statutory authority a corporation has no existence after its dissolution. Oklahoma Natural Gas Co. v. Oklahoma, 213 U. S. 257.

The Navarro Lumber Co. had its existence under the laws of California. Section 400 of the Civil Code of that State reads, in part, as follows:

Unless other persons are appointed by the court, the directors or managers of the affairs of a corporation at the time of its dissolution are trustees of the creditors and stockholders or members of the corporation dissolved, and have full powers to settle the affairs of the corporation, collect andi pay outstanding debts, sell the assets thereof in such manner as the court shall direct, and distribute the proceeds of such sales and all other assets to the stockholders. Such trustees shall have authority to sue for and recover the debts and property of the corporation, and shall be jointly and severally personally liable to its creditors and stockholders or members, to the extent of its property and effects that shall come into their hands.

Under these provisions of the state statute, in the absence of the appointment of others by the court, the directors of the transferor at the time of its dissolution became trustees of the corporation’s creditors and stockholders with powers prescribed by the statute to liquidate the affairs of the corporation. Their powers were not limited as to time and included the right to settle claims for additional Federal taxes. McPherson v. Gommissioner, 54 Fed. (2d) 751; affirming R. W. Crosman, 22 B.T.A. 390; United States v. Laflin, 24 Fed. (2d) 683; Newhall v. Western Zinc Mining Co., 164 Cal. 380; 128 Pac. 1040; Rossi v. Caire, 174 Cal. 74; 161 Pac. 1161; Havemeyer v. Superior Court of the City and County of San Francisco, 84 Cal. 327; 24 Pac. 121.

The designation of the corporation in the deficiency notice as the taxpayer, instead of its liquidating trustees, has been held not to be important. McPherson v. Commissioner, supra. See Commissioner v. New York Trust Co., 54 Fed. (2d) 463; certiorari denied, 285 U.S. 556.

The trustees received actual or constructive notice of the deficiency notice, and being bound by law to take notice of it (McPherson v. Commissioner, supra), sought a redetermination of the taxes alleged to be due from the dissolved corporation by instructing their attorney to file an appeal with this Board. The petition filed with the Board was an affirmative action (California Iron Yards Co. v. Commissioner, 47 Fed. (2d) 514) and the proceeding was instituted by the only persons authorized by the state law to settle the affairs of the dissolved corporation. Crosman v. Vivienda Water Co., 150 Cal. 575; 89 Pac. 335. The proceeding was “For the Navarro Lumber Co.” by its duly authorized trustees in liquidation and in substance was an appeal by the taxpayer as the term is used in section 277 (b) of the 1924 Act.

A motion to dismiss the original petition for want of jurisdiction because it was not properly verified would have been denied. Gibson Amusement Co., 22 B.T.A. 1212. Whatever defects there might have been in the original petition were cured by the amended petition filed two weeks later.

We think the case of Navarro Lumber Co., supra, was an appeal by the transferor of the petitioners and served to extend the period of limitation for assessment against the taxpayer.

Our decision should be for the respondent for another reason. The petitioners, with the other trustee, invoked the jurisdiction of the Board in the case of the taxpayer and did not contest it at any time during the course of the proceeding. The petitioners are not now in a position to deny that we had jurisdiction. Jere R. Downing, 26 B.T.A. 1115; Warner Collieries Co. v. United States, 63 Fed. (2d) 34; Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123.

The liability of the petitioners as transferees for unpaid taxes of the Navarro Lumber Co. for 1919 and 1920 is not barred by the statute of limitations.

Decision will be entered for the resfondent.


author: Lansdon:

text:
    O. Moorshead, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57045.
    Promulgated June 1, 1933.

      Ray G. Ransom, C.P.A., and Herschel L. Washington, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Lansdon:

The principal question here is whether the petitioner received constructive dividends from the Hanlin Supply Co. in 1927 and 1928 as determined by the respondent. “ Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means of taxing something other than income and thus violating the constitution itself.” John A. Brander, 3 B.T.A. 231. There was no corporate action declaring dividends nor any book entries evidencing dividend obligations of the corporation or credits and charges of the amounts to the petitioner. At all times the costs of the lands, improvements and equipment were included in the asset accounts of the company’s books. There is, therefore, no recorded act of the company that evidences the payment of the amount in question to the petitioner. The determination of the respondent therefore rests wholly upon his interpretation of the meaning of the facts.

The petitioner was the president of the company. He and other members of his family owned about 96 percent of its issued stock. For a time at least legal title to the property was in the petitioner. He occupied the dwelling as his home at. a rental too low to constitute a profitable return on the investment. These facts must be the basis upon which respondent has made his determination. In our opinion they are not sufficient. As long as the law recognizes that a corporation and its shareholders are separate entities the relative stockholdings are not material.

The record discloses that when the company acquired the land legal title was taken in the name of the lawyer, Branine, who was then in its service. Since it is clear that the company purchased the land for its own purposes and paid with its own funds, it is obvious that the lawyer was a mere conduit through whom title was taken from the transferor. This being true it follows that Branine could convey to petitioner no greater interest in the property than he possessed in his own right, that is, the bare legal title that petitioner and his wife passed on to the company, which, in our opinion, was at all times after the purchase in 1927, the beneficial owner of the property that it acquired and improved for its own purposes.

In a controversy of this nature it is not material that the deed through which the company finally acquired its legal title was not recorded. In Kansas, while an unrecorded deed means nothing to strangers to a land transfer, it is completely binding on the parties thereto as to any controversies between themselves. Revised Statutes of Kansas, 1928, ch. 67, p. 223; Marshall v. Shepard, 23 Kan. 321; Smith v. Wooster, 59 Kan. 240.

It is undisputed that petitioner lived in the property, but it is equally well established that he not only paid a stated rental for it but that he agreed to and did hold it available to the company at all times for the purposes for which it was acquired. In this circumstance we are of the opinion that petitioner did not constructively receive dividends in the taxable years in the amounts determined by the respondent.

Since no evidence was adduced in respect of the second issue, the determination of the respondent thereto is affirmed. The evidence indicates that the petitioner’s income tax returns were, for the taxable years, consistent with the facts and conclusions set out herein. The penalty, if any, for negligence should not be collected.

Decision will be entered under Bule 50.


author: Van Fossan:

text:
    William R. Stewart, Mary S. Witherbee and Spotswood D. Bowers, Executors and Trustees under the Will of Lispenard Stewart, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45282.
    Promulgated June 1, 1933.

      Spotswood D. Bowers, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   opinion.

Van Fossan:

On January 81, 1933, report on the above styled case was tion that decision be entered under Rule 50. For brevity the findings of fact included in our former report are incorporated herein by reference. Before entry of decision the respondent filed a motion asking, in effect, that the report be set aside and its conclusion of law reversed. In support of the motion respondent cited the decision of the Supreme Court in Reinecke v. Smith et at., Executors, 289 U.S. 172.

In the course of our former opinion, and essential to our conclusion therein, we held that the trustees under the trusts in question constituted an “ adverse interest ” with respect to the grantor. In the cited case, Reinecke v. Smith et al, Executors, supra, the power of revocation was placed in the grantor “ and either one of the other two trustees or their successors.” The Court observed that the trustee owes no duty to the beneficiary to resist alteration or revocation of the trust and that the case must be viewed as if the reserved right of revocation had been vested jointly in the grantor and a stranger to the trust. Consequently, there being no adverse interest, it was held that the grantor was in control of the property and taxable on its income.

In our judgment the conclusion of the Supreme Court is determinative of the issue in the instant case and requires us to reverse our former holding. The Court observed that, “ as pointed out in Burnet v. Guggenheim, (77 L. Ed. 411), the same considerations as to ownership and control affect the power to impose a tax upon the transfer of the corpus and upon the income.” The reasoning of the Court negatives any supporting effect of the cases relied on in our opinion. Counsel for petitioner urges that the statements of the Supreme Court in Reinecke v. Smith et al., Executors, supra, on which reliance is placed, are obiter. We do not so view them. But were it so, they blaze the trail that we should follow. A careful study of the cited decision, and those referred to therein, leaves us with no doubt in our minds. Respondent correctly included in the taxable estate the corpus of the four trusts.

Decision will be entered, under Rule 50.


author: Seawell:

text:
    Mrs. A. H. Murchison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62838.
    Promulgated June 1, 1933.

      Harry C. Weeks, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Seawell:

The respondent determined a deficiency of $415.89 in income tax for 1929, resulting, in part, from his disallowance as a deduction of depletion equal to 27% percent of the amount received from the sale of royalty oil. The issue is whether or not the petitioner is entitled to the depletion deduction. The case was submitted on a stipulation of facts, which we incorporate herein by reference as our findings of fact.

It appears from the stipulation that in 1924 A. H. Murchison and E. H. Pigg obtained an oil and gas lease of certain unimproved lands in Wilbarger County, Texas. Thereafter in 1924 the lessees executed an instrument by the terms of which they “ granted, sold, transferred, conveyed and delivered ” to George B. Ray and J. H. Massie all of their interest in the lease except “ an overriding five-sixteenths (-is) royalty in and to said premises.” The sale was made subject to all the covenants of the lease and in consideration of a cash payment of $15,000.

Upon the death of A. H. Murchison, in 1926, his interest in the overriding royalty passed to the petitioner, his widow. During the taxable year the petitioner received the sum of $6,464.88 from the sale of her share of royalty oil produced from the premises by the assignees of the lease in 1929. In her return for 1929 she claimed 27% percent thereof as a deduction for depletion of her interest in the premises. The respondent disallowed the entire amount.

The respondent contends that the assignment divested A. H. Murchison of his entire estate in the premises, and, accordingly, petitioner had no reversionary or other interest in the property in 1929 subject to depletion. The cases of Waller v. Commissioner, 40 Fed. (2d) 892, and Herold, v. Commissioner, 42 Fed. (2d) 942, and other decisions of the courts and the Board are cited by the respondent to support his rejection of petitioner’s claim to depletion.

In the Waller and Herold cases, supra, there was an assignment by the lessees of their interest in the leases for a cash consideration and a royalty of all oil produced and saved from the property by the assignees. The effect of the assignments on the right of the assignors to depletion on the royalty rights reserved in the assignments was before the Court in Palmer v. Bender, 287 U.S. 551, decided since the submission of this proceeding. In holding that the assignors of the leases were entitled to deductions for depletion, the Court said, among other things:

* * * The language of the statute [section 214 (a) (10), Revenue Act of 1921] is broad enough to provide, at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital.
* * * # * * #
Similarly, the lessor’s right to a depletion allowance does not depend upon his retention of ownership or any other particular form of legal interest in the mineral content of the land. It is enough, if by virtue of the leasing transaction, he has retained a right to share in the oil produced. If so he has an economic interest in the oil, in place, which is depleted by production. * * *
In the present case the two partnerships acquired, by the leases to them, complete legal control of the oil in place. Even though legal ownership of it, in a technical sense, remained in their lessor, they, as lessees, nevertheless acquired an economic interest in it which represented their capital investment and was subject to depletion under the statute. Lynch v. Halworth-Stephens Co., supra. When the two lessees transferred their operating rights to the two oil companies, whether they became technical sublessors or not, they retained, by their stipulations for royalties, an economic interest in the oil, in place, identical with that of a lessor. Burnet v. Harmel; Bankers Pocahontas Coal Company v. Burnet, supra. Thus, throughout their changing relationships with respect to the properties, the oil in the ground was a reservoir of capital investment of the several parties, all of whom, the original lessors, the two partnerships and their transferees, were entitled to share in the oil produced. Production and sale of the oil would result in its depletion and also in a return of capital investment to the parties according to their respective interests. The loss or destruction of the oil at any time from the date of the leases until complete extraction would have resulted in loss to the partnerships. Such an interest is, we think, included within the meaning and purpose of the statute permitting deduction in the case of oil and gas wells of a reasonable allowance for depletion according to the peculiar conditions in each case.

Section 23 (1) of the Revenue Act of 1928, in so far as it relates to the right of the petitioner to depletion based upon her royalty interest in the property, is the same as section 214 (a) (10) of the 1924 Act, construed by the court in the Palmer case, supra.

The case of Lizzie H. Glide, 27 B.T.A. 1264, involved the question of whether the amount of a bonus received by a lessor of unproductive oil and gas land could be reduced by an allowance for depletion, and is not contrary to the conclusion reached in this proceeding. Here the petitioner’s income was not derived from a bonus paid for the assignment of the lease, but from the sale of royalty oil extracted from the leased premises within the taxable .year.

The issue is controlled by the Palmer case. Accordingly, our decision is in favor of the petitioner.

It is agreed in the stipulation that in her return for the taxable year the petitioner overstated taxable interest in the amount of $1,250. This amount will be eliminated from petitioner’s gross income in the recomputation of her tax liability under Rule 50.

Decision will T>e entered under Rule 50.


text:
    Pittsburgh and Lake Erie Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42764.
    Promulgated June 1, 1933.

      0. 0. Handy, Esq., Charles C. Paulding, Esq., and Leo Mawoille, Esq., for the petitioner.

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

Smith:

On brief the respondent admits that the first issue is similar to that decided by the Board in the case of Texas & Pacific Ry. Co., 9 B.T.A. 365, which has been followed consistently in numerous decisions, wherein it was held that the allowance for interest on completed additions and betterments did not constitute income in the year of final settlement with the Director General of Railroads but was income during the period of Federal control. The respondent submits that under the decision mentioned and those following it, net taxable income for the year 1920 as shown in the notice of deficiency should be increased in an amount of $24,390.92 in accordance with his alternative plea contained in his amended answer to the petition. The parties have agreed that, of the- sum allowed, $24,390.92 was allowed for the two months of January and February 1920, during which the properties of this petitioner were under Federal control. The Board has consistently held that such payments to railroads on the accrual basis constituted income of the period of Federal control. We accordingly hold that the respondent erred in including $197,926.83 representing rental interest on completed additions and betterments in petitioner’s 1923 income, and that the amount of $24,390.92 applicable to the two months in the taxable year 1920 under Federal control should be treated as income in 1920. See Union Pacifie R.R. Co., 26 B.T.A. 1126, 1132; International-Great Northern R.R. Co., 24 B.T.A. 726, 747.

The other issue is whether the back mail pay received by the petitioner in 1920 and 1921 pursuant to a decision of the Interstate Commerce Commission on December 23, 1919, but not served on the interested parties or made public until January 15, 1920, constitutes taxable income for 1920. We have no information as to the year or years for which this back mail pay was allowed. Neither have we any explanation of or reason for two payments, one in 1920 and one in 1921, instead of a single payment in 1920. The respondent submits that the entire amount is taxable in 1920 under our decision in International-Great Northern R.R. Co., supra. We there considered the question of when a similar payment under the same Interstate Commerce Commission decision constituted income to the taxpayer on the accrual basis. There, the respondent contended that the back mail pay constituted income in neither 1919 nor 1920, but in 1916 and 1917, for which years the additional compensation was paid. Here, the petitioner insists that the payments in 1920 and 1921 constituted income of 1919, even though it reported these payments as income of the years in which they were received.

We have reexamined our decision on this point in the International-Great Northern R.R. Co. case, particularly in view of the possible effect of the decisions of the Supreme Court in United States v. Anderson, 269 U.S. 422; Continental Tie & Lumber Co. v. United States, 286 U.S. 290, to which reference has been made by the petitioner. The underlying principle of these cases is that the earnings of a particular taxable period should be offset by the expenses incident to producing those earnings. In the earlier case, the taxpayer’s books showed the accrual of munitions taxes in 1916 and the Court held that the amount of such taxes was deductible in computing the income tax for that year. Some point is made by the petitioner in the instant proceeding that the deduction of the accrued taxes in the Anderson case, supra, was allowed pursuant to a Treasury decision promulgated in January 1917 and by analogy contends that the promulgation of the Interstate Commerce Commission decision authorizing the back mail pay here involved warrants the accrual of the amount of such back mail pay in 1919. It is to be noted that this taxpayer did not accrue the amounts of the back mail pay upon its books in any year prior to the receipt of such payments. In the later case it was held that a payment made to the taxpayer, also on the accrual basis, constituted income in 1920 when the right to the payment became fixed by the Transportation Act of 1920, and pot in a subsequent year when the award was actually made.

In International-Great Northern R.R. Co., supra, we said:

The only compensation which the carriers had assurance o£ receiving for the transportation of mail was that named in the Act of Congress [approved July 28, 1916] and which was the amount accrued upon the petitioner’s books prior to 1920, in accordance with the accounting requirements of the Interstate Commerce Commission. The income-tax returns for years prior to 1920 were made upon the accrual basis and we think correctly made when made in accordance with the books of account. That no possible basis existed for any other accrual is plainly indicated by the report of the Interstate Commerce Commission in Docket 9200, Railway Mail Pay, 56 I.C.C. 1. That a dispute existed can not be doubted since the Post Office Department and the railroads contended for bases of compensation widely different (56 I.C.C. 1).

Interstate Commerce Commission Decision 9200 extended the provisions of the Act of 1916 to carriers other than those selected by the Postmaster General. In effect, that decision ordered compensation for transporting the mails to be made upon the space system but it did not even approximately determine the mail pay of any particular railroad. Subsequent proceedings were doubtless necessary to determine the application of the space system to carriers theretofore compensated upon some other basis.

The petitioner argues that the accounting regulations of the Interstate Commerce Commission do not govern the issue before this Board. We recognized the force of this argument in New York, Chicago & St. Louis R.R. Co., 26 B.T.A. 1229, 1290, where we said that:

* * * What a carrier may do in its accounting classification as a private industry or even as a regulated interstate carrier is apart from its subservience as a taxpayer to the requirements of the revenue law. Old Colony R.R. Co. v. Commissioner, 284 U.S. 552. * * *

See also Kansas City Southern Ry. Co. v. Commissioner, 52 Fed. (2d) 372, 377.

In the circumstances of the instant proceeding, we are of opinion that the accounting regulations of the Interstate Commerce Commission as applied to the items under consideration are reasonable and more nearly reflect this petitioner’s true income than would the accrual of these items in 1919. The petitioner has treated these items as income in the manner provided by the Interstate Commerce Commission regulations and there is nothing in this record to warrant a departure from our holding in International-Great Northern R.R. Co., supra.

Judgment will he entered under Rule 50.