author: Van Fossan:

text:
    The Central Railroad Company of New Jersey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58625.
    Promulgated September 7, 1933.

      Richard L. LaTly, Esq., and A. H. Elder, Esq., for the petitioner.

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

Van Fossan:

The question for consideration is whether or not the value of the property received by the petitioner in settlement of its equity suit against Joyce and the Victory Steamship Co. constitutes taxable income for the year 1928.

The petitioner contends that whatever of value was received by it in settlement of the equity suit was not taxable income within the intent of the Sixteenth Amendment. In support of this contention the petitioner cites the definition of income adopted by the Supreme Court in Eisner v. Macomber, 252 U.S. 189, and argues that what it received in settlement was not a gain derived from capital or labor or both combined, nor a profit gained through the sale or conversion of capital assets. An analysis of the facts in the situation fails to sustain petitioner’s contention.

In the equity suit involved in this proceeding the petitioner sought an accounting for profits or for damages, whichever should prove to be the greater. The facts show that the evidence in the hearings before the first special master tended to prove a larger amount of profits than of damages. It is clear too from the facts and from the bill of complaint in the equity suit, a copy of which was made a part of the stipulation of facts, that the suit of the petitioner against Joyce and the Victory Steamship Co. was not a suit to collect damages for a loss of profits. Nowhere in the bill of complaint or in the evidence before this Board is there any indication that the petitioner sought reparation for profits which Joyce’s conduct prevented it from earning during the years in which he was manager of the petitioner’s marine department.

The petitioner’s claim of a right to an accounting for profits is based on the well established doctrine that an agent is precluded by his relationship with his principal, voluntarily assumed, from taking advantage of his principal for his own benefit and from dealing with the latter’s property and interests in any other capacity than as an agent who is bound to subordinate his own interest to that of his principal. As a necessary consequence of this doctrine it is well settled that if an agent is disloyal to his principal in his dealings with the latter’s property or with third parties on his principal’s behalf, consequently deriving profits, he may not keep the profits thus acquired as against his principal, but in respect thereto becomes a trustee for his principal, who at his election may compel an accounting. Robertson v. Chapman, 152 U.S. 673; United States v. Carter, 217 U.S. 286; Sandoval v. Randolph, 222 U.S. 161; Essex Trust Co. v. Enright, 214 Mass. 507; 102 N.E. 441; Hogle v. Meyering, 161 Mich. 472; 126 N.W. 1063. As held in Jackson v. Smith, 254 U.S. 586, on which the petitioner relies, in such case the law makes a fiduciary accountable for all the profits obtained even though no damage to the principal be proved. Magruder v. Drury, 235 U.S. 106. It follows that when the petitioner’s equity action against Joyce and the Victory Steamship Co. was settled before its determination by the court, whatever was received by the petitioner in. such settlement was received in lieu of profits and, therefore, represented the profits claimed by the petitioner from defendants on account of the various transactions enumerated in the bill of complaint.

It is, of course, true, as insisted by the petitioner in its brief, that not everything of value received by a taxpayer is income. But the so-called “ donation ” cases cited by the petitioner, such as Edwards v. Cuba R.R. Co., 268 U.S. 628, Aransas Compress Co., 8 B.T.A. 155; Great Northern Ry. Co., 8 B.T.A. 225; Midland Valley R.R. Co., 19 B.T.A. 423, and others of similar import, are not applicable to the facts of the present proceeding. The profits, if any, from the transactions involved in the equity suits in no way constituted reimbursement for capital expenditures or contributions to capital as did the subsidies paid by the Cuban Government in Edwards v. Cuba R.R. Co., supra, nor were the profits in question here in any sense donations. The allegations of fact from which the petitioner derived the right, if any, to compel Joyce to account for profits were that he was in the employ of the petitioner as a trusted agent; that in conjunction with an outsider as his partner in his scheme and by means of corporate instrumentalities and devices organized and conceived by him, he used his employment by and his position with the petitioner together with the petitioner’s facilities, and floating and other equipment for making secret profits. The contracts and leases entered into by the petitioner, which were a necessary part of Joyce’s alleged unauthorized operations, were executed by the petitioner in the ordinary course of its business operations for its business purposes ; and under these contracts the petitioner paid out as expenses and deducted from income for the year in which paid the total sum of $1,608,048.71. It is our opinion, therefore, that in 'fact Joyce’s alleged secret profits were linked inextricably with the petitioner’s business operations and with Joyce’s employment by the petitioner. These facts are basic to the petitioner’s alleged right to the accounting in the equity suit. It follows that the profits sought in the equity suit were at least partially derived from the employment of the petitioner’s capital and labor and there is nothing in the facts from which we can determine what part, if any, of the profits sought was not so derived. Therefore, in view of the broad definition of gross income set out in section 213 (a) of the Revenue Act of 1926, as including gains or profits and income from any source whatever, and in view of the definition laid down in Eisner v. Macomber, supra, we find nothing in the facts relating to the question now under consideration essentially distinguishing this proceeding on principle from the cases in which it has been held that funds recovered by the taxpayer as a result of a suit must be included in taxable income. Banta Refrigerator Co., 15 B.T.A. 1038; Armstrong Knitting Mills, 19 B.T.A. 318; Buffalo Union Furnace, Co., 23 B.T.A. 439; Sly Mfg. Co., 24 B.T.A. 65; Sanford v. Brooks, 282 U.S. 359.

The petitioner also contends that the profits realized by the Joyce corporations belonged to the petitioner when earned and that the income taxes due thereon were actually paid by the several corporations ; and that in any event any tax due on account thereof was barred by the statute of limitations prior to 1928.

It was stipulated that the Victory Steamship Co. and the Railroad Stevedoring Corporation, whose operations and profits were involved in the petitioner’s equity suit, paid income taxes each year on account of such profits and that the total income taxes so paid were greater than the deficiency in question in this proceeding. There is no evidence that the other two corporations whose profits were involved in the equity suit paid any income taxes thereon. However, whether the latter two corporations did or did not pay income taxes on the profits involved in the equity suit is of no importance here, for the reason that we can not hold in this proceeding that the petitioner was entitled to the profits when earned by these corporations. In this connection it is to be observed that by their answers, which were attached to and made a part of the stipulation of facts herein, Joyce and the Victory Steamship Co. deny any liability to the petitioner for the profits involved in the equity suit. That suit did not proceed to a judicial determination and a compromise settlement of a suit at law or in equity before a final judgment or decree is not tantamount to a judicial determination. The facts before us indicate the nature of the equity suit and disclose the basic principles involved therein. But the facts adduced by the defendant in the hearing before the first special master or which might have been introduced by the defendant at a hearing before the second special master are not before us and we, therefore, can not determine here what the United States District Court might have decided with respect to the merits of the equity action had the case proceeded to a final decree.

Moreover, the law applicable to the allegations of the bill of complaint, as set forth in the various cases hereinbefore cited, is to the effect that in such case the principal may compel an accounting for profits and that the defendants are liable therefor when proved. Neither in Jackson v. Smith, supra, nor in Porter v. Woodruff, 36 N.J. Eq. 174, on both of which the petitioner relies, is anything held by the court from which a basis may be inferred for holding that profits of an undetermined amount, the right to which is in dispute, are taxable in any other year than that in which their amount is ascertained and that amount is reduced to possession by the taxpayer. The fact that the liability of Joyce for the profits was in dispute distinguishes this case from cases cited by the petitioner. At the time the Joyce corporations received the profits involved in the equity suit they received them under a claim of right with no restriction as to their disposition. The corporations were, therefore, required to include such profits in their income tax returns for the years in which earned, even though it might thereafter be decreed that Joyce and these corporations were liable for them to the petitioner. North American Oil Consolidated v. Burnet, 286 U.S. 417; Board v. Commissioner, 51 Fed. (2d) 73. Such payment of taxes, therefore, was made by these corporations on their own behalf and not on the petitioner’s account. Moreover, there is no evidence in this proceeding to support the petitioner’s contention that the payments made by the several corporations were paid out of the petitioner’s funds. Even though Joyce and the corporations were accountable to the petitioner for profits made as charged in the bill of complaint in the equity suit, nevertheless it may not be assumed without proof that these corporations did no other business than that referred to in the bill of complaint in the equity suit.

Not until 1928 did the petitioner have any knowledge of what, if any, amount of the profits claimed would be received by it. Therefore, it could not report and was not required to report before that time any amount of income represented by the profits claimed, North American Oil Consolidated v. Burnet, supra, and since the amount receivable was ascertained, realized and reduced to possession when the settlement was made in 1928, whatever was so received must be included in the petitioner’s income for that year. Burnet v. Logan, 283 U.S. 404.

The petitioner also contends that “ if a tax be assessable on account of receipt of title to the dock property in 1928, it should be assessed, not on the value of the physical property, but merely on the purely nominal value of the paper title received in 1928 for petitioner was the owner of the said structures since they were placed on the land.” In support of this last contention the petitioner reiterates the facts hereinbefore referred to, namely, that the Boat Repairing Corporation was organized and controlled by Joyce and James; that the petitioner was unaware of Joyce’s interest in that corporation; that Joyce purported to act .for the petitioner in negotiating with the Boat Repairing Corporation the leases of the water front property in Jersey City referred to in the findings of fact, the last of which was executed and delivered in 1919; and that the petitioner was still unaware of Joyce’s relations with the Boat Repairing Corporation when it consented to the assignment to the Communipaw Dry Dock Co. of the lease executed in Í919. The lease assigned to the Communipaw Dry Dock Co. is that surrendered to the petitioner upon the settlement of the equity suit. On these facts the petitioner argues that the lease was void for the reason that Joyce, the petitioner’s agent, in leasing the property, could not become interested as lessee of the property either personally or through a third person, citing Cowenhoven v. Hannah (New Jersey Court of Errors and Appeals), 147 Atl. 434, and further argues that because the lease was void the structures and equipment placed on the leased land became the petitioner’s property immediately when so placed.

As authority for its contention that the lease was void the petitioner cites Porter v. Woodruff, supra. In that case the court, referring to instances in which an agent acts in a dual capacity without the knowledge of the principal, stated that in such cases the courts “ do not pause to speculate concerning the merits of the transaction * * * but they at once pronounce the transaction void * * ⅜.” It is our opinion that it may not be held because of the quoted statement of the court in Porter v. Woodruff, supra, that the lease to the Boat Repairing Corporation was a nullity upon its execution. On the facts stated, although the dual capacity in which Joyce acted was unlawful, the lease could not be avoided by the Boat Repairing Corporation. That corporation certainly was bound by it so long as the petitioner elected to hold the corporation to the terms of the lease. The lease could only be avoided by the petitioner, which was the lessor. It was, therefore, voidable, but not an absolute nullity. And it is our opinion that the statement quoted from Porter v. Woodruff, supra, is not inconsistent with this view. Where an agent purports to sell or lease his principal’s property and, without the knowledge of his principal, adopts a dual capacity and himself becomes the purchaser or lessee, or where in such case he sells or leases his principal’s property to a third person for his own benefit, the principal may have rescission of the sale or lease and secure the return of the property, Robertson v. Chapman, 152 U.S. 673; Rich v. Black, 173 Pa. 92; 33 Atl. 880; Breedlove v. Holton, 143 Wash. 343; 255 Pac. 132, or at his election may accept the situation and compel an accounting for any profits the agent has made. Robertson v. Chapman, supra; Moore v. Petty, 135 Fed. 668; Atlantic Transportation & Pine Tar Co. v. Rosin & Turpentine Export Co., 247 Fed. 618; Porter v. Woodruff, supra. In the present proceeding it appears that, upon discovery of the alleged disloyalty of Joyce, its agent, and of his interest in the Boat Repairing Corporation, the petitioner accepted the situation in respect to the lease of the water front property to the Boat Repairing Corporation and elected to bring suit to compel an accounting for all profits made by Joyce in connection with leases and contracts entered into by the petitioner with the Boat Repairing Corporation and the other Joyce corporations, including the lease of the water front property which, in 1924, with the consent of the petitioner had been assigned to the Communipaw Dry Dock Co. The latter does not appear to have been associated with Joyce or the corporations in which he was interested.

The equity suit was begun in March 1926. At that time the petitioner had knowledge of Joyce’s alleged duplicity. The petitioner did not, however, then disaffirm the lease but, on the contrary, from the date of the petitioner’s discovery of Joyce’s dual capacity until the date of the- settlement of the equity action in June 1928, the Communipaw Dry Dock Co. was allowed to remain in undisturbed possession of the water front property. It is, therefore, a fair assumption that during a period of at least more than two years after the discovery of Joyce’s alleged duplicity the petitioner continued to receive and accept from the Communipaw Dry Dock Co. rental for the water front property in Jersey City at the annual rate of $9,600 as provided by the assigned lease. It is our opinion, therefore, that, having elected to sue for an accounting for profits instead of for rescission of the lease and having, with full knowledge of existing conditions, elected to accept benefits under the lease, the petitioner may not now assert that the lease could be avoided. Truslow v. Parkersburg, 61 W.Va. 628; 57 S.E. 51; Gordon v. Beck, 196 Cal. 768; 239 Pac. 309. City of Findlay v. Pertz, 66 Fed. 427.

The petitioner also asserts that in any event the dock structures and equipment placed on the leased water front property were erected and purchased out of money belonging to it. It is our opinion that there is no evidence sustaining this contention. It is not shown that the only business engaged in for profit by the Boat Repairing Corporation was that involved in the equity suit. At the most the petitioner contends only that it was entitled to profits connected with or growing out of Joyce’s fiduciary relations with the petitioner and the petitioner’s contracts with the Joyce corporations.

Even if we should assume the correctness of the petitioner’s contention that any tax assessable should not be assessed on the value of the property transferred to it in settlement of the equity suit, but only on the nominal value of the paper title to that property, still the petitioner could not prevail in this proceeding. The unencumbered title to the property and undisputed possession thereof undoubtedly has some value to the petitioner’s business. What that value is, is not proved in this proceeding and, therefore, even on the petitioner’s own theory in this respect the presumption in favor of the respondent’s determination has not been overcome.

Decision will be .entered for the respondent.


source: Caselaw Access Project

author: Adams:

license: Public Domain

text:
    Manistique Lumber and Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52588.
    Promulgated September 14, 1933.

      Harry H. Meisner, Esq., for the petitioner.

      Owen W. Sweeleer, Esq., for the respondent.
   OPINION.

Adams:

The questions presented in this case are two: First, whether under the above facts, the respondent erred in failing to allow the deduction claimed in petitioner’s income tax return for the year 1928, of the sum of $867.87 as ordinary and necessary business expense, or whether it constituted a permanent improvement which was properly chargeable to permanent improvement of petitioner’s property, and, as such, represented a capital expenditure.

The pertinent portions of section 215 (a) of the Revenue Act of 1926 and the regulations thereunder are as follows:

Sec. 215. (a) In computing net income no deduction shall in any case be allowed in respect of—
.* ⅜ ⅝ ⅜ ⅜ ⅝ ⅜
(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

Section 24 (a) of the Revenue Act of 1928 is identical with the above quoted portion of the 1926 Act.

Article 292, Regulations 69, reads as follows:

Art. 292. Capital expenditures. — Amounts paid for increasing the capital value or for making good the depreciation (for which a deduction has been made) of property are not deductible from gross income * ⅜ ⅜.

Under these provisions and the above findings of fact, it seems to us clear that the determination of the respondent was correct, and as to this matter, his findings are approved. We feel that this question has been settled by the opinions of the Board and the Courts. This Board has held that expenditures for items that are to continue in use in the business are to be classified as capital items. First National Bank of St. Louis, 3 B.T.A. 807; Leedom & Worrall Co., 10 B.T.A. 825; Laura Allen, 14 B.T.A. 723, 726; Fidelity Storage Corp., 18 B.T.A. 517, 526. The Board has also held that, in the absence of evidence, if expenditures were made for repairs the Commissioner’s determination should be approved. Gude Brothers, Kieffer Co., 2 B.T.A. 1029. In this case it is clear that the expenditures were not made for repairs, since the expenditures were for the original construction of the road necessary to the petitioner’s business, which was afterwards repaired from time to time.

The second question presented is whether or not the Commissioner erred in refusing to allow the petitioner to set up, in its 1928 income tax return, loss both for specific bad debts and also a reserve for bad debts which have not been ascertained definitely to constitute losses.

Under the findings above, we believe this question to be determined by the Revenue Act of 1928, together with the regulations thereunder, the pertinent portions of such act and regulations being as follows:

[Sec. 23.] In computing net income there shall be allowed as deductions:
⅞ ⅝ * * * # ⅜
(j) Bad, Debts. — Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

Article 191, Regulations 74, reads in part as follows:

Art. 191. Bad Debts. — -Bad debts may be treated in either of two ways—
(1) By a deduction from income in respect of debts ascertained to be worthless in whole or in part, or
(2) By a deduction from income of an addition to a reserve for bad debts.

Under the law and the anthorities, petitioner had the option to adopt and use either one of these methods, but it did not have the right, without the approval of the Commissioner, to use both, according to its caprice or its interest. Petitioner did not request the respondent to change the method which he had adopted, and was not given any authority to do so, and therefore had no legal right to change the method which it had originally adopted. The authorities on this question are uniform and it seems to be well settled. Kay Mfg. Co., 18 B.T.A. 753; affd., 53 Fed. (2d) 1083, held that the taxpayer’s election to deduct specific bad debts for a given year was binding for subsequent years. First Natl. Bank of Omaha, 17 B.T.A. 1358; Transatlantic Clock & Watch Co., 3 B.T.A. 1064. Many other cases announcing the same doctrine might be cited, but we feel it unnecessary to do so.

We have noted petitioner’s citation of the case of Rhode Island Hospital Trust Co. v. Commissioner, 29 Fed. (2d) 339, but in our opinion it does not apply to the present situation.

The finding of the Commissioner on the second issue is affirmed.

Judgment will he entered for the respondent.


author: Seawell :

text:
      J. O. W. Gravely, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49103.
    Promulgated September 14, 1933.

      George E. H. Goodner, Esq., and Frederick G. Rohwerder, G.P.A. for the petitioner.

      Harold Allen, Esq., and L. H. Rushbrook, Esq., for the respondent.
   opinion.

Seawell :

This proceeding involves an alleged deficiency in income tax for the year 1927 in the amount of $19,445.95.

The only error assigned by the petitioner is that the Commissioner erroneously included in taxable net income for the year 1927 salary in the amount of $87,500, representing income of prior years.

In 1918 the China American Tobacco & Trading Co. was incorporated for the purpose of dealing in tobacco, which it sold mostly in China or the Orient. In 1925 the corporate name was changed to “ China American Tobacco Company.” J. O. W. Gravely, a resident of Rocky Mount, North Carolina, was the president of the corporation from the date of its organization and owned about 55 percent of its stock. William T. Fuller was bookkeeper and office man of the corporation since some time in 1919, but was not an officer or director of the corporation.

The bylaws of the corporation authorized the directors to fix the salaries of the officers, and in 1919 the directors fixed the salary of J. O. W. Gravely at $55,000 per year, to continue until the board of directors changed it. The board of directors consisted of J. O. W. Gravely, his three sons and three Chinese gentlemen. The business was practically managed and controlled by J. O. W. Gravely and his sons, one of whom was vice president and another secretary-treasurer.

The $55,000 salary was regularly credited to J. O. W. Gravely on the books of the corporation until June 30, 1923, on which date J. O. W. Gravely instructed Fuller to credit him thereafter on the books of the corporation at the rate of only $30,000 per year, which was done until June 30, 1927, on which date L. L. Gravely, the secretary-treasurer of the corporation since its organization, directed Fuller to credit to his father, J. O. W. Gravely, on the corporation’s books $87,500 as back salary, which was accordingly done. Thereafter petitioner’s salary was credited at the rate of $55,000 per year. The amount of $142,500 was entered on the books of the corporation to petitioner’s credit in 1927 and was made up of $55,-000 ordered by petitioner’s son to be credited to petitioner as salary for that year and $87,500 as extra or back salary on 1923, 1924, 1925 and 1926.

The reduction and the restitution on the books of the corporation of the salary of petitioner were without any formal action or resolution by the board of directors. Important business of the corporation was, however, frequently discussed and decided informally by the petitioner and his sons and then reported and acted on without formal resolution of the directors, leaving comparatively little to be done at formal directors’ meetings, held only every two months.

The corporation’s returns were filed on the accrual basis. The petitioner’s returns were filed on the cash receipts and disbursements basis. Both the corporation’s returns and the petitioner’s returns from 1919 to 1927 were prepared by Fuller, the corporation’s bookkeeper.

On June 30, 1927, petitioner owed the corporation about $125,000, part of which was on open account and part was evidenced by notes, one note for $82,100 having been given in 1926.

On the corporation’s returns for 1923 to 1927, inclusive, the following deductions were set up on account of salary paid to petitioner:

1923. $42, 500
1924. 30, 000
1925. 30, 000
1926. 30, 000
Extra for 1923_ 12, 500
“ “ 1924. 25,000
“ “ 1925'. 25,000
“ “ 1926. 25, 000
Salary for 1927. 55, 000

These deductions'were allowed, with the exception of $87,500 in 1927, representing that portion of the total deduction of $142,500 that was set up as extra salaries for prior years.

On petitioner’s individual returns for the years 1928, 1924, 1925, and 1926 the same amounts given above for said years were reported received as salaries. For the year 1927, petitioner 'reported as salary $30,000. The China American Tobacco Co. was able to pay petitioner the yearly salary of $55,000 claimed by petitioner though not entered on the books.

The petitioner had a running account on the books of the corporation to which were credited his salary and any moneys advanced by him to the corporation on its behalf and to which were debited any drawing which he made from the corporation and any payment made by the corporation for him. The corporation did not pay salaries by checks or in cash, but credited each officer’s account each month with a pro rata amount of his salary.

When the time came for the petitioner to file his 1927 return he was in China and an extension of time for filing it was granted by the collector, within which time the petitioner returned home and discussed with Fuller, the bookkeeper, the matter of filing his (petitioner’s) 1927 return. Fuller explained to him that the China American Tobacco Co. had deducted the back salary in 1927 and gave him a memorandum showing the effect on his taxes of including the whole amount in 1927 income and of spreading it over prior years. The petitioner discussed with Fuller and also with one of his sons the matter of filing amended returns for years prior to 1927 and then went to Raleigh, North Carolina, to see the collector, and while there submitted a memorandum to a deputy collector from which the deputy prepared his 1927 return and the same was then, on October 10,1928, sworn to by the petitioner and filed.

The petitioner did not file amended returns for the years from 1923 on, and within a week after his return home from Raleigh he left for China and returned to this country after about a year.

The record shows that the petitioner was not given credit on the books of the China American Tobacco Co. for the full amount of his salary — $55,000 yearly — for the years 1923 to 1926, inclusive, until 1927, when he was given credit for his full salary for that j^ear and also for back salary in the amount of $87,500 for the years 1923 to 1926, inclusive. The fact that the petitioner owed the corporation enough to have taken up his back salary does not show payment. It was only when he got the credit against such indebtedness (iy application thereto of his deferred salary that he received payment to that extent, and that was not until 1927.

In the circumstances of this case, the insistence that the petitioner in a sense received constructive payment of his entire salary in the years 1923 to 1926, inclusive, is not in our opinion sound. The record shows he had the power to receive an actual payment of his entire salary in each of the years for which back salary is now claimed and sought to be allocated. Not having reported in preceding years the income now in question and not having filed amended returns covering the years preceding 1927, he can not now repudiate his own acts or resort to the use of the fiction of constructive payment or receipt to the detriment of the public revenues.

The principle and reasoning in Alice H. Moran, Executrix, 26 B.T.A. 1154, 1157 is applicable here. See also W. R. Ramsey, 26 B.T.A. 277, 281; affd., 66 Fed. (2d) 316, and authorities therein cited. We are of the opinion, therefore, that the respondent’s determination herein is correct and the same is approved.

Decision will be entered, for the respondent.


author: Lansdon:

text:
    Stella H. McConnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43478.
    Promulgated September 14, 1933.

      W. S. Pritchard, Esq., for the petitioner.

      Thomas F. Gallaban, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined a deficiency in income tax for the year 1925 in the amount of $730.16. For her causes of action the petitioner alleges (1) that the Commissioner erroneously determined that she sold any part of a certain parcel of real estate in the taxable year, (2) that if there was such a sale, he has undervalued such property as well as another certain parcel of real estate sold in the same year, as of the date of her acquisition thereof, and (3) that she is entitled to report the profit from one of such sales on the installment basis.

Upon the death of her father in December 25, 1916, the petitioner, as one of his heirs, acquired an undivided one-sixth interest in two certain parcels of real estate, consisting of (1) a tract 100 by 100 feet known and described as lots 18 and 19 of block 71, hereinafter called the Eighteenth Street property, and (2) lot 16 of block 57, hereinafter called the Fourth Avenue property, all in the city of Birmingham, Alabama.

On May 1, 1925, the petitioner and the other owners of undivided interests therein sold and transferred a portion of the Eighteenth Street property, an area 100 by 40 feet, to John W. McConnell, Harvey Branscomb and Mattie M. Huey, for a recited consideration of $91,338.33. On the same day the petitioner, John W. McConnell and Mabel C. Roscoe purchased the remainder of the property, 100 by 60 feet in area, for a recited consideration of $165,447.95. After these transactions were concluded, the petitioner owned no interest in the tract 40 by 100 feet and did own a nine-twentieths undivided interest in the tract 60 by 100 feet. The parties agree that such sales and transfers were based on a valuation of the entire property at $450,000.

In the taxable year the joint owners thereof sold the Fourth Avenue property for $45,000. Only $5,000 cash was paid down on the sale price, but during the same year the purchaser, with the consent of the sellers, placed a first mortgage on the property and paid the cash so obtained in the amount of $15,000 to the sellers. The balance of the purchase price, $25,000, was paid in three equal annual installments.

Petitioner contends that the several transactions in which the Eighteenth Street property was subdivided into two tracts 100 by 60 feet and 100 by 40 feet, respectively, and in which she disposed of all her interest in the smaller tract and enlarged her interest in the larger, w7ere no more than a readjustment of their several interests by the joint owners of the property and that as a matter of fact she sold nothing but, on the contrary, was a purchaser of additional interests in the larger tract. The deeds evidencing the two transactions are in the record and do not appear to support petitioner’s contention that the six joint owners merely readjusted their interests. The smaller tract in which the petitioner owned a one-sixth interest was sold, as recited in the deed, for $91,333.33 and the assumption of certain mortgage indebtedness by the purchasers only, one of whom was one of the joint owners of the property. Petitioner testifies that she received no cash from this sale but the deed shows that the several joint owners received cash in the amount set out above, which was in addition to the mortgage assumed by the purchasers. In.these circumstances we conclude that petitioner sold her one-sixth interest in the smaller tract as determined by the respondent.

Petitioner alleges that even if there was a sale the respondent has overstated the profit realized and contends that the value of the property at the date of her father’s death was much greater than that upon which the respondent has computed the gain from the sale in the taxable year. The property in question was included in the estate of the decedent for estate tax purposes at a value of $150,000, which the respondent has used as his basis in determining the gain realized from sale in the year 1925. Unless there is convincing evidence of another value, that determined for estate tax purposes is presumed to be correct. David Williams, 15 B.T.A. 227. The petitioner introduced the testimony of several real estate dealers in Birmingham in support of her claim that each of the parcels of real estate in question had a fair market value in 1916 in excess of the amounts included in the estate tax return. J. L. Yancy, who has been in the real estate business in Birmingham for 45 years, stated that the value of the Eighteenth Street property was approximately $250,000 at December 25, 1916, and that of the Fourth Avenue property, $15,000. George W. Wheatley, engaged in the real estate business in Birmingham for 27 years, testified to the same figures as fair and reasonable market values of the respective properties on the date in question. Yancy also testified, that the deceased owner had told him that he had several times refused offers of $240,000 for the property in block 71. The Government introduced no evidence in rebuttal and in cross-examination failed to discredit or weaken the testimony of the expert witnesses of petitioner. On the record we conclude that the determinations of the respondent as to the values of the two parcels of real estate must be overruled. The profits from the sale of the two properties in 1925 should be recomputed on the basis of values of $250,000 and $15,000, respectively.

The petitioner also contends that in the circumstances she should be allowed to report her profits from the sale of her interest in the Fourth Avenue property on the installment basis. The record discloses that out of a sales price of $45,000 the vendors received $20,000 in the year of the transaction. It is immaterial that part of this amount was realized from a first mortgage, or that it was placed on the property by the vendors with the consent of the vendees. The proceeds of the mortgage were paid to the vendors in the year of the sale and must be included in the down payment which, therefore, was in excess of one fourth of the purchase price. There is no basis for the claim that the profits from the sale should be reported on the installment basis. Sec. 212 of the Revenue Act of 1926 and arts. 44 and 46 of Regulations 69; W. H. Batcheller, 19 B.T.A. 1050.

Decision will be entered under Rule 50


text:
    New Orleans Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48003.
    Promulgated September 14, 1933.

      Arthur A. Moreno, Esq., for the petitioner.

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

Lansdon:

The respondent has determined a deficiency in income tax for the year 1927, in the amount of $39,528.90. The only issue is whether certain amounts received by the petitioner in the taxable year represented interest on obligations of the city of New Orleans and so were exempt from Federal income tax under the provisions of section 213 of the Revenue Act of 1926. The facts are not in dispute and are stipulated as follows:

That the New Orleans Land Company was the owner of a certain tract of land located in the city of New Orleans, and that on November 24, 1925, the New Orleans Land Company entered into an agreement with the city of New Orleans;
It is further stipulated that on February 2, 1926, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company transferred to the City of New Orleans the land described as Tract No. 1 for the recited consideration of §200,000;
That on February 2, 1927, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company transferred to the city of New Orleans the land described as Tract No. 2, for the recited consideration of $212,000;
That on December 16, 1927, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company transferred to the city of New Orleans, the land described as Tracts Nos. 3, 4, 5, 6, 7, 8, 9, and 10 for the recited consideration of $1,750,266.66;
That all of these transfers were made in accordance with the rights and obligations in the agreement entered into between the city of New Orleans and the New Orleans Land Company on November 24, 1925 ;

That the New Orleans Land Company, in making its income return for the year 1927, did not return the sum of $192,266.66, which it calculated or claimed as interest and as exempt income under the terms of the agreement of November 24, 1926; that if no part of the sum or sums received by the petitioner upon the transfer of Tracts Nos. 2 to 10, inclusive, is interest within the meaning of the Revenue Acts and exempt income under the law, then there is due an additional tax of $39,528.90 from this petitioner for the year in issue.

The contract of sale, attached to the stipulation as Exhibit A, contains the following provisions which are material to the issue here:

This agreement made this 24th day of November, 1926, by and between the City of New Orleans, represented herein by Martin Behrman, its Mayor, hereinafter called the “ Purchaser ”, party of the first part, and the New Orleans Land Company, of New Orleans, Louisiana, represented herein by George Dendinger, its President, hereinafter called the “ Vendor ”, party of the second part:
WITNESSETH :
Paragraph One. The party of the second part does hereby agree to sell to the party of the first part, who agrees to buy for the price of Two Hundred Thousand Dollars ($200,000) to be paid simultaneously with the signing of the deed, on or before February 1, 1926, the lands mentioned and described as Tract No. 1 on the plan annexed hereto and made a part hereof as Exhibit A, which plan has been signed by the parties hereto for identification herewith, and which land is more particularly described as follows:
* * ⅝ * * *
Paragraph Two. For and in consideration of the purchase of the land mentioned and described in Paragraph One hereof, and only in the event said land has been actually paid for on or before February 1st, 1926, as provided for in Paragraph One, an option is hereby granted by the party of the second part to the party of the first part to purchase on or before February 1, 1927, for the sum and price of Two Hundred Thousand Dollars ($200,000) with six per cent interest thereon from February 1, 1926, the land mentioned and described as Tract No. 2, of the plan annexed to and made a part of this agreement as Exhibit A, which land is more particularly described as follows:
* * * * * ⅜ *

Paragraphs 3, 4, 5, 6, 7, 8, 9, and 10 are similar to 1 and 2. Paragraphs 11 and 12 are as follows:

Paragraph Eleven. The ten (10) tracts of ground hereinabove mentioned and described are located in the City of New Orleans and are bounded on the north by a line Four Hundred (400) ft. north of and parallel to Adams Avenue, on the west by Orleans Blvd., on the south by Taylor Avenue and on the east by Bayou St. John, as per sketch and map attached hereto and made a part thereof.
Paragraph Twelve. It is understood and agreed that the party of the first part shall have the right, at any time after Tract No. 1 has been purchased and paid for, to exercise in numerical order the options hereinabove given, by giving Sixty (60) days’ written notice and paying to the party of the second part simultaneously with the signing of the deed the sum of Two Hundred Thousand Dollars ($200,000) with six per cent interest from February 1, 1926, for each tract of land conveyed.
*******

The deed transferring title from the petitioner to the city of New Orleans of tract No. 1, attached to the stipulation as Exhibit B, after the recitation of formal matters and terms, includes the following:

Who [president ol petitioner] declared that in consideration oí the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, convey, transfer, assign, abandon, deliver and set over without any warranty whatsoever, insofar as the land involved in the suit entitled “ State of Louisiana versus New Orleans Land Company, No. - of the Docket of the Civil District Court for the Parish of Orleans ”, even as to the restitution of purchase price but with lawful warranty, however, limited as to the restitution of the purchase price as to all other portions and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto
This sale is made and accepted for and in consideration of the sum of Two hundred Thousand Dollars, cash, which the vendor acknowledges to have received from the purchaser and for which full acquittance and discharge is hereby granted.

The deed transferring title to tract No. 2 from the petitioner to the city of New Orleans, after formal recitals, contains the following:

Who [president of petitioner] declared that in consideration of the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, convey, transfer, assign, abandon, deliver and set over with lawful warranty and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto
⅝ ⅝ ⅜ ⅜ # ⅜ sfc
A Certain Tract op Land, situated in the Second District of the City of New Orleans, being Tract No. 2, lying immediately adjacent to and west of Tract No. 1, which tract No. 1 is fully described in the deed from the New Orleans Land Company to the City of New Orleans, passed before Robert Legier, Notary Public, on the second day of the Month of February, in the year 1926, said Tract No. 2 being more particularly described as follows:
⅝* V •!» ⅜*
This sale is made and accepted for and in consideration of the sum of Two Hundred and Twelve Thousand Dollars ($212,000) cash, which the vendor acknowledges to have received from the purchaser and for which full acquittance and discharge is hereby granted.
By reference to the hereto annexed certificates from the Register of Conveyances and Recorder of Mortgages, it does not appear that said vendor has previously alienated said property or that same is encumbered with any mortgages whatsoever.
sfe ⅝ ij* ⅝ * ⅝

The deed transferring title to tracts nos. 3, 4, 5, 6, 7, 8, 9, and 10 from the petitioner to the city of New Orleans, excluding formal recitals and descriptions, contains the following:

Who [president of petitioner] declared, that in consideration of the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, convey, transfer, assign, abandon, deliver and set over with lawful warranty and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto
⅝ # ⅜⅛ ⅜: * * *
This sale is made and accepted for and in consideration of the sum of One Million, Seven Hundred Fifty Thousand, Two Hundred Sixty-six and 66/100 Dollars ($1,750,266.66) Cash, which the vendor acknowledges to have received from the purchaser and for which full acquittance and discharge is hereby granted.

Upon audit of petitioner’s income tax return for the taxable year, the respondent disallowed petitioner’s claim that the amount of $192,226.66 represented interest on obligations of the city of New Orleans, added such amount- to petitioner’s gross income for that year and determined the deficiency here in controversy.

The petitioner is a Louisiana corporation, with its principal office at New Orleans. Its sole contention here is that the amount of $192,266.66 received, as claimed by it, as interest on obligations of the city of New Orleans is exempt from taxation under the provisions of section 213 (b) (4) of the Revenue Act of 1926. Apparently this contention is based on the theory that the agreement incorporated in the stipulation as Exhibit A was a contract under which the city of New Orleans purchased, or agreed to purchase, the entire tract of 2,000 acres here involved.

Careful study of the agreement and of the deeds conveying title to the successive tracts, as finally purchased and paid for by the city of New Orleans, does not sustain the claim of petitioner. Paragraph “ One ” of the agreement provides for the sale of tract No. 1, on or before February 1, 1926, for $200,000 in cash. Upon the accomplishment of that transaction, the city of New Orleans acquired an option to purchase tract No. 2 at any time before February 1, 1927, for $200,000, with 6 percent interest thereon from February 6, 1926, but was under no enforceable obligation to make that purchase. The deed transferring tract No. 2 recites that “ This sale is made and accepted for and in consideration of the sum of $212,000, cash.” Similarly, the deed transferring the eight remaining tracts recites that “ This sale is made and accepted for and in consideration of the sum of $1,750,266.66, in cash.” In our opinion each of the sales in question was made for cash and there was, at no time, any obligation of the city of New Orleans to pay interest. There was no point of time between November 4, 1925 and December 16, 1927, at which the city of New Orleans owed any money to the petitioner in connection with the sales in question. We think it follows that if there was no debt, no money withheld, and no obligation to pay money, there was no agreement, contract or obligation to pay interest. Cf. Kansas City Southern Ry. Co., 16 B.T.A. 665; affd., 52 Fed. (2d) 372; certiorari denied, 284 U.S. 676; Leo M. Klein, 26 B.T.A. 745; Marine Transport Co., 28 B.T.A. 566; W. W. Cleveland, 28 B.T.A. 578.

Decision will he entered for the respondent.

       Sec. 213. For the purpose of this title * * *
      (a) The term “ gross income ” includes gains, profits and income * * * from * * * trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
      (b) The term “ gross income ” does not include the following items, which shall be exempt from taxation under this title:
      *******
      (4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; * * *


author: Aeundell:

text:
    John A. Snyder, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49721.
    Promulgated September 14, 1933.

      Henry M. Ward, Esq., and Harry A. Fellows, Esq., for the petitioner.

      R. W. Wilson, Esq., and W. W. Kerr, Esq., for the respondent.
   opinion.

Aeundell:

The respondent’s determination of a deficiency in income tax in the amount of $38,961.22 for the year 1928 arises put of his application of the rule of “ first in, first out ” to sales of stock made by petitioner in the taxable year.

The facts upon which the case was submitted are those alleged in the amended petition and admitted in the respondent’s answer thereto, and those which it was stipulated the petitioner would testify to if present. For the purposes of this report the pertinent facts may be briefly summarized.

In 1928 and several prior years petitioner dealt in stock of the United Gas Improvement Co. He traded through two brokerage houses on margin and pyramided his purchases. Upon a decline in the market so that his margin fell below the required percentage the brokers reduced his debit balance by sufficient sales to make up the deficiency in the margin. Upon a rise in the market the paper profits were used to increase his holdings of the stock. By this method of operation the stock standing to petitioner’s credit on the brokers’ books increased during the year from 5,300 shares to 8,000 shares, an increase of 2,700 shares. At the same time his debit cash balance on the brokers’ books increased from $501,865.59 to $932,822.67, an increase of $430,957.08. These changes were the result of sales by the brokers at various dates throughout the year of a total of 7,900 shares and the purchase of 10,600 shares for petitioner’s account. Purchases and sales affecting petitioner’s account were entirely through the medium of street certificates handled by the brokers, who debited and credited petitioner’s account to reflect the transactions, and at no time during the year did the brokers, on the one hand, or petitioner, on the other, deliver to each other actual stock certificates.

The substance of petitioner’s testimony, offered by stipulation, was that in each case where a sale was made it was his intention to sell the last acquired stock first and shortly thereafter to buy back an equivalent amount in order to increase his margin and acquire additional shares of the stock.

In determining the deficiency the respondent applied to petitioner’s stock transactions the method of computation prescribed by article 58 of Begulations 14, as follows:

When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not he determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock ■will constitute gain.

The applicability and validity of the above article of the regulations, commonly known as the rule of “ first in, first out ”, are the only questions presented for decision. The same petitioner was before us in a proceeding reported at 20 B.T.A. 778, contesting a deficiency arising out of similar transactions in the same stock in the year 1925. In that case we sustained the respondent’s application of the rule in controversy here, and on appeal by the petitioner our decision was affirmed by the Circuit Court of Appeals, Third Circuit, in an opinion reported at 54 Fed. (2d) 57. In the opinion of the Board it was said that there was no evidence of “ petitioner’s intention to sell any designated stock.” Evidently to meet this situation petitioner’s testimony was given in this case to the effect that in each sale he intended to sell the most recently acquired stock. This, however, does not establish that the sales were made in that order, and we are unable to find that they were so made in view of the stipulated facts that there were no deliveries of stock certificates, and the transactions were entirely through the medium of street certificates which were not identified or in any way earmarked for petitioner’s account. Consequently, the facts upon which we have to go here are in no way different (save as to amounts) from those in the previous case.

Petitioner’s principal argument is that the regulation applied here ’ is invalid, under the decision in Heiner v. Donnan, 285 U.S. 312, which was decided since the previous case involving this same taxpayer. The Donnan case dealt with a conclusive presumption; hence, it involved an entirely different question and is readily distinguishable from this case, in which the presumption is rebuttable. “A rebuttable presumption clearly is a rule of evidence ” (Heiner v. Donnan, supra), and “ casts upon the person against whom it is applied the duty of going forward with his evidence on the particular point to which the presumption relates.” Manley v. Georgia, 279 U.S. 1. It does not estop the taxpayer from establishing the existence of a fact. Where the taxpayer identifies the stock traded in the presumption does not apply. Howbert v. Penrose, 38 Fed. (2d) 577; Cleveland Trust Co., Executor, 24 B.T.A. 132. The presumption announced in the regulations merely follows the rule that has been in effect at least since the decision in Towne v. McElligott (decided in 1921), 274 Fed. 960; hence, it cannot be said to work any hardship on the taxpayer, inasmuch as he had ample warning of the necessity of putting his accounts in shape to enable him to identify his purchases and sales.

Decision will be entered for the respondent.


author: Smith :

text:
    American Exchange Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56057.
    Promulgated September 20, 1933.

      William H. Harding, Esq., H. C. Kilpatrick, Esq., and Herbert M. Bruñe, Jr., Receiver, for the petitioner.

      Henry A. Cox, Esq., for the respondent.
   OPINION.

Smith :

The sole question presented by this proceeding is whether the petitioner is authorized under the statute to file a consolidated return with the New York Fire Insurance Co. for the calendar year 1928. The respondent has denied the petitioner this right upon the authority of Fire Companies Building Corp., 23 B.T.A. 550; affd. (C.C.A., 2d Cir.), 54 Fed. (2d) 488; certiorari denied, 286 U.S. 546; Cincinnati Underwriters Agency Co. v. Commissioner (C.C.A., 6th Cir.), 63 Fed. (2d) 309; certiorari denied, 289 U.S. 754. The petitioner contends that the decision of the Board in Fire Companies Building Corp., supra, was predicated in large part upon the fact that the rate of tax imposed upon a domestic corporation by section 230 (a) (2) of the Revenue Act of 1926 was 13½ percent of the net income, while the rate of tax imposed upon a fire insurance company under section 246 (a) (1) of the same act was 12½ percent of the net income. The Board stated in its opinion:

In view of the fact that insurance companies are placed in a class .by themselves and taxed wholly differently, from other corporations, and the fact that they could not be included in a consolidated return without violating other provisions of the statute, we think that it is clear that Congress did not intend that they should be included in a consolidated return with other companies and that it was the intention that the statute relating to consolidated returns (section 240) should be limited in its application to corporations subject to tax at the same rate so that the tax could be computed in the first instance as a unit.

The petitioner argues that no such objection can be made against the filing of the consolidated return for the year 1928 and that section 141 (e) of the Revenue Act of 1928, reading as follows:

A consolidated return shall be made only for the domestic corporations within the affiliated group. An insurance company subject to the tax imposed by section 201 or 204 shall not be included in the same consolidated return with a corporation subject to the tax imposed by section 13.

is no bar to the filing of a consolidated return for the calendar year 1928.

It is to be noted, however, that the difference in rates imposed by the Revenue Act of 1926 upon insurance companies and ordinary domestic corporations was not the only consideration for the Board’s ruling in Fire Companies Building Corp., supra. The Board pointed out in its opinion that the method of computing the net income of a fire insurance company was markedly different from the method of computing the net income of an ordinary domestic corporation. The taxing statute placed insurance companies in a class by themselves for the purpose of the computation of net income. The Board still adheres to its view that it was not the intention of Congress to permit the affiliation of ordinary domestic corporations with insurance companies. The case of Cincinnati Underwriters Agency Co. v. Commissioner, supra, is directly in point. Answering the argument of petitioner that, since the Revenue Act of 1928 expressly excluded insurance companies from affiliation with non-insurance companies commencing with the year 1929, it must be assumed that in the earlier acts Congress regarded it as being permitted, the Circuit Court of Appeals for the Sixth Circuit said:

It is true that under earlier acts, and to some extent under the act of 1926, the Internal Revenue Department permitted affiliations between insurance companies and other corporations. There were provisions even in the earlier acts which made it impracticable to permit the affiliation, and we can find no justification for the department’s practice under those acts. * * * We agree with the view expressed in Fire Companies Building Corporation Case, supra, that this difference in the two acts is too fragile ” to indicate an intention to interpret the law of 1926 as permitting affiliation, and that it is just as reasonable to assume that the intent of the change was to leave the situation as it had been ” and “ to make it clear that for the future, at any rate, affili-atioa should be limited to corporations of the same sort.” Besides, as already stated, there was no provision in any of the prior acts for a tax rate applicable to the consolidated income of these differently taxed units, and in our view the Commissioner had no authority to apply the higher class rate to the consolidated result.

Judgment will be entered for the respondent.


author: ARUndell :

text:
    Gladys G. Terbell, Joseph B. Terbell, Jr., and Thomas G. Terbell, as Executors of the Estate of Joseph B. Terbell, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62791.
    Promulgated September 20, 1933.

      John B. Nash, Esq., and Paul B. Peyton, Esq., for the petitioners.

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

ARUndell :

The respondent has determined a deficiency in income tax for the year 1929 in the amount of $5,435.98. The deficiency arises primarily by reason of the disallowance of a deduction of $22,500 which petitioners assert should be allowed either as “ interest paid ” or as an “ ordinary and necessary expense of carrying on a trade or business.” The facts have been stipulated-and the stipulation is incorporated herein by reference.

It appears that on or about October 4,1928, Joseph B. Terbell, now deceased, sold short on the market 9,000 shares of Bucyrus Erie Co. convertible preference stock. As a part of this transaction and in order to make delivery of the said stock he borrowed an equal number of shares and delivered them to the purchaser. There was no covering purchase in 1928 or 1929 or at any other time prior to decedent’s death on April 15, 1931. During the year 1929 cash dividends in the amount of $22,500 were declared and paid to the stockholders of record of said 9,000 shares of Bucyrus Erie Co. convertible preference stock, who were either decedent’s vendees or purchasers of the shares from those vendees. As a part of decedent’s contract in borrowing the 9,000 shares, he had obligated himself to pay to the lender a sum equal to the dividends declared and paid during the year, which obligation he discharged, and it is this amount that petitioners seek to deduct.

It is respondent’s view that the amount of $22,500 may not be deducted either as interest or as an ordinary and necessary expense, but that it is an item of cost to be taken into consideration when the transaction is finally completed by a covering purchase. I.T. 1764, C.B. II-2, p. 22; S.M. 4281, C.B. IV-2, p. 187. We find no authority holding to the contrary and petitioners call our attention to none. It is clear that the sum of $22,500 paid the lender of the stock was not interest per se, and the petitioners do not seriously contend that it is. Nor can the sum paid be regarded as an ordinary and necessary expense of carrying on a trade or business. We have only the stipulated facts and there is no suggestion in those facts that the decedent was engaged in the business of making short sales or in dealing in securities generally.

Respondent’s action in disallowing the deduction is in accordance with his consistent practice of many years standing. We are not persuaded that it is wrong.

Decision will be entered for the respondent.


author: Trammell:

text:
    Flora M. Bonney and Alice E. Crawford, Executrices of the Last Will and Testament of James A. Macdonald, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55248.
    Promulgated September 22, 1933.

      Edwin W. Ooo-ney, Esq., for petitioners.

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

Trammell:

The question here is whether the corpus oí the trust should be included in the gross estate of the decedent. The respondent has determined that it should be. The trust agreement reserved to the settlor the right to receive the income from the trust during his lifetime; it reserved to the settlor the right to supervise investments for the trustee, and there was included in the trust agreement a provision under the operation of which there was a possibility of the trust property reverting to the settlor in the event the beneficiaries predeceased him.

In our opinion, neither nor all of these reservations combined is sufficient to warrant the inclusion of the trust property in the decedent’s gross estate.

The decedent herein, by means of the trust agreement executed in 1901, sold and transferred to the trustee therein named the stocks and securities referred to and did not reserve unto himself any power, either alone or in conjunction with any other person, to alter, amend or revoke the provisions of the trust agreement.

The trust instrument when signed and the actual transfer of the securities when consummated, were beyond the recall of the decedent. It was a completed transaction. The only beneficial interest the decedent had after the creation of the trust was the right to receive the income from securities comprising the corpus thereof. The right of the settlor to receive the income from the fund or trust, which right he possessed immediately prior to death, was obliterated by his death, and the direction to the trustee to pay such income to him during his life does not make the transfer of the property comprising the trust a transfer to take effect in possession or enjoyment at or after the settlor’s death within the meaning of section 302 (c) of the Revenue Act of 1926, or identical provisions of prior acts. See May v. Heiner, 281 U.S. 238; McCormick v. Burnet, 283 U.S. 784; Morsmam v. Burnet, 283 U.S. 783.

A joint resolution of Congress to amend section 302 of the Revenue Act of 1926, approved March 3, 1931, is not retroactive and has no bearing upon the decision of this case. See Elizabeth B. Wallace, Executrix, 27 B.T.A. 902. Nor was the reservation by the settlor of the right during his lifetime to supervise investments sufficient to constitute the transfer one to take effect in possession or enjoyment at or after the settlor’s death. See Reinecke v. Northern Trust Co., 278 U.S. 339.

The respondent contends that, since there was a possibility of the trust property reverting to the settlor during his lifetime, due to the beneficiaries predeceasing him, the property should be included jn the settlor’s gross estate. This question, however, was decided adversely to respondent in the case of McCormick v. Burnet, supra. In the McCormick case, as in this case, the corpus of the trust was to be transferred to the settlor in case she survived the beneficiaries to whom the income by the terms of the trust was payable after her death, but the Supreme Court held that even though there was a possibility of a reversion, the value of the trust property .should not be included in the gross estate of the decedent. In both the cases of Nichols v. Coolidge, 274 U.S. 531, and Coolidge v. Long, 282 U.S. 582, there was present the possibility that the children of the grantors, together with their issue, might predecease the grantors, in which case the trust of its own accord would have terminated and the property would have gone back to the grantors or their estate. The court, however, did not consider in either of those cases that this possibility of a reverter was a sufficient interest in the property to render the transfer thereof subject to tax.

This question was also involved in the case of Nanaline H. Duke et al., Executors, 23 B.T.A. 1104; affd., 62 Fed. (2d) 1057, and also in the cases of Stephen Peabody et al., Executors, 24 B.T.A. 787; H. Selden Taylor, Jr., et al., Executors, 27 B.T.A. 220; Lucy Belle Dunham et al., Executors, 26 B.T.A. 286; and Elizabeth B. Wallace, Executrix, supra. All of these cases were decided adversely to the respondent’s contention. There is a material distinction between a possibility of property reverting to the grantor and a contingency upon which the property might be transferred from the grantor at death. If the decedent made a complete and absolute transfer of his property it is not subject to estate tax, notwithstanding under some contingency it might revert to him. On the other hand, if the decedent did not convey his entire right, title aiid interest in the property, or make his death the time and occasion of the transfer, as was done in Sargent v. White, 50 Fed. (2d) 410, and Chemical Bank & Trust Co. et al., Executors, 25 B.T.A. 1153, then such properties so transferred are included in the gross estate because of the fact that the transfer takes effect in possession or enjoyment at or after the decedent’s death. The mere possibility or contingency of the property reverting to the transferor is not sufficient.

We therefore hold that the property included in the trust herein involved should not be included in the gross estate of the decedent.

Judgment will be entered under Rule 50.


text:
    Standard Fuel & Material Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47015.
    Promulgated September 26, 1933.

      Allan Muddiman, G.P.A., for the petitioner.

      Thomas F. Gallaban, Esq., for the respondent.
   OPINION.

Lansdon:

The dispute submitted to us in this appeal relates to income taxes for the fiscal year ended June 30,1928, in the amount of $4,639.66, and arises out of the respondent’s having held that the petitioner derived a taxable gain from the sale of 3,000 shares of the stock of a subsidiary corporation, which it organized and supplied with capital in that period.

The petitioner is a corporation, organized under the laws of Déla - ware, with headquarters at Birmingham, Alabama. On September 27, 1927, it organized the Standard Building & Material Co., hereinafter sometimes referred to as the new company, with an authorized capital stock of 6,000 shares with no par value. For organization purposes, 3,000 shares, or one half of the new company’s stock, were issued to dummy stockholders who surrendered the same for cancellation on September 27, when incorporation was complete.

The record fails to show the order in which these several acts of organization were performed, but on September 27 the petitioner paid in to the treasury of the new corporation $3,000 in cash, and transferred to it, by book invoices, a group of assets valued at $71,-566.48. Thereafter, on the same day, two stock certificates, numbered 4 and 5, respectively, for 3,000 shares each of the new corporation’s capital stock were issued to petitioner.

On September 30 the new corporation received its charter from the secretary of state. On the same date petitioner sold to the Birmingham Slag Co. 3,000 shares of its capital stock of the new company for the cash price of $61,562.28, conveyance of which it made by assigning over to the Birmingham Slag Co. stock certificate no. 4 theretofore issued to petitioner.

The petitioner claims that the cost to it of the stock transferred by certificate no. 4 was the value of the assets it transferred to the new company, which the parties agree was $71,566.48, and that it sustained a loss in the sale. This claim is predicated upon the theory that it purchased two separate blocks of the new company’s stock, as evidenced by certificates nos. 4 and 5, for $71,566.48 in property and $3,000 in cash, respectively.

The respondent contends that the petitioner’s purchase of the entire issue of the new company’s stock must be regarded as a single transaction, and that the payment in property and cash combined must be treated as the cost to petitioner.

The record shows that the petitioner organized the Standard Building & Material Co. and became owner db initio of 3,000 shares of its capital stock upon their issue to dummy stockholders on September 27, 1927. The original subscription terms are not shown, but petitioner’s vice president testified at the hearing that the petitioner and not the dummy stockholders “ was the real owner or purchaser of those shares.” There being no other stockholder, the petitioner was owner of the new corporation at the moment of its birth, and this control enabled it to sell itself at its own price the unissued stock. Arkansas Valley Agricultural Society v. Eicholtz, 46 Kan. 164; 25 Pac. 13; Shellenberger v. Patterson, 168 Pa. St. 30; 31 Atl. 943; Ashley v. Quintard, 90 Fed. 84.

On the date of the organization of the new company the petitioner transferred to it property valued at $71,566.48, and also paid in to its treasurer $3,000 in cash. Thereafter, or at least on the same day, stock certificates 4 and 5, each for 3,000 shares of the new company’s stock, were issued to the petitioner.

The exact order of these transactions is not shown, and, under the circumstances, we do not consider it important, inasmuch as all occurred on the same day and for all practical purposes were coincidental. We, therefore, hold that the petitioner’s acquisition of all of the stock of the Standard Building & Material Co. must be regarded as a single transaction, and that the cost to petitioner of each share may be ascertained only by dividing the sum total in property and cash paid by the number of shares in the entire issue.

Even if it could be held that the petitioner separately purchased two groups of stock covered in certificates 4 and 5 at different prices, its contention here could not prevail. The law recognizes no identifiable species of property in a share of corporation stock which can be separated and sold from the mass. Petitioner’s having endorsed over to the purchaser an original stock certificate, under the circum stances, is of no significance. That certificate was merely the corporation’s official recognition that its holder was the beneficial owner of an interest in its property and entitled ratably to participate in its earnings and share in a distribution of its assets, upon liquidation.

Had the petitioner issued to itself only the first 3,000 shares of the new company’s stock for the assets transferred, its contentions would undoubtedly be sound in respect to their cost; however, the subsequent purchase of the balance of the company’s stock for a price less than 5 percent of that attributed to the first resulted in a dilution of the cost of the entire issue to a lowered base, which we hold the respondent correctly determined. Frederick Ayer, 6 B.T.A. 152; affd., 25 Fed. (2d) 534.

Decision will he entered for the respondent.


text:
    Jacob K. Newman and Elsa Schwartz Newman, Executors, Estate of Edgar Newman, Petitioners, v. Commissioner of Internal Revenue, Respondent
    Docket No. 49553.
    Promulgated September 26, 1933.

      Ralph J. Schwartz, Esq., for the petitioners.

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

Adams:

Petitioners contend that none of the proceeds mentioned in our findings should be included as á part of decedent’s gross estate, and, in any event, no more than one half of such proceeds should be so included.

In support of the contention that none of the proceeds should be included petitioners rely on three points, as follows:

(a) The policies, having been taken out prior to the effective date of the Revenue Act of 1918, are controlled by the decision of the Supreme Court of the United States in the case of Lewellyn v. Frick, 268 U.S. 238. They form no part of the gross estate of the decedent. They cannot be taxed as part of that gross estate, without running counter to the provisions of the Fifth Amendment of the Constitution of the United States and Article 1, Sec. 8 of the Constitution of the United States.
(b) The proceeds of these policies cannot be included in the gross estate, because of the decision of the Supreme Court of the United States in the case of Chase National Bank v. United States, 278 U.S. 327. That case has no application to the present case and if it were applicable, it is distinguishable.
(c) The estate tax is concededly a tax imposed on transfers at death. It is the transfer that is subject to the tax. Under the local law of Louisiana, insurance policies and their proceeds payable to a wife, as in this case, form the separate property of the wife, and no interest was transferred by the death of the decedent. To impose a lax on the wife’s property would run counter to the provisions of the Constitution of the United States.

The Supreme Court, in Lewellyn v. Frick, supra, held that the Eevenue Act of 1918, imposing a transfer tax on proceeds of insur-anee policies, applied only to policies issued after the passage of the act. The Frick decision was decided on May 11, 1925, and was followed by this Board in Charles L. Harris, Administrator, 5 B.T.A. 41 (1926); Martha B. Phelps, Executrix, 6 B.T.A. 648 (1927); and Mercantile Trust Co., Executor, 13 B.T.A. 85 (1928); and by the Federal District Court for the Western District of Missouri in Wyeth v. Crooks, 33 Fed. (2d) 1018.

On January 2, 1929, the Supreme Court handed down its decisions in Reinecke v. Northern Trust Co., 278 U.S. 339, and Chase Nat. Bank v. United States, supra. Among other things, the former case dealt with two certain trusts which were created prior to the passage of the applicable statute, but “ made subject to a power of revocation in the transferor * * The Supreme Court held that by reason of the reserved power of revocation the “ shifting of the economic interest in the trust property which was the subject of the tax ” was not complete until decedent’s death, and that the applicable statute was not, therefore, retroactive, since death followed the passage of the statute. In the latter case the decedent on September 13, 1922, took out three insurance policies on his life, named his wife beneficiary in each but reserved the right to change the beneficiary, and died on April 10, 1924. In holding as constitutional the statute which sought to tax as a transfer the proceeds of the policies there in question, the Supreme Court said in part:

The statute in terms taxes transfers.
⅜ ⅜ ⅝ $ ⅜- ⅜
The precise question presented is whether the termination at death of that power and the consequent passing to the designated beneficiaries of all rights under the policies freed of the possibility of its exercise may be the legitimate subject of a transfer tax, as is true of the termination by death of any of the other legal incidents of property through which its usé or economic enjoyment may be controlled.
A power in the decedent to surrender and cancel the policies, to pledge them as security for loans and the power to dispose of them and their proceeds for his own benefit during his life * ⅜ * is by no means the least substantial
of the legal incidents of ownership, and its termination at his death so as to free the beneficiaries of the policy from the possibility of its exercise would seem (o be no less a transfer within the reach of the taxing power than a transfer effected in other ways through death.

Cf. Porter v. Commissioner, 288 U.S. 436.

Subsequent to the decisions in Reinecke v. Northern Trust Co. and Chase Nat. Bank v. United States, supra, it has been held consistently that where a decedent has taken out insurance policies on his own life and reserved, up to the date of his death, the right to change the beneficiary, the proceeds of such policies (subject to an exemption of $40,000 where the proceeds are receivable by beneficiaries other than the executor) are a part of the gross estate of the decedent, regardless of when the policies were taken out. See Louis M. Weiller et al., Executors, 18 B.T.A. 1121; Edwin S. Raugh, Executor, 19 B.T.A. 993; William A. Cushman et al., Executors, 19 B.T.A. 1012; Fannie C. Richardson et al., Trustees, 20 B.T.A. 728; Helena Liebes, Executrix, 20 B.T.A. 731; affd. (C.C.A., 9th Cir.), 63 Fed. (2d) 870; Heiner v. Grandin (C.C.A., 3d Cir.), 44 Fed. (2d) 141 (Circuit Judge Buffington dissenting on ground that Frick case was still the law) ; reaffirmed at 56 Fed. (2d) 1082; Max W. Feuerbacher et al., Executors, 22 B.T.A. 734; Philip W. Blood et al., Executors, 22 B.T.A. 1000; Anthracite Trust Co. v. Phillips (U.S. Dist. Ct., Pa.), 49 Fed. (2d) 910; H. T. Cook et al., Executors, 23 B.T.A. 335; Lillian T. Latty, Executrix, 23 B.T.A. 1250; Bessie M. Ballinger, Executrix, 23 B.T.A. 1312; David A. Reed et al., Executors, 24 B.T.A. 166; Oreon E. Scott et al., Executors and Trustees, 25 B.T.A. 131; Sally S. Levy et al., Executors, 25 B.T.A. 1174; affirmed on this proposition by the second circuit, 65 Fed. (2d) 412; and Harry LeBaron Sampson, Executor, 1 Fed. Supp. 95.

It would serve no useful purpose to discuss further the three above mentioned points relied upon by petitioners, as each point is decided adversely to petitioners in one or more of the foregoing decisions. We pass, therefore, to petitioners’ alternative contention that, in any event, no more than one half of the proceeds in question should be included in decedent’s gross estate.

Section 302 of the Revenue Act of 1926 provides in part as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(g.) To the .extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. [Italics supplied.]

The total proceeds here involved, $176,851.13, were all receivable by decedent’s widow, who was the sole beneficiary under all the policies. No amount was “ receivable by the executor * * Therefore, only the last phrase of section 302 (g) is applicable here. And the only matter left for determination under that phrase is whether, in fact and in law, the policies in question were “taken out by the decedent * *

Article 25 of respondent’s Regulations 70 provides in part as follows:

Insurance is deemed to be taken out by the decedent in all cases where he pays all the premiums, either directly or indirectly, whether or not he makes the application. On the other hand, the insurance is not deemed to be taken out by the decedent, even though the application is made by him, where all the premiums are actually paid by the beneficiary. Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid. [Italics ours.]

The matter contained in section 302 (g), supra, is identically the same as the matter contained in section 402 (f) of the Revenue Acts of 1918 and 1921 and section 302 (g) of the Revenue Act of 1924; and the matter quoted above from article 25 of Regulations 70 is identically the same as is contained in article 25 of Regulations 68 (1924 edition), and substantially the same as is contained in article 27 of Regulations 63 (1922 edition) and article 32 of Regulations 37 (1919 edition).

It is petitioners’ position that, since it is stipulated that “ the premiums on all of the policies were paid out of community income we are compelled to find that one half of the premiums was paid by decedent and one half by his wife; that under the respondent’s regulations only one half the insurance shall be deemed to be “ taken out by the decedent”; and that only the proceeds from one half the policies are, therefore, within the statute.

We shall divert a moment to make three observations: First, as stated above, the question with which we are concerned is, Were the policies “ taken out by the decedent ? ” On the basis of the pleadings alone, we would be justified in resolving this question in favor of the respondent, for the reason that paragraph 5 (b) of the petition alleges, and the answer admits, that “ all of the above policies were taken out by decedent * * See a similar statement in paragraph 5 (a) of the petition, which the answer also admits. But, in view of the stipulation by the parties that “ the premiums on all of said policies were paid out of community income,” we think it is our province to decide as a matter of law whether, under article 25 of Regulations 70, only one half of the insurance shall be deemed to have been taken out by the decedent. Second, throughout the entire argument of petitioners, considerable stress is laid on statements found in the decisions of the Louisiana courts to the effect that proceeds of insurance policies payable to the wife form no part of the husband’s estate. But the “ net estate ” as used in the Federal statute “ does not mean an amount to be ascertained as such under any general rule of law or under statutes governing the administration of estates, but is the gross estate as specifically defined in section 302, less deductions permitted by section 303.” Porter v. Commissioner, supra. And as explained above, the “ gross estate as specifically defined in section 302 ” includes proceeds of insurance (in excess of $40,000 when received by the beneficiary) under policies taken out by decedent, regardless of when taken out, in all cases where the insured reserved the right to change the beneficiary. Chase Nat. Bank v. United States, supra, and cases thereafter cited. Third, it should be noted that petitioners concede that the proceeds in question form no part of the commvwrdty estate, which concession, as far as the proceeds in question are concerned, makes inapplicable the ruling contained in Treasury Decision 3138, 23 T.D. 238. Cf. Liebman v. Fontenot, 275 Fed. 688.

Because of the fact that the premiums were paid out of community income, can it be said that the decedent paid one half and his wife one half, and that under article 25, Regulations 70, supra, only one half of the insurance in question shall be deemed to have been taken out by the decedent?

Article 2404 of the Eevised Civil Code of the State of Louisiana (third edition) provides in part as follows:

The husband is the head and master of the partnership or community of gains; he administers its effects, disposes of • the revenues which they produce, and may alienate them by an onerous title, without the consent and permission of his wife.

In Moseman's Estate, 38 La. Ann. 219, the husband, a short while before his marriage, had taken out a policy of insurance on his own life, payable “to his executors, administrators, or assigns.” After his marriage the premiums were paid from community funds. After bis death, upon settlement of his estate, the question was agitated whether the money paid by the insurance company upon the policy belonged to the community. In holding the money so paid to be property of the husband’s separate estate, the court said in part:

The contract creates certain rights and obligations which spring into existence the moment it is formed. Thus, at the date of the policies, Moseman acquired for himself the right to receive, at his death, * * * the sums stipulated to be paid, subject to the conditions of compliance with his own engagements to pay the premiums as they fell due.

The court then decided that the “ character of the interest and of the ownership thereof takes its impress from the date of the contract ” and that “ we are bound to hold that the interest of Mose-man under these policies, having vested before his second marriage and at a time when he was a single man, belonged to his separate estate, and did not enter into the subsequent community.” The court then continued:

We are of opinion, however, that the community is entitled to reimbursement of the amount of the several premiums which were paid, after the marriage, out of its funds.
We are aware that, in the case of insurance by the husband for the benefit of the wife, it has been held that the latter takes the fund without liability to reimburse the community the premiums paid by it. Succession of Bofenschen, 29 Ann. 714.

Cf. E. Michna, 24 B.T.A. 715.

In Succession of Bofenschen, 29 La. Ann. 711, 714, the court, in referring to Succession of Clark, 27 La. Ann. 269, said in part:

Clark and his wife died on the same day. His death was a few hours before hers. The husband or in other words, the community owed rent for the house in which himself and wife lived. He had but little property, not enough to pay his rent. He had insured his life in his wife’s behalf. His lessor, unable to realize the rent from his scanty effects, sought to make this life-policy answerable for it. It was held that the money derived from his policy belonged to his wife’s succession, and it was decreed to her legatees. The objections made by the opponents in the present case are the same as those considered in these cases, and pronounced untenable. The policy on the decedent’s life issued to his wife for the benefit of herself and children. The premiums were paid by the husband out of community funds, over which he had control as head and master thereof. The most that could be claimed would be the reimbursement of the premiums to the community, but we do not think that claim well founded. [Italics ours.]

The law of community property also exists in the adjoining State of Texas. There, as in Louisiana, the husband is head and master of the community. Waterman Lumber & Supply Co. v. Robins, 159 S.W. 360; Lasater v. Jamison, 203 S.W. 1151; Stone v. Jackson, 109 Tex. 385; 210 S.W. 953; and Moore v. Wooten, 265 S.W. 210. Cf. Poe v. Seaborn, 282 U.S. 101; and Bender v. Pfaff, 282 U.S. 127.

In Martin v. McAllister, 94 Tex. 567; 63 S.W. 624, Thomas P. Martin took out an insurance policy on the life of his wife, payable to himself. The premiums were paid out of the community. Upon the wife’s death the question arose whether the proceeds belonged to the husband as his separate property or to the community. In holding they belonged to the husband, the court said in part:

The money derived from the policy * * * was not acquired during the marriage, but was received by the husband after her death * * * and belonged to Thomas P. Martin in his separate right. [Citing both Louisiana and Texas cases.] * * *
It is contended ⅜ * * that the husband could not appropriate the community funds to his own use in the purchase of this contract without the consent of his wife; but our statute specifically provides that the husband shall have the sole right of control of the community property, and it has been uniformly held that such control cannot be interfered with unless it is exercised in fraud of the rights of the wife.

In Whiteselle v. Northwestern Mutual Life Ins. Co., 221 S.W. 575 (Texas), occurs the following statement:

The use of community funds in payment of premiums for insurance upon the life of one spouse in favor of the other does not, in the absence of fraud, create in the community the right to reimbursement for the funds so used.

In the instant case, petitioners contend that, because it is stipulated that “the premiums on all of the policies were paid out of community income,” it follows as a matter of law that the wife paid one half and the husband one half. We do not think this is necessarily so. The husband was head and master of the community, and as such, the law of Louisiana permitted him to use community funds for the payment of insurance premiums on his life, so long as he did not defraud his wife in so doing, and, in the absence of fraud, the wife had no redress. There is no evidence that fraud was present here and, since all the policies were made payable to the wife, such a possibility would scarcely exist. There is, likewise, no evidence of any agreement on the part of the wife that she was to pay any portion of the premiums in question. The respondent has determined that the policies were taken out by the decedent on his own life, and we find nothing in the record, or in article 25 of Regulations 70, supra, that would warrant us in disturbing this determination. Cf. John Bromley et al., Executors, 16 B.T.A. 1322. We, therefore, conclude that the action of the respondent in including in decedent’s gross estate under section 302 (g), supra, proceeds of insurance in the amount of $136,851.13 was entirely proper and in accordance with the law thereunto pertaining.

Judgment will he entered for the respondent.