author: Van Fossan:

text:
    Joseph Walker Wear, William E. Goodman and William Potter Wear, Executors of the Estate of William Potter, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47612.
    Promulgated July 20, 1932.

      Olcmde G. Smith, Esq., for the petitioner.

      E. L. Gorhin, Esq., and Ralph F. S'tauhley, Esq., for the respondent.
   OPINION.

Van Fossan:

Petitioners make two contentions — (1) that under the law of Pennsylvania the property in question passed under the will of the donor (decedent’s father) to the beneficiaries; and (2) that the determination of the Orphans’ Court of Philadelphia County to this effect is conclusive and thus determinative of the whole question.

Even though it be conceded that the law of Pennsylvania is as contended by petitioners and that under the state law the decision of the orphans’ court was correct, we are nevertheless unable to agree with petitioners that the property was improperly included in the taxable estate under the provisions of section 302 (f) of the Revenue Act of 1926.

Petitioners concede that the power was a general power.” It is established by the facts that it was exercised. The exercise of the power brought the case within the wording and intent of the Federal tax statute and justified the respondent’s action. All of the considerations urged upon us in support of petitioners’ position were exhaustively considered by the Board in Edward J. Hancy, Executor, 17 B. T. A. 464, and ruled adversely to petitioners. Petitioners do not attempt to distinguish the cited case, but content themselves with an attempted but unconvincing distinguishing of Pennsylvania Co., etc. v. Lederer, 292 Fed. 629, one of the cases cited in support of the Haney- decision. In our opinion the decision in Edward J. Haney, supra, is controlling. That case was based on established rulings of the Federal courts and has been approvingly cited by the Board in subsequent cases. It stands as the considered judgment of the Board. See Marry M. Lee, Executor, 18 B. T. A. 251; Bank of New York Trust Co., Executor, 21 B. T. A. 197; Cortlandt F. Bishop, Executor, 23 B. T. A. 920.

Nor are we disturbed or hindered in reaching the above conclusion because in a case arising under the same documents it was decided by the Orphans’ Court of Philadelphia County that the attempted exercise of the power of appointment was a nullity and the award should have been made to the distributees under the will of Thomas Potter. Whatever may have been the effect of this decision in the local administration of the estate, and it would seem that under the facts it was of no effect, the only announced reason for amending the earlier decision being to bring the parties within the rule announced in Estate of Helen M. W. Grant, 13 B. T. A. 174, this decision is not conclusive of the question before us. The Board of Tax Appeals is a Federal tribunal engaged in deciding questions presented under the Federal taxing acts. Though there are certain restricted situations in which the local law may be controlling, in the present case we are not so confined. The statute which we are here interpreting was enacted by the Congress of the United States to meet certain situations and achieve certain results. Ás has been said by the Supreme Court, “ the Act of Congress has its own criteria,” and in determining whether or not there has been a transfer under the Federal statute we must look to the interpretations adopted by the Federal courts and tribunals. See Edward, J. Hancy, supra; Chase National Bank v. United States, 278 U. S. 327. Pennsylvania Co., etc. v. Lederer, supra; Fidelity Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600.

Decision will he entered for the respondent.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    Yost Auto Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43815.
    Promulgated July 20, 1932.

      P. R. Strout, C. P. A., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Matthews :

The petitioner in this case is protesting the disallowance by the respondent of a deduction from gross income for 1927 in the sum of $1,400. This amount is entered on its books under its account for tires as “ reserve for seven buses ” and in his report to the stockholders for the year 1927 the general manager of the petitioner corporation explains this entry as follows:

During the year, most of the tires on our stage equipment were used up and replaced with contract tires of the Firestone Tire & Rubber Company. For the purpose of replacing- these buses with our own rubber at such future time as this may become necessary, a reserve fund for this purpose was set up to the amount of $1,400.00 and charged to tire operation expenses. After including this item in our cost of tires for the year, the tires' cost us 1.27 cents per mile, as compared with 1.38 per mile for the previous year.

We have found that the petitioner did not purchase any tires during the year 1927 and the items aggregating $2,886.44 which were charged to the account for tires in 1927, in addition to the reserve fund of $1,400, represented payments made to the Firestone Tire & Rubber Company under a contract whereby the Firestone Company furnished tires to the petitioner at an agreed rate per bus mile. This contract was to run to May 1, 1928, and it was provided that the petitioner might continue to use the hired tires at the rate specified for an additional period of 120 days before purchasing them in accordance with the terms of the contract, which are more fully set out in our findings. Seven buses were equipped with hired tires in 1927. The general manager of the petitioner corporation testified that the reserve for tires in the sum of $1,400 represented an estimate of the amount petitioner would have to pay the Firestone Company for the hired tires at the expiration of the contract.

The statute provides that expenses paid or incurred during the taxable year shall be allowed as deductions in computing net income. Under the accrual system of bookkeeping items of expense may be accrued where they represent obligations or expenses definitely incurred, but liabilities or expenses will be considered to have accrued only when all the events have occurred from which liability or expense can be determined and become fixed. Naitove & Co. v. Commissioner, 82 Fed. (2d) 949, affirming 8 B. T. A. 589.

In William J. Ostheimer, 1 B. T. A. 18, a lessee of chattels sought to take as a deduction amounts set aside as a reserve in anticipation of liability under the terms of the lease to replace the leased property. It was held that only the amounts actually expended or for which, liability had actually been incurred during the taxable year may be deducted. See also Atlas Mixed Mortar Co., 23 B. T. A. 245; Schuster & Co. v. Williams, 283 Fed. 115; Seabright Woven Felt Co. v. Ham, 38 Fed. (2d) 114; Lucas v. American Code Co., 280 U. S. 445.

Even if we concede that, under the circumstances of the instant case, business prudence may have justified the petitioner’s setting up in 1927 of a reserve for tires, it is clear that no liability in praesenti was incurred in the taxable year. It appears that a liability to purchase tires in some amount would be incurred at some time in the future, but reference to the provisions of the contract, which expired on May 1, 1928, but might be continued at the petitioner’s option on the same basis for' 120 days thereafter, shows how indefinite, on the evidence presented, is the obligation of the petitioner to make any payment under the contract at its termination. We conclude that the reserve for tires is not deductible in determining net income for 1927.

Judgment will be entered for the respondent.


author: Smith :

text:
    Herald News Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48530.
    Promulgated July 22, 1932.

      B. A. Bcartlett, Esq., for the petitioner.

      O. A. Bay, Esq., for the respondent.
   OPINION.

Smith :

The petitioner contends that it is entitled to have its tax liability for the entire calendar year 1926 computed on the basis of the consolidated return filed by it and the El Paso Times Company, or, in the alternative, that it is entitled under the provisions of section 240 (f) of the Revenue Act of 1926 to have its accounts consolidated with those of the El Paso Times Company for the period January 1 to May 24, 1926.

As to the first question, the statutory requirements for affiliation under section 240 (d) of the Revenue Act of 1926 are (1) the ownership by one corporation of at least 95 per cent of the stock of the other or others, or (2) the ownership by the same interests of at least 95 per cent of the stock of two or more corporations. The petitioner claims affiliation under the second provision. It contends that Ramsey, who held more than 5 per cent of the stock of the El Paso Plerald Company during the period in question, constituted the same interests with Slater, who owned all of the stock of the El Paso Times Company. This contention must be denied. The term “ same interests,” as used in the statute, has been construed to mean the same economic interests. Handy & Harmon v. Burnet, 284 U. S. 136.

So far as the evidence shows, Ramsey and Slater had no common business interests. Ramsey merely lent Slater a sum of money and in settlement of the indebtedness acquired the 400 shares, amounting to more than 5 per cent, of stock of the El Paso Herald Company. These individuals were in no sense the same economic interests.

There is no question but that Ramsey was the legal owner of the shares in question, notwithstanding the agreement that Slater might reacquire them at his will and that he held a power of attorney to vote them. The statute requires legal ownership of at least 95 per cent of the stock by the same interests. This requisite was lacking during the period January 1 to May 24,1926.

With respect to the second question, the statute provides, in section 240 (f) of the 1926 Act, as follows:

In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

It is undeniable that the businesses here were “ related ” and were controlled directly or indirectly by the same interests. Beyond this point, however, we are unable to proceed in applying the statute. All that this provision of the statute requires the Commissioner to do is to “ consolidate the accounts ” of the related business, if necessary, “ in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital.” The record before us indicates that such a consolidation of the accounts as the statute contemplates may have been made.upon the basis of the written agreement under which the companies operated. In substance this agreement calls for an apportionment between the companies of the cost of production of both papers on the basis of the amount of the relative percentage of total pages issued. The revenue or income accounts were kept separately. At proper accounting intervals the necessary charges were made as between the several accounts. Apparently this plan produced the results of which the petitioner now complains, that is, a taxable gain for the El Paso Herald Company and a loss for the El Paso Times Company. The petitioner argues that “the operating loss indicated by the accounting records of the Times Company was reflected in the income of the Herald Company by reason of arbitrary allocation of production costs which were made, regardless of the earnings of the Times Company; ” that “ the portion of such costs arbitrarily assigned to the Times Company was inaccurate and greatly in excess of the actual costs of producing the Times and hence caused the company to show a loss for accounting purposes.” The fact is, however, that the petitioner has offered no other or better plan for a consolidation of the expense accounts of the companies, nor is any plan suggested for a consolidation and apportionment of the income and other accounts. It merely protests that the method used was arbitrary. We held in Roessler & Hasslacher Chemical Co., 25 B. T. A. 915, that, where any distribution or apportionment of deductions is proper, it is incumbent upon the petitioner to prove an apportionment which is reasonably accurate under the circumstances.

As pointed out in Broadway Strand Theatre Co., 12 B. T. A. 1052, a.nd Western Hide & Fur Co., 26 B. T. A. 354, where the accounts are consolidated under this provision of the statute, it is then necessary to break up the accounts and segregate the items attributable to each in order to determine the correct tax liability. There is no evidence before us which would afford a basis for such a segregation of the items unless it be the above agreement under which the companies operated. Cf. also Nowland Realty Co., 18 B. T. A. 405; aff'd., Nowland Realty Co. v. Commissioner, 47 Fed. (2d) 1018. Certainly the statute does not purport to authorize the offsetting of a loss or gain of one business against a gain or loss of a related business by a consolidation of accounts.

Judgment will be entered for the respondent.


author: Smith:

text:
    H. S. & M. W. Snyder, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36686.
    Promulgated July 25, 1932.

      J. G. Korner, Jr., Esq., for the petitioner.

      J. M. Leinenhwgel, Esq., for the respondent.
   opinion.

Smith:

The respondent determined the petitioner’s income-tax liability for 1925 upon the basis of a separate return for the period January 1 to June 30, 1925, and a consolidated return for the period July 1 to December 31, 1925, asserting a deficiency of $5,093.24 for the latter period.

The stipulated facts and pleadings show that the petitioner, a Massachusetts corporation, was not affiliated with any other corporation prior to July 3, 1925, when the Export Trading Company was organized and affiliated with it. The petitioner sustained a net loss for the taxable year 1923 of $152,328.11, which it seeks to apply against its net income for 1925 (its 1924 net income being offset by its 1922 net loss). For the calendar year 1925, the petitioner and the Export Trading Company duly filed a consolidated return, which, before the deduction of any portion of the petitioner’s 1923 net loss, showed a net income of $78,357.54, against which was applied the petitioner’s 1923 net loss of $152,328.11, leaving $73,970.57 of that net loss unabsorbecl. Amended separate returns were subsequently filed for each corporation for the calendar year 1925.- In its separate return, the petitioner reported a net income of $78,608.06, against which was applied its 1923 net loss of $152,328.11, leaving $73,720.05 of that net loss unabsorbed; the Export Trading Company’s separate return for the period July 3 to December 31, 1925, showed a net loss in the amount of $250.52. On January 7,1928, the petitioner filed two amended returns, one of which covered the period from January 1 to June 30, 1925, and showed a net income .of $47,810.40, against which was applied its 1923 net loss of $152,328.11, leaving $104,517.71 of that net loss unabsorbed; the other, a consolidated return for itself and the Export Trading Company covering the period from July 1 to December 31,1925, showed consolidated net income of $30,547.34, against which was applied the portion ($104,517.71) of petitioner’s 1923 net loss not absorbed'by its net income for the period January 1 to June 30,1925.

In his determination for the period July 1 to December 31, 1925, the respondent has disallowed the deduction of any portion of the net loss sustained by the petitioner for the year 1923. The respondent’s determination is based upon the first return filed covering the operations of the petitioner and its affiliate for the calendar year 1925. . That return showed a loss, after the deduction of the petitioner’s 1923 net loss of $152,328.11, of $73,970.57. The respondent has taken the difference between these two amounts, or $78,357.54, as the net income of the petitioner and its affiliate for the calendar year 1925, and allocated one-half of this sum, or $39,178.77, to the period July 1 to December 31, 1925, as the net income of the petitioner and its affiliate for that period. The petitioner contends that it is entitled to have its net income for the entire calendar year 1925 offset by its 1923 net loss.

Our problem is to determine this petitioner’s “next succeeding taxable year ” with relation to its taxable year 1923. Section 206 (e) and (b) of the Revenue Act of 1926. The petitioner contends that it is the calendar year 1925, whereas the respondent contends that it is the period January 1 to June 30, 1925.

The stipulation shows that the Export Trading Company had no existence prior to July 3, 1925, when it was organized and affiliated with the petitioner corporation. There was no period prior to affiliation for which the Export Trading Company could have filed a separate return, as contemplated by article 634 of Regulations 65 and 69, and this fact distinguishes the instant proceeding from those cases where corporations having a separate existence prior to affiliation within the taxable year were required to file separate returns for such preaffiliation period. See American La Dentelle, Inc., 1 B. T. A. 575; American Steel Co., 7 B. T. A. 641; Tolerton & Warfield Co., 23 B. T. A, 892; Fidelity Nat. Bank & Trust Co. v. Commissioner, 39 Fed. (2d) 58; Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984.

The respondent argues that the period in 1925 prior to the organization of the Export Trading Company should be treated as a “ taxable year,” for which the petitioner filed an amended separate return, since such a period is within the purview of section 200 (a) of the Revenue Act of 1926, which is as follows:

The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The term “ taxable yea/r ” includes, in the case df a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which, such return is made. The first taxable year, to be called the taxable year 1925, shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925.

The italicized sentence appeared in this section of the Revenue Act of 1924 for the first time, and was inserted for the purpose of extending the benefits of the “ net loss ” and other sections of the law “ to taxpayers who are required by law to make a return for a fractional part of a year.” See Ways and Means Committee Report No. 179, and Senate Finance Committee Report No. 398, 68th Cong. 1st sess.

Section 212 (b) of the Revenue Act of 1926 declares in plain mandatory language that “ net income shall be computed upon the basis of the taxpayer’s annual accounting period.” The record supports the petitioner’s contention that its accounting period was the calendar year, that it filed returns on that basis, and that the consolidated return which it filed for the entire year 1925 was the required return, citing F. A. Hall Co., 3 B. T. A. 1172; Kellogg Commission Co., 6 B. T. A. 771; Fibre Container Co., 9 B. T. A. 575; Lancaster Lens Co., 10 B. T. A. 1153, 1155, and cases cited; and Colmer-Green Lumber Co., 12 B. T. A. 256. Those decisions support the petitioner’s contention.

In Margay Oil Corporation, 26 B. T. A. 199, we discussed prior decisions (Automatic Fire Alarm Co., 13 B. T. A. 1195; Hutt Contracting Co., 17 B. T. A. 818; Summerfield Co., 24 B. T. A. 829; and American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508), respecting the returns to be filed by corporations that became affiliated during the year. In that case we pointed out the necessity of separate returns where the corporations had been in existence prior to affiliation, and the sufficiency of a single consolidated return for the full year of the parent or principal corporation in which is included the income of the subsidiary or affiliate corporation for the period of its existence during that year. In holding that the respondent had erroneously divided the year 1925 into two taxable periods, we said:

In the present case the petitioner’s subsidiary had no separate existence for tax purposes in 1925 and there was no occasion for the filing of a separate return. The petitioner operated throughout the year and the filing of a consolidated return by it was proper under the cases above cited. Consequently, as to petitioner, there was no fractional part of a year which could be taken to be a “ taxable year” under section 200 (a) of the Revenue Acts of 1924 and 1926. In relation to the year 1924, petitioner’s “ succeeding taxable year ” was the calendar year 1925, and the “ next succeeding taxable year ” was the calendar year 1926. We accordingly hold that respondent erred in refusing to allow the 1924 net loss as a deduction in computing net income for 1926. * * *

The organization of the subsidiary corporation (Export Trading Company) and its affiliation with the petitioner did not change the petitioner’s taxable year. Swift & Co. v. United States, 38 Fed. (2d) 365; Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436, 438; American-Hawaiian, S. S. Co. v. United States, 46 Fed. (2d) 592; American Paper Exports, Inc., v. Bowers, supra. Furthermore, the affiliation neither deprived this petitioner of its personal privilege, nor diminished that privilege, of offsetting the gains of the two succeeding taxable years by its 1923 net loss. Woolford Realty Co. v. Rose, 53 Fed. (2d) 821; aff'd., 286 U. S. 319. In that case, the Circuit Court of Appeals for the Fifth Circuit said:

* * * This personal privilege, extended to the individual taxpayer to palliate the rigidity of the annual system of taxation, and to spread over the two succeeding years for the purpose of deduction in them from the net income which the taxpayer might make in those years, losses which, though not all actually accruing in the one year, were perhaps the foundation of the income of the following years, * * * should be given the full effect intended. * * *

The instant proceeding involves neither a change in the taxpayer’s taxable year from a calendar to a fiscal year basis (or vice versa), necessitating a return for a short period within the year (see Strain Brothers, Inc., 19 B. T. A. 601; Pennsylvania Electric Steel Casting Co., 20 B. T. A. 602), nor the affiliation of two preexisting corporations, each of which would be required to file separate returns for the preaffiliation period within the year. (See cases cited, supra, on this point, and compare A. S. Siracusa Sons, Inc., 23 B. T. A. 53).

There being no period in 1925 for which the Export Trading Company could have filed a separate return, or for which the petitioner should have filed a separate return, and the two corporations having filed the required return for 1925 upon a consolidated basis (Margay Oil Corporation, supra), with relation to the year 1923, this petitioner’s “succeeding taxable year ” was the calendar year 1924 and its “ next succeeding taxable year ” was the calendar year 1925. It appearing that the petitioner’s unabsorbed net loss for 1923 exceeded its net income for 1925, it follows that petitioner had no taxable net income in 1925.

Judgment of no deficiency will he entered.


text:
    Newblock Oil Company of Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28045.
    Promulgated July 25, 1932.

      Erwin Bruce Hallett, Esg., for the petitioner.

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

Sea well: The following sections of the Revenue Act of 1921 are applicable in the determination of the issues herein:

Seo. 204. (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
Seo. 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner I with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and- determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

The first issue is whether a single consolidated return for the entire calendar year 1922, including the operations of the Delaware corporation for the full year and those of the petitioner (the Texas corporation) from April 19 to December 31, 1922, was proper, or whether a separate return was required of the Delaware corporation for the period in that year prior to affiliation and a consolidated return of the two corporations for the period of affiliation in that year. We see no necessity for an extended discussion of the question as, in our opinion, the issue here presented has been heretofore considered and decided by this Board and by the courts, and such decisions are controlling herein. It has been held that where a corporation had no existence or separate activity prior to becoming affiliated with another corporation — -as in the instant case with the petitioner — the necessity for filing separate returns disappears, a single consolidated return for the calendar year in which the corporations become affiliated being sufficient. Automatic Fire Alarm Co., 13 B. T. A. 1195; Hutt Contracting Co., 7 B. T. A. 818; Margay Oil Corporation, 26 B. T. A. 199; American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508.

In view of the decisions cited, we are of the opinion that in the instant case a consolidated return by the aforesaid Delaware corporation for the calendar year 1922 covering its own operations for the entire year and the operations of the petitioner (Texas corporation) for the period April 19 to December 31, 1922, the period of affiliation, was proper and all that was necessary to comply with the law and the respondent was in error in determining otherwise. Since we have held that only one return is required for 1922 and that the operations of both corporations for 1922 would be included in such return (that is, those of the Delaware corporation for the entire calendar year 1922 and those of the Texas corporation from April 19,. 1922, to December 31, 1922), there remains no longer the question of the application of a net loss in one period or year in determining net income in a succeeding period or year, but, in view of the fact that the losses of the Delaware corporation exceed the net income of the Texas corporation, it becomes merely a question of combining the two amounts to determine whether there is a consolidated net income. While the losses stipulated are in terms of “ net losses,” apparently the losses in the ordinary sense would not be different from the net losses, or at least would exceed the net income of the Texas corporation. It accordingly necessarily follows that since the net income of the Texas corporation for the period April 19, 1922, to December 31, 1922, is less than the losses of the Delaware corporation for the entire calendar year 1922 there is no consolidated net income for 1922 and therefore no deficiency due from the petitioner.

Judgment of no deficiency will ~be entered.


author: Sea well :

text:
    Sailors Brothers Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53552.
    Promulgated July 25, 1932.

      A. E. James, Esq., for the petitioner.

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

Sea well :

In the petition, three errors were assigned, therein designated as 4 (a), 4 (b) and 4 (c). The first two of them relate to the manner of apportioning the tax liability among the members of the affiliated group, but at the hearing counsel for the petitioner made the following statements:

In some minor particulars, the Commissioner has denied some allegations as set forth in the petition. The petition also, in its original form, (and it has not been amended) sets out two alleged errors, numbered 4 (a) and 4 (b), which the petitioner is not pressing at this time. The evidence which I shall offer, which is entirely documentary, may seem to your Honor to have an indirect bearing upon those issues. It is not introduced for that purpose. The sole issue now being pressed by the petitioner in this proceeding is that set forth in paragraph 4 (c) of the petition, and relates to the question of the deduction of net losses. The reason I am introducing this matter is that it is somewhat interwoven with the peculiar situation which arose in the handling of this case.

However, in any event the meager evidence submitted would not, in our opinion, justify a reversal of 'the Commissioner’s action in proposing to have the entire deficiency assessed against the petitioner. Certainly, it has not been shown that there was no agreement among the parties which would support the Commissioner’s action. “ The proof of the existence or nonexistence of an agreement between corporations as to the allocation of tax among them is, beyond doubt, a part of the taxpayer’s burden.” Morganite Brush Co., 24 B. T. A. 776.

The error on which the petitioner relies relates to the deductibility of net losses sustained by various members of the affiliated group in 1925 and 1926 in determining consolidated net income for 1927. In considering this question we consider it pertinent to observe at the outset that, in our opinion, in view of recent decisions by the Federal courts, it is no longer open to question that each member of an affiliated group is a taxpayer and must be viewed in its individual capacity for the purpose of carrying forward net losses from one year to another, except to the extent that a part of its net loss may have already been availed of in determining consolidated net income for a given year. In other words, affiliation merely makes of a group of corporations a tax-computing unit, and each of them retains its identity as a taxpayer. Woolford Realty Co. v. Rose, 286 U. S. 319, and Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332; Swift & Co. v. United States, 38 Fed. (2d) 365; Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436; and Commisisoner v. Ben Ginsburg Co., 54 Fed. (2d) 238. We are of the opinion that it also follows from the same authorities that a net loss sustained by a member of an affiliated group, whether before or after becoming a member of such group, is individual to the member sustaining such net loss and may not be availed of in a subsequent year for a greater amount than the income realized in such year.

With the above principles in mind, we will dispose of the questions presented by the above assignment of error. In the first place, we can see no merit to the contention that net losses sustained by the Ideal Furniture Company in 1925 and 1926, and the petitioner in 1926, may be carried forward and allowed as a deduction in computing consolidated net income for 1927. Both corporations already had losses in 1927 before the application of a net loss for the prior years and therefore no occasion exists to apply the net losses of the prior years. Of course, another member of the group had net income for 1927, but, as we suggested at the outset, one corporation may not carry forward its net losses other than for the purpose of reducing its own income. New Castle Leather Co., 26 B. T. A. 282.

This leaves for consideration the fourth member of the affiliated group, E. Levy" and Sons, Inc., which had net income in its individual capacity for 1926 and 1927, but a net loss for 1925. A part of the net loss for 1925, apparently agreed between the parties as representing a pro rata part of the net loss for the entire year, $7,539.85, was sustained by such corporation for the period January 1, 1925, to October 20, 1925, that is, during the period prior to the time when it became a member of the affiliated group, and the balance, $1,852.80, was sustained during the remainder of the year, when it was a member of such group. In determining consolidated net income of the group for 1925, the net loss of $1,852.80 was used as a deduction, the combined result being a consolidated net loss for 1925 in the amount of $5,162.95. Since a part of this corporation’s net loss was used in eliminating or wiping out income of other members of the group, only a proportionate part of its net loss is available to be carried forward and allowed as a deduction in computing net income for the succeeding year or years. We think the Commissioner properly determined such proportionate part in the amount of $1,205.25. Swift & Co. v. United States, supra.

We then have the situation where K. Levy and Sons, Inc., in its individual capacity had a net loss for the period January 1, 1925, to October 20, 1925, in the amount of $7,539.85, an unabsorbed net loss for the period October 21, 1925, to December 31, 1925, of $1,205.25, and net income for the years 1926 and 1927 in the respective amounts of $11,806.28 and $58,980.92, and our question is whether the net losses of such corporation for 1925 may be carried forward and allowed as a deduction in computing consolidated net income for 1927. Since the net income of E. Levy and Sons, Inc., for the calendar year 1926 exceeds even the losses of the two periods in 1925 combined, it becomes immaterial whether we view the two periods as two taxable years or as one taxable yearin any event there would be no unabsorbed portion of a net loss from 1925 which could be carried forward and allowed as a deduction in computing net income for 1927, the year with which we are concerned. It is true that the corporations as a group had a consolidated net loss for 1926 without the necessity for applying net losses of prior years and therefore it might be said that no benefit was derived prior to 1927 from the 1925 net losses of E. Levy and Sons, Inc., but we do not understand such considerations to be determinative of the issues involved. As heretofore stated, each member of an affiliated group is a taxpayer and their affiliation merely makes of them a tax-computing unit. Woolford Realty Co. v. Rose, supra. One of the steps in the determination of the consolidated net income of an affiliated group for any year is the determination of the net income of each member of the group; that is, aside from proper elimination for intercompany transactions, we would determine the net income of each member of the group as if standing alone, including the items of income applicable to each corporation and allowing the deductions provided by statute, and the combined income and losses (if such there be) would constitute the consolidated net income or consolidated net loss, as the case might be. When computed in the foregoing manner, we find that one of the deductions to which E. Levy and Sons, Inc., is entitled for 1926 is the net loss sustained by it in 1925. Since the net income of this corporation for 1926 exceeded the net loss for 1925, it follows that the entire net loss for 1925 would be absorbed in computing its net income for 1926, and therefore no net loss from 1925 would remain which might be used as a deduction in computing net income for 1927. Delaware & Hudson Co. et al., 26 B. T. A. 520.

In an amended answer the Commissioner was permitted to set up an affirmative allegation and claim an increased deficiency on account thereof, based on the averment that he erroneously allowed a deduction in 1927 of $1,205.25, the proportionate part of the consolidated net loss for 1925 which was applicable to E. Levy and Sons, Inc. In view of what we have said above, it follows that the position of the Commissioner is well taken, and that such increased deficiency as may result from the elimination of the deduction in question should be granted.

Judgment will be entered under Rule 50.


text:
    Stanley Company of America, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31516, 33142, 40023.
    Promulgated July 26, 1932.

      Lawrence A. Baker, Esq., and Henry H. Elliott, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Smith:

The respondent has proposed for assessment against the petitioner, as transferee under the provisions of section 280 of the Revenue Act of 1926, liabilities for the unpaid taxes of the several transferor companies named for the calendar year 1919 as follows:

The only question at issue is whether the petitioner, while admitting its liability as transferee for any deficiencies in the taxes due from the transferor companies for 1919, is entitled in these proceedings to a redetermination of the amounts of such deficiencies. The parties have filed written stipulations setting forth all of the material facts and, in the alternative, the amounts for which the petitioner is liable, contingent upon the ruling of the Board on the question of the petitioner’s right to have the deficiencies redetermined.

The stipulation filed in Docket No. 33142 is as follows:

1. That on or about October 28, 1926, the Commissioner of Internal Revenue mailed to the Stanley Realty Company, Philadelphia, Pennsylvania, a notice of deficiency proposing to assess additional 1919 income and profits taxes in the amount of $39,012.84.
2. That on or about December 27, 1926, a petition was filed with the United States Board of Tax Appeals by the Stanley Realty Company praying for a redetermination of the liability proposed for assessment by letter dated October 28, 1926. This appeal was docketed number 22171.
3. That 'ob or ’about February 17,1027) the Board entered 'all order, a copy of which is attached hereto and made a part hereof, and marked Exhibit A.” [See footnote.] Said order was entered without any testimony being introduced, and there was no hearing on the merits or issues presented by the petition held prior or subsequent thereto.
4. That on December 14, 1925, the Stanley Realty Company was dissolved. That at the ’date of dissolution and for some time prior thereto the Stanley Company of America owned all of the capital stock of the Stanley Realty Company.
5. If the aforesaid order of the Board (attached as Exhibit A) is a bar to the right of this petitioner in this proceeding of seeking a redetermination of the tax liability of said Stanley Realty Company on the merits, the Board may enter an order finding the petitioner to be liable as a transferee of the Stanley Realty Company within the meaning of Section 280 of the Revenue Act of 1926 for $39,012.84 plus interest as provided by law. If this petitioner in this proceeding is not barred by said order from seeking a redetermination of the tax liability of said Stanley Realty 'Company on the merits, the true and correct deficiency due from said Stanley Realty Company for the year 1919 is $8,491.36 and the Board may enter an order against this petitioner for that amount plus interest as provided by law.
6. The Stanley Company of America, petitioner herein, is a transferee of the assets of the Stanley Realty Company, petitioner in Docket No. 22171, and as such transferee is liable for a deficiency of $39,012.84 or $8,491.36 together with interest as provided by law, whichever is found by this Board to be due in this proceeding.
7. It is further stipulated and agreed that nothing in this stipulation shall be construed to deprive either party hereto of the right to prosecute an appeal from the decision of this Board on the question of whether the Stanley Company o’f America as ’transferee, the petitioner herein, is ’foreclosed by the aforesaid order ’of the Board in the case of Stanley Realty Company v. Commissioner of Internal Revenue from showing herein any different liability than that shown by said order.

The stipulations filed in Docket Nos. 31516 and 40023 are in all material respects similar to that above. In each instance It is stipulated that a deficiency notice was sent to the transferor company, a petition and answer were filed with the Board, and an order of dismissal was Issued by the Board fixing the amount of the deficiency as determined by the respondent. It is also stipulated in the other proceedings that the petitioner is liable, in the alternative, for the following amounts:

In Jahncke Service, Inc., 20 B. T. A. 837, we held that where in a prior proceeding, brought by a taxpayer corporation in its own name, the Board determined the amount of its tax liability, such determination is binding upon the transferee stockholder of such taxpayer and may not be contested in a subsequent proceeding brought by the transferee under section 280 of the Bevenue Act of 1926. To the same effect is J. E. Duval, 21 B. T. A. 1357; aff'd., 57 Fed. (2d) 496. In Nora M. Carney et al., 22 B. T. A. 721, we held that a prior determination in respect of a transferor’s tax liability is also binding upon the Commissioner in a proceeding against the transferee stockholders.

However, in Wayne Body Corporation, 22 B. T. A. 401, we limited the application of that rule to cases in which there had been a prior hearing and determination by the Board on the merits. In that case we held that the transferee in a proceeding brought under section 280 of the Bevenue Act of 1926 was not precluded from contesting the amount of a deficiency for 1917, where in a prior proceeding brought by the transferor the Board granted the taxpayer’s motion to “ withdraw from the petition any objections made to the deficiencies found by the respondent for the years 1917 and 1920.” In distinguishing that case from Jahncke Service, Inc., supra, we said:

The exception to the rule which freely permits the transferee, on appeal from a proceeding under section 280, to contest the correctness of the amount of tax originally determined against the transferor, is where the transferor appealed to this Board in the original proceeding for a deficiency and the cause was heard on its merits and final determination was made. We have held in such a case, in a subsequent appeal by a transferee from a proceeding under section 280, the transferee is precluded from contesting the correctness of the tax against transferor. Jahncke Service, Inc. 20 B. T. A. 837. We have no such case before us in this proceeding; there was no hearing on the merits as to 1917. We therefore hold that petitioner is not precluded from inquiring into the correctness of the amount of the tax assessed against the Detroit Company for 1917.

The facts here are similar in all material respects to those in Wayne Body Corporation, supra. In none of the prior proceedings brought by the transferors was there any determination of a deficiency on the merits. The proceedings were all dismissed on motion of the petitioners and the respondent’s determinations were approved fro forma. Under these circumstances, we are of the opinion that the transferee is entitled in these proceedings to contest the amounts of the tax liabilities of the transferors.

In each of the present proceedings the parties have stipulated the amount for which the petitioner is liable as transferee if the Board should hold that the petitioner is entitled to a redetermination of the liability of the transferor companies;

Judgments of deficiency will be entered for the following a/mounts: Docket No. 81516, $3,602, flus interest; Docket No. 3311$, $8,-191.36, flus interest; Docket No. 10023, $760.53, flus interest.

       Order op Dismissal
      This proceeding having been called Xroin the Day 'Calendar of February 17, 1927, and counsel for the petitioner having moved to dismiss, without objection’ by counsel for the respondent, it is hereby
      'Ordered that the motion be and the ‘same 'is bereby granted. The amount of the deficiency is $39,01-2.84 for the year 1919, as determined by the Commissioner.
      [Signed] C. Rosers Arundeld,

        Member,

      united States Board oe Tax Appeals.
      Dated, washington, D. C.,
      February 17, -1927.


text:
    Charles H. W. Foster and Charles H. Allen, Executors of the Will of Caroline B. Foster, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46672.
    Promulgated July 26, 1932.

      Charles M. Roger son, Esg., for the petitioners.

      Lewis /S. Pendleton, Esg., for the respondent.
   OPINION.

Smith :

On brief, the respondent states his contention as follows:

It is the contention of the Commissioner that the transfer to- the decedent’s issue was one intended to take effect in possession or enjoyment at or after the decedent’s death within the meaning of Section 302 (c) and that the value of the entire property is subject to tax with the exception of the remainder interest therein deductible under Section 303 (a) (3) as a bequest to charity.

On brief, the respondent discusses generally the common law relative to contingent remainders, and treats the question before us as though the status of the rights of the decedent’s issue is determinative of the question. Similar rights were not considered to have affected the transfer involved in Shukert v. Allen, 273 U. S. 545. To illustrate the erroneous conclusion reached by that line of reasoning, the respondent argues that upon the death of the decedent “ for the first time the children possessed interests susceptible of definite valuation and subject to all of the incidents of absolute ownership,” which interests he values not upon the basis of their life expectancy, during which they could receive the income from the trust (although that was the basis of his first determination of the deficiency), but upon the basis of the value of the trust property at the decedent’s death, less the then present value of the remainder interest of Harvard College, postponed for 20 years beyond the life expectancy of the youngest of 20 named persons living at the basic date. Under the terms of the special agreement by which the decedent conveyed property to the Harvard Mutual Foundation in November, 1916, and the terms of her will, also executed in November, 1916, her issue shared per stirpes and not per capita in the income of the fund after her death, and the children' of the decedent’s married son and daughter were to receive per stirpes the share of the income after the death of their parents. Obviously, if the interests of the decedent’s issue are susceptible of valuation, it is either upon the basis of their life expectancy or the value of the property at the basic date, less the value of the remainder postponed after that expectancy, and not upon the basis contended for by the respondent. Cf. Henry R. Ickelheimer et al., 14 B. T. A. 1317; William Nelson Cromwell et al., Executors, 24 B. T. A. 461. If anything was transferred from the decedent at death to her issue, it was not the right to receive the income in question per autre vie, because that was merely the term of the trust, and there might have been a failure of “ issue ” long before the termination of the Harvard Mutual Foundation, and the conversion of this special fund into the general fund at the option of the trustees, in which event the income went to Harvard College until the termination of the trust, at which time Harvard College received the corpus of the trust. The Commissioner, having admitted error, as alleged by petitioners, in determining that the income of the property in question “ passed under and by virtue of the Will ” of the decedent, “ or of the exercise of a power of appointment in her Will,” and in including same in decedent’s gross estate at a value of $122,745.28 (the estimated present worth of a 4 per cent income on the value of the property transferred to the Harvard Mutual Foundation over the separate expectancies of Mary C. and Susan C. Foster, W. C. Bowditch, and the youngest child of C. H. W. Foster), there remains only the issue as to whether the transfer by the decedent to the Harvard Mutual Foundation in 1916 was a transfer of property “to take effect in possession or enjoyment at or after ” her death in 1926 within the purview of section 302 (c) of the Bevenue Act of 1926.

The petitioners contend that the decedent’s gifts to the Harvard Mutual Foundation were absolute, complete, and beyond her control, and nothing passed upon her death to the living — that there was no taxable transfer of property — citing May v. Heiner, 281 U. S. 238; Burnet v. Northern Trust Co., 283 U. S. 782; Morsman v. Burnet, 283 U. S. 783; McCormick v. Burnet, 283 U. S. 784.

The respondent argues that May v. Heiner, supra, and the other cases cited by petitioners are distinguishable in that they “ involved interests which had vested prior to death or which terminated with death,” whereas here we are concerned with interests that vested upon the death of the decedent, and cites Tyler v. United States, 281 U. S. 497, and Klein v. United States, 288 U. S. 231. The Tyler case dealt with an estate by the entirety and the Klein case applied the rule of the Tyler case to a contingent remainder which vested by reason of the death of the grantor, who had reserved to himself the reversion. In both cases, the remainder interest in the property involved was contingent upon survivorship, the survivor took by reason of the death of the decedent — that event effected the transfer. Similar contentions regarding the applicability of the principles of these cases were decided adversely to the respondent in Stephen Peabody et al., Executors, 24 B. T. A. 787.

The respondent also relies upon Sargent v. White, 50 Fed. (2d) 410, decided by the Circuit Court of Appeals for the First Circuit (to which Circuit an appeal from our decision would lie). That decision followed Klein v. United States, supra, in which the court said:

* * * differs ¡rom this case to this extent, that the grantor by deed transferred a life estate in some real property directly to his wife, expressly reserving to himself the fee, which, or as in this case the absolute title to the trust funds, passed to the wife at his death in case she survived him.

The court, in distinguishing May v. Heiner, supra, said:

* * * the absolute disposition of the trust property was provided for in the trust instrument and only the income was reserved to the husband of the grantor and to herself for life, if she survived him.

The stipulated facts show that the decedent made an absolute disposition of the property by irrevocable transfer to the Harvard Mutual Foundation, reserving to herself and her issue the right to receive the net income hereof. The decedent had no control over the trustees and their handling of the trust fund, and she had no power of disposition of the corpus of the fund by will or otherwise (cf. Edward J. Hancy, Executor, 17 B. T. A. 464; John S. Montgomery et al., Executors, 17 B. T. A. 491; Cortlandt F. Bishop, Executor, 23 B. T. A. 920, 928); neither was there a possibility of the property reverting to her or going to her heirs upon the happening of any event (cf. Sargent v. White, supra). As the Supreme Court said in May v. Heiner, supra:

* * * no interest in tbe property held under the trust deed passed from her to the living; title thereto had been definitely fixed by the trust deed. The interest therein which she possessed immediately prior to her death was obliterated by that event.

The May v. Heiner case arose under section 402 (c) of the Revenue Act of 1918, which is substantially the same as section 302 (c) of the Revenue Act of 1926, which the respondent seeks to apply to the trust property involved in the instant proceeding. That decision was based upon the earlier decision in Reinecke v. Northern Trust Co., 278 U. S. 339, wherein the court said:

It is of significance, although not conclusive, that the only section imposing the tax, section 401, does so on the net estate of decedents and that the miscellaneous items of property required by section 402 to be brought into the gross estate for the purpose of computing the tax, unless the present remainders be an exception, are either property transferred in contemplation of death or property passing out of the control, possession or enjoyment of the decedent at his death. They are property held by the decedent in joint tenancy or by the entirety, property of another subject to the decedent’s power of appointment and insurance policies effected by the decedent on his own life, payable to his estate or to others at his death. The two sections read together indicate no purpose to tax completed gifts made by the donor in his lifetime not in contemplation of death, where he has retained no such control, possession or enjoyment. In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402 (c) “ to take effect in possession or enjoyment at or after his death,” include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * *

The decedent’s life estate was obliterated by her death; the right of her issue to receive the income after her death was established by the trust agreement, and the clause in her will designating the beneficiaries after her death, while ostensibly the exercise of the power of appointment, was in reality executed almost contemporaneously and in accord with the special agreement regarding the trust property and was not an enlargement of that agreement. Where, as here, irrevocable gifts are made to a trust and the donor reserves the income to himself for life and the right to designate the beneficiaries of the income after his death, which right is exercised in accordance with the trust agreement, it is doubtful whether any portion of the trust property should he included in the decedent’s gross estate, in view of the decision in May v. Heiner, supra. Such doubts should be resolved in favor of the taxpayer (Gould v. Gould, 245 U. S. 151, 153), particularly in view of the fact that immediately following the per ewriam decisions in Burnet v. Northern Trust Co., supra; Morsman v. Burnet, supra; and McCormick v. Burnet, supra, Congress amended section 302 (c) of the Revenue Act of 1926 by joint resolution (Public 131), approved March 4, 1931, which specifically provides for the inclusion of property transferred in trust where the transferor “ has retained for his life * * * the income from the property or * * * the right to designate the persons who shall * * * enjoy * * * the income therefrom.” The amendment was not retroactive and has been applied only to transfers “ made after 10.80 P. M. * * * March 3, 1931.” Treasury Decision 4314. See United States v. Field, 255 U. S. 257.

The respondent’s action in including the trust property in the decedent’s gross estate and deducting therefrom the value of the remainder interest of Harvard College, is reversed. Cf. Lillian M. Wheeler, Executrix, 20 B. T. A. 695; Frederic Ullman et al., Executors, 20 B. T. A. 782; Frances Plumer McIlhenny et al., Executors, 22 B. T. A. 1093; Colonial Trust Co. et al., Executors, 22 B. T. A. 1377; Namaline H. Duke et al., Executors, 23 B. T. A. 1104; Frank G. Williams et al., Executors, 25 B. T. A. 1078.

"Judgment will be entered under Rule 50.


author: Van Fossan :

text:
    Effie B. Shearman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55900.
    Promulgated July 26, 1932.

      Charles B. Mclnnis, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Van Fossan :

Section 42 of the Revenue Act of 1928 provides:

The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.

Article 33 of Regulations 74 contains the following statement:

Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder.

The petitioner contends that the doctrine of constructive receipt should not be applied and cites Commissioner v. Adams, 54 Fed. (2d) 229; affirming our decision in Cecil Q. Adams, 20 B. T. A. 243. She asserts that the dividends from W. R. Grace & Company were not actually received by her until January 2, 1929, and that inasmuch as her return was made by the cash receipts and disbursements basis, section 42 of the Revenue Act of 1928 is controlling. Whether or not there has been constructive receipt depends on the facts. In the Adams case the facts led us to hold that there was not such receipt, while in Mary Miller Braxton, 22 B. T. A. 128, we held that dividends were constructively received and should be included in gross income. The cases are entirely reconcilable. Section 42 applies to income both actually and constructively received during the taxable year.

The petitioner further claims that even if the Board should follow its decision in the Braxton case, supra, the dividends received by her from W. R. Grace & Company were not unqualifiedly made subject to her demand in 1928. She contends that she could not have received dividends from W. R. Grace & Company until after its close of business on December 31, 1928, by virtue of the resolutions of that corporation adopted on March 7, and December 12, 1928. A careful scrutiny of those resolutions, however, discloses that its dividends were payable on December 31, 1928, to stockholders of record at the close of business on that day. No specific method of payment was directed. The stipulated facts also show that the dividend checks were mailed to the petitioner by W. R. Grace & Company “ on December 81, in the usual course of business and after the stock transfer books of W. R. Grace & Company were closed for the day on December 31, 1928.” It does not appear what time of day the corporation closed its stock transfer books or ceased business, but it is unnecessary for us to inquire as to that fact. The mailing of the dividend checks was an act done “in the usual course of business ” on December 31, 1928, and after the close of the stock transfer books. The petitioner could have made a personal demand for and received her dividend payments from the corporation at the close of business on December 31, 1928.

On the facts here present we are of opinion that the dividends in question were unqualifiedly made subject to the petitioner’s demand during 1928 and are subject to tax for that year.

Judgment will be entered for the respondent.


author: Mabqueite :

text:
    Isaac Michael Green, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas Henry Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31293, 31294.
    Promulgated July 26, 1932.

      Lloyd W. Dinkelspiel, Esq., and Jerome B. While, Esq., for the petitioners.

      J. A. Lyons, Esq., and E. L. Updike, Esq., for the respondent.
   OPINION.

Mabqueite :

The respondent asserts that the petitioners are liable as transferees for income taxes assessed against Green’s Advertising Agency for the years 1919,1920 and 1921. The contention is founded upon the theory that the -corporation was insolvent during each of those years and remained insolvent until it was dissolved in April, 1926, and that while so insolvent it distributed to the petitioners large amounts of money as dividends. The amount of dividends to each petitioner in each of the taxable years was greater than the amount of income tax against the corporation for those years, respectively. When the corporation was dissolved the net value of its assets distributed to the petitioners amounted to $8,200.

Section 280 (a) (1) of the Revenue Act of 1926 provides that there shall be assessed, collected and paid in the same manner as in the case of a deficiency in tax:

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The respondent invokes the trust-fund theory respecting corporate assets. But not every transferee of assets of a corporation is liable to the company’s creditors under the trust-fund doctrine. This Board held in Samuel Keller, 21 B. T. A. 84, that:

This trust can only be impressed upon assets of the corporation which are distributed upon dissolution, or during the insolvency of the corporation, or when such distribution creates a condition of insolvency.

See also United Stages v. Armstrong, 26 Fed. (2d) 227; Ratcliff v. Clendenin, 232 Fed. 61; Hollins v. Brierfield Coal Coke Co., 150 U. S. 371.

In the case of McDonald v. Williams, 174 U. S. 397, the court said:

We think the theory of a trust fund has no application to a case-of this kind. When a corporation is solvent, the theory that its capital is a trust fund upon which there is any lien for the payment of its debts has in fact very little foundation. No general creditor has any lien upon the fund under such circumstances, and the right of the corporation to deal with its property is absolute so long as it does not violate its charter or the law applicable to such corporation.
* # # # $ ❖ *
The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment of a receiver, an action could not be brought by the latter to recover the dividend thus paid on the theory that they were paid from a trust fund, and therefore were liable to be recovered back.
It is contended on the part of the complainant, however, that if the assets of the bank are impressed with a trust in favor of its creditors when it is insolvent, they must be impressed with the same trust when it is solvent; that the mere fact that the value of the assets of the corporation has sunk below the amount of its debts, although as yet unknown to anybody, cannot possibly make a new contract between the corporation and its creditors. In the case of insolvency, however, the recovery of the money paid in the ordinary way without condition is allowed, not on the ground of contract to repay, but because the money thus paid was in equity the money of the creditor.; that it did not belong to the bank, and the bank in paying could bestow no title in the money it paid to' one who did not receive it bona fide and for value. The assets of the bank while it is solvent may clearly not be impressed with a trust in favor of creditors, and yet the trust may be created by the very fact of the insolvency and the trust enforced by a receiver as the representative of all the creditors.

The taxes in question, although asserted subsequent to the taxable years, constituted a potential liability of the corporation of which the stockholder must take notice. Updike v. United States, 8 Fed. (2d) 913; United States v. Armstrong, supra. The basic question, then, is whether Green’s Advertising Agency was insolvent when it distributed dividends to these petitioners in 1919, 1920 and 1921, or was made insolvent by such distribution. If so, they are clearly liable under section 280 of the Revenue Act of 1926.

The books of account of the advertising agency formed the basis of the respondent’s evidence to sustain his contention that the company was insolvent during 1920 and thereafter. The book which was relied upon discloses that from January, 1919, until the end of 1925, the company earned net profits for each year, distributed them to stockholders, and kept its capital of $25,000 unimpaired. It also discloses that while the distribution of dividends at the close of the year 1919 did not then render the company insolvent, the further distribution of dividends in subsequent years left the company with an aggregate of capital and surplus insufficient to pay the then accumulated total of income tax. The company thus became insolvent in 1920 by reason of the dividend distributions and remained insolvent thereafter until the corporation was dissolved in 1926.

The dividends were paid to the present petitioners in equal portions. The aggregate amount received by each petitioner during the years 1919, 1920 and 1921 was more than the total of the income taxes asserted against the company for those years. In our opinion each petitioner is liable, as transferee, for payment of the company’s unpaid income taxes here asserted unless that liability is barred by some valid defense. The petitioners allege as defenses that: (1) The true tax liability of Green’s Advertising Agency for the years here involved has not yet been finally determined; (2) under the Revenue Act of 1926 any claim for taxes for the years in question is barred by the statute of limitations; (3) Green’s Advertising Agency was a personal service corporation and not subject to the taxes here involved; and (4) the liability now asserted is barred by reason of compromise.

The record discloses that after receiving deficiency notices, Green’s Advertising Agency filed appeals with this Board, and the only question presented was that of the personal service status of the advertising agency. Decision was rendered in September, 1927, and was appealed to the Circuit Court of Appeals, where it was affirmed February 11, 1929. Meanwhile, in May, 1928, the taxes here involved were assessed against the advertising agency, no stay bond having been filed. No petition was filed in the Supreme Court for a writ of certiorari, and, therefore, the decision of the Board became final, under section 1005 (a) (2) of the Revenue Act of 1926, on May 11, 1929. One year longer was permitted under the statutes for making assessments against these petitioners, or until May 11, 1930, but prior to that date the petitions herein were filed and thereby again suspended the running of the statute of limitations in favor of the petitioners.

Even though the running of the statute might have been invoked by the corporation, it waived its right in that particular and the defense is not now available to these petitioners. The assessment has been made, the Board’s decision has become final, and the matter is thus concluded, not only with respect to the status of the corporation as a taxable entity and the amount of taxes due from it, but also with respect to the running of the statute of limitations, which might have been offered as a defense. Cf. Cromwell v. County of Sac, 94 U. S. 351; Harshman v. Knox County, 122 U. S. 306. In the Cromwell case the court said:

* * * the judgment, if rendered upon the merits, constitutes an absolute bar to a subsequent action. It is a finality as to the claim or demand in controversy, toncluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose. Thus, for example, a judgment rendered upon a promissory note is conclusive as to the validity of the instrument and the amount due upon it, although it be subsequently alleged that perfect defenses actually existed, of which no proof was offered, such as forgery, want of consideration, or payment. If such defenses were not presented in the action, and established by competent evidence, the subsequent allegation of their existence is of no legal consequence. The judgment is as conclusive, so far as future proceedings at law are concerned, as though the defenses never existed. The language, therefore, which is so often used, that a judgment estops not only as to every ground of recovery or defense actually presented in the action, but also as to every ground which might have been presented, is strictly accurate, when applied to the demand or claim in controversy. Such demand or claim, having, passed into judgment, cannot again be brought into litigation between the parties in proceedings at law upon any ground whatever. * * *

And in the Harshman case, the court used the following language:

* * * And, * * * “ the estoppel is not confined to the judgment, but extends to all facts involved in it, as necessary steps or ground-work upon which it must have been founded.” It is none the less conclusive because rendered by default. * * * Certainly nothing that contradicts the record of the judgment can be alleged in a proceeding at law for its collection by execution. * * *

While the Board’s decision was rendered in an appeal by the corporation, in our opinion the present petitioners were in privity with that corporation and are bound by the decision. They owned all of the capital stock of the company, except 1 per cent, presumably qualifying shares,, standing in the name of Isaac Green’s wife; they were, the managing officers of the company,, attended to all its affairs, and formulated and directed its policies. Cf. Jahncke Service, Inc., 20 B. T. A. 837; J. E. Duval, 21 B. T. A. 1357; Coe v. Armour Fertilizer Works, 237 U. S. 413; Selig v. Hamilton, 234 U. S. 652. We consider the above decisions controlling on the question of privity and, the. defenses not being personal to petitioners,, we conclude that they are estopped from now asserting the first three of their defenses, enumerated above, affecting the liability of the corporation. We are also of opinion that the period for assertion of liability against the petitioners as transferees had not yet expired at the time the notices of liability were mailed to petitioners, to, wit, on April 18, 1927.

The petitioners also, contend that the liability now asserted is barred by reason of a compromise. The evidence discloses only that, the petitioners sent, checks, accompanied by an offer of compromise, to the collector of internal, revenue at San Francisco,-who gave receipts for them and collected the amounts of the checks through the usual banking procedure-. The offer of compromise was neither accepted nor rejected by the respondent when the proceedings were heard.. In our opinion the facts disclosed are not such as constitute an estoppel against the respondent in respect to. the present proceedings.

With respect to the refunds claimed by the petitioners, this Board has no jurisdiction to consider the claims filed. These refund claims were apparently filed in connection with their personal liability for income taxes and we do not have those proceedings before us. See section 284 (e) of the Revenue Act of 1926, and section 322 (d) of the Revenue Act of 1928.

Decision wül T)e, entered for the respondent.


author: Matthews:

text:
    Lillian G. McEwan, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. F. McEwan, Petitioner, v. Commissioner of Innternal Revenue, Respondent Anna B. McEwan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Anna B. McEwan and Leo S. Black as, Executors of the Will of W. H. McEwan (Deceased), Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 25994-25997.
    Promulgated July 27, 1932.

      R. H. Evans, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   opinion-.

Matthews:

The value of the Tyee stock in 1913 held by the Wolverine and sold in 1922 on the dissolution of the latter corporation, in the absence of evidence pf any previous sales of the stock around 1913, and of any evidence on the value in 1913 of the stock of Sutton, 25 per cent of whose stock constituted assets of Tyee, must be determined by the value of the undertying assets of the several corporations. George M. Wright, 19 B. T. A. 541, 548; Nathaniel J. Hess, 24 B. T. A. 475. It was admitted by respondent in the pleadings and again at the hearing that no question as to value of assets arose save as to the Vancouver Island timber holdings of the Sutton Company, upon which the respondent placed a March 1, 1913, value of $1,200,000 calculated on the basis of 2,000,000,000 board feet at. 60 cents per M feet. The petitioner contends that the value should be $1,718,547, based on 2,291,396,000 board feet at 75 cents per M feet. The issue, therefore, becomes solely one of fact and, since we have found for the petitioner on both facts in issue, extended comment is unnecessary.

Respondent admitted in his brief that the “ quantity of timber shown by Gardiner & Baxter’s cruise is correct.” Since the cruise was made in 1922 and the timber for the most part was a virgin stand, this is tantamount to an admission that there were at least as many board feet in the holdings on March 1, 1913, as in 1922and leaves in effect only the question of valuation.

Respondent’s determination rests solely, it is admitted, on the value of 60 cents per M feet employed in the settlement of a Federal estate tax case (the decedent having been the husband of- one of the petitioners) in 1923.

The principal factors upon which respondent relies are (1) the amount of hemlock and balsam, about 37 per cent, in the Sutton holdings; and (2) the inaccessibility of western Vancouver Island from the lumber market by reason of its distance from the railhead at Alberni. Respondent’s only witness, W. T. Andrews, valuation engineer of forests and forest industry in the Bureau of Internal Revenue, knew of no sales in 1913 on Vancouver Island and admitted that the major factor inducing to his conclusion of valuation at 60 cents per M was the McEwan estate settlement of 1923. 'We do not think that the valuation found in the McEwan estate settlement is conclusive in this proceeding.

The petitioners produced nine witnesses, all well qualified as to their knowledge of timber values, and also introduced evidence of sales of property from 1909 to 1913 in the vicinity of the property in question, which testimony sustained the valuation of 75 cents per thousand feet claimed by the petitioners.

Upon consideration of all the evidence, we have come to the conclusion, as above stated, that the amount of timber on the Sutton holdings on March 1, 1913, was 2,291,378,000 feet, and that its value, on an average, was 75 cents per M feet. Accordingly, upon a recom-putation under Rule 50, these figures should be used to determine the profit or loss resulting from the sale in 1922.

Judgment will be entered under Bule 50.


author: Black: Seawell,

text:
    Valentine Bliss, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53422.
    Promulgated July 27, 1932.

      (J. B. Comegys, Esq., for the petitioner.

      A. Pierce, Esq., for the respondent.
   OPINION.

Black:

The question presented to us for decision is whether the profits made by the sale of certain corporate stocks during the taxable year 1928, the legal title to which was vested in a trustee under a trust created by the petitioner, should be regarded as part of the income of the petitioner and taxable to him, or should be regarded as the income of the trust and taxable to it. The provisions of the Revenue Act of 1928 applicable to the present proceeding are printed in the margin.

Petitioner admits, and it has been so stipulated by the parties, that the income from the dividends received by the trust in 1928 was taxable to him because the trust instrument required that such income be distributed to him by the trustee in periodical installments, at such periods as from time to time he might designate in writing. Petitioner contends, however, that the profits resulting from the sale of the stock were not taxable to petitioner because the trust instrument specifically provided that all gains and profits resulting from sales of the corpus should in all respects be treated and considered not as a portion of the income of said trust estate, but as a part and parcel of the principal; that this principal or corpus was definitely and finally disposed of, so far as petitioner is concerned, by the trust instrument; and that as to him, the trust was irrevocable.

The respondent contends that, although the trust instrument provides that it is irrevocable as to the settlor (petitioner herein), nevertheless the trustee is given the power to revoke, and that, inasmuch as the trustee is the North Scranton Bank and Trust Company, of which petitioner is president and one of the directors, the effect is the same as giving the petitioner the power to revoke in conjunction with a person not a beneficiary of the trust, and to revest in himself title to the corpus of the trust and, hence, comes clearly within the provisions of the statute which we have quoted in the margin. The respondent cites no authority either of the Board or the courts to support his contention. The authorities cited by petitioner in support of his position are not directly in point and are only useful by analogy. We have found no decided case, either by the Board or the courts, which is directly in point.

Numerous cases deal with situations where the settlor of a trust reserved the right unto himself in conjunction with the trustee to revoke the trust, but we have found no case where, as in the instant proceeding, the trust instrument provides that it is irrevocable by the settlor but may be revoked by the trustee acting alone, and without consulting either the settlor or the beneficiaries of the trust. This, it seems to us, is quite unusual, but, though quite unusual, must be interpreted, and we must decide how the gains and profits resulting from a sale of the trust corpus in 1928 are affected by the cited provisions of the Revenue Act of 1928.

Perry on Trusts, Yol. I, par. 268, says:

If a person has once accepted the office of Trustee either expressly or by implication, it is conclusive; and he cannot afterwards by disclaimer or renunciation, avoid its duties and responsibilities. And the reason is that, if the estate has once vested in the Trustee it cannot be divested by a mere disclaimer, or renunciation, nor can he convey the estate against the consent of the cestui que trust without committing a breach of trust, unless the instrument creating the trust gives Mm that power * * *. In such ease the Trustee mag resign the trust, and convey the estate in the manner pointed out in the instrument creating the trust, if it spealcs upon that subject. [Italics supplied.]

In the instant case the trust instrument does speak upon the subject. The trust instrument shows that the trustee, when accepting the trust, specifically provided that it “hereby reserves unto itself the right and power to revoke and dissolve the same at any time upon giving ten days written notice of its intention so to do to Valentine Bliss during his lifetime, etc.”

We therefore conclude that the trust instrument was one in which the power to revoke was vested solely in the trustee; that as to the grantor, it was irrevocable, and that the income to the trustee resulting from a sale of the corpus in 1928 was not income to petitioner as the grantor of a revocable trust within the meaning of section 166 of the Revenue Act of 1928.

Section 167 of the Revenue Act of 1928 is not applicable, because the gains and profits resulting from the sale of the trust corpus in 1928 were by the express terms of the trust not distributable to the petitioner, but were to be added by the trustee to the trust corpus. Petitioner admits that the dividends received by the trustee from the corporate stock in 1928 were taxable to him because distributable to him.

Reviewed by the Board.

Decision will lye entered wider Bule 50.

Seawell,

dissenting: The trust instrument here under consideration provided that it should be irrevocable by the grantor, but that the trustee “hereby reserves unto itself the right and power to revoke * * * upon giving ten days written notice of its intention so to do ” to the grantor. The word “ reserves ” means to keep back or withhold; to exclude something from that which is granted. Certainly the trustee, the bank, had no power of revocation of the trust here involved except as the grantor therein gave it the power. Upon what imaginable reason could the trustee be interested in revocation ? If it desired to be relieved of its duties, it could resign its trusteeship without the revocation of the trust.

The grantor was a stockholder, a director and the president of the trustee. If at any time the grantor should desire a revocation of the trust it may reasonably be inferred that a word or intimation from him as maker of the trust to himself as president of the trustee would receive prompt audition and be considered by the trustee as nothing less than a command. To make the income taxable to the grantor the statute requires power lodged in some one, not a beneficiary, and the grantor (where the grantor has not the power alone) “ in conjunction ” to revest the title in the grantor. In the trust instrument this power is lodged in (1) the bank (the trustee) which is not a beneficiary, and (2) the grantor. The trustee can not revoke without giving written notice to the grantor. The manner of “ giving written notice ” is not provided for, and it must therefore be by the usual legal method, unless the grantor will accept the service in some other way. The grantor must, therefore, act in a negative, if not in a positive, manner. The power to revoke the instrument and revest the property in the grantor is present in the two, to wit, the bank and Valentine Bliss. The statute does not require, necessarily, positive action of both parties in which the power resides. The power to revest may be by the action of either, provided it is “ in conjunction ” with the other.

Moreover, the determination of the Commissioner is presumed to be correct. In this case the petitioner has not attempted, but has failed, to negative that which appears quite evident, to wit, that this peculiar power to revoke the trust instrument is given to one who is in fact the agent and tool of the grantor, and who is purposely designated in the instrument to provide facilities wihereby the grantor might be enabled to avoid tax.

       [Sec. 166. Revocable Tmsts.1 Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
      [Sec. 167. Income for Benefit of Grantor.] Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor.


author: Leech:

text:
    Greenleaf Textile Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46747.
    Promulgated July 28, 1932.

      Benjamin Mahler, Esq., for the petitioner.

      William E. Damis, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Leech:

The Commissioner haying determined no deficiency for the fiscal year ended February 28, 1927, this proceeding is dismissed as to that year, for lack of jurisdiction. Cf. Southern Feed Co., 6 B. T. A. 736.

The asserted deficiency in controversy for the fiscal year ended February 29, 1928, resulted from the Commissioner’s disallowance of a deduction of $49,893.24 taken by petitioner as a loss realized in that year on real estate purchased in 1925. Section 23 (f) of the Revenue Act of 1928 and section 234 (a) (4) of the Revenue Act of 1926 provide that in computing net income there shall be allowed as deductions “ losses sustained during the taxable year and not compensated for by insurance or otherwise.”

The title to the real estate in question was taken in the name of the S. and G. Realty Company. This company never functioned as such, and, admittedly, was a mere name, in which the title was held for the. sole benefit of petitioner. Therefore, if the loss asserted was sustained in the taxable period here involved, the petitioner must prevail. Gulf Oil Corporation v. Lewellyn, 248 U. S. 71; Stewart Forshay, 20 B. T. A. 537; United States v. Jelenko, 23 Fed. (2d) 511. This Board early adopted the rule that a taxpayer could not sustain a deductible loss as to the value of real estate while retaining title thereto, upon the theory that losses growing out of the ownership thereof, are deductible only when ascertained and determined upon an actual, completed, and closed transaction during the taxable year, and are not sustained through the mental processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself.” A. J. Schwurzler Co., 3 B. T. A. 535. The Circuit Court of Appeals for the 6th Circuit, in the case of Brumback v. Denman, 58 Fed. (2d) 128, affirming 48 Fed. (2d) 255, apparently recognized an exception to this theory by applying the “ practical test ” of the Supreme Court in United States v. White Dented Co., 274 U. S. 398, and Lucas v. American Code Co., 280 U. S. 445, which had to do with losses in the value of personal property, to losses involving real estate. The exception which the court there recognized is the occurrence of an identifiable event during the taxable period in which the controverted loss is claimed of such, consequence as to definitely fix the taxpayer’s loss, regardless of title. It was held there that a court order authorizing a bond issue and assessing a tax against lands for the payment of the principal and interest on the bonds when due, was such an event.

Although petitioner in the instant case has our sympathy, we are unable to find in the evidence before us any event of comparable effective consequence, upon the happening of which the worthlessness of the land in question was definitely and decisively determined. The absence of such occurrence brings this case within the operation of the rule in A. J. Schwarzler Co., supra, the facts in which were somewhat similar to those here. In effect the situation in the case at bar can not be described as resulting in more than a mere diminution of value which does not constitute a realized or sustained loss. Cf. White Star Line, 20 B. T. A. 111. We hold, therefore, that, since the petitioner retained title to the real property in question throughout the tax period at issue, there was no actual, completed and closed transaction resulting in a deductible loss. A. J. Schwarzler Co., supra. Cf. Brumback v. Denman, supra.

The petitioner’s alternative issue is that taxes and interest paid on the Miami property in its two prior tax years be considered for the purpose of determining the correct statutory net losses incurred in those years and deductible in the taxable year. The Board, in redetermining a deficiency for a taxable year, has jurisdiction to consider such facts with relation to the taxes for other taxable years as may be necessary to redetermine correctly the amount of the deficiency in controversy. Section 274 (g), Revenue Act of 1926, and section 272 (g), Revenue Acts of 1928 and 1982. The petitioner had net losses for the two prior taxable years ended February 28, 3926 and 1927, in the amounts of $5,321.80 and $401.96, respectively, and the Commissioner has allowed the deduction thereof in determining the deficiency in question. Section 234 (a) (2) and (3) of the Revenue Act of 1926 provides specifically for the deduction of interest and taxes paid or accrued within the taxable year.

The excess of the deductions allowed by section 234 over gross income, with certain exceptions not applicable here, constituted petitioner’s net losses for those two preceding years. Section 206, Revenue Act of 1926, section 117, Revenue Act of 1928. The said amounts of interest and taxes were charged to Greenblatt’s personal account during those prior years and no deduction has been taken on that account. Accordingly, the net losses for the two prior years should now be increased by the interest and taxes paid in those years and such increased net losses brought forward in recomputing the correct deficiency for the taxable period here involved.

Judgment will he entered under Rule 50.


text:
    Clara Hill Lindley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54001.
    Promulgated July 28, 1932.

      E. G. Lindley, Esq., for the petitioner.

      Nathan Gammon, Esq., and B. F. WeeJcley, Esq., for the respondent.
   opinion.

Leech:

Section 23 (a) of the Revenue Act of 1928 permits the deduction in computing net income of “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * Petitioner contends that the payments made by her to attorneys under the circumstances set out in our findings represent business expenses incurred in the administration of the estate of her mother, Mary T. Hill. It is her contention that she was engaged in the business of the administration of that estate, due to the refusal of the.regular administrator to act in prosecuting an appeal from the judgment rendered against him by the District Court. The authorities cited in support of this contention are decisions holding expenses of the administrator in defending or prosecuting suits against or on behalf of the estate are business expenses deductible by him from gross income of the estate.

Here we have a different situation. The expense incurred under the facts set out in the findings, if paid by the administrator, would have been clearly deductible by him from income of the estate. However, this expense is not a payment by the estate incident to the carrying on of the business of administration, but one by petitioner as an heir at law of the decedent in protecting her interest as a beneficiary of the estate. We can not agree with petitioner’s contention that in employing counsel and prosecuting the appeal she was merely carrying on the business of administration of the estate, and, even if such conclusion could be reached it would not sustain a personal deduction by petitioner in her individual capacity of expenses incurred for the estate.

As an alternative theory petitioner contends that the expenditures in question were ordinary and necessary expenses incurred by her in carrying on her individual business. In support of this she has shown that she is a woman of means, manages her property and makes many sales and purchases of securities.

It may be that expenses incident to the personal activities of petitioner in handling her estate and producing income therefrom represent deductible business expenses, but as to the expense here in question we can not see any connection with such business. The inheritance of property is assuredly not an incident of her purported business. This expense was merely the cost to petitioner of securing her portion of such inheritance. In George P. Douglas, 1 B. T. A. 372, we said: “Legal expenses incurred in breaking a will by which a taxpayer comes into possession of his inheritance are not expenses incurred in carrying on a trade or business.”

In Caroline T. Kissel, 15 B. T. A. 1270, cited as authority by petitioner, we had a question clearly distinguishable from that here presented. There, we allowed the deduction, by a woman engaged in business, of expenses incurred by her in litigation in respect to taxes claimed as due upon the income of such business. If petitioner in the present proceeding were engaged in business, the property in respect to which these expenses were incurred was not used therein, and the expense was not connected therewith and did not grow out of such business so as to bring the case within the rule laid down in Kornhauser v. United States, 276 U. S. 145.

In Alice P. Bachofen von Echt, 21 B. T. A. 702, we denied the deduction of legal expenses incurred by the taxpayer in recovering from the Alien Property Custodian her sequestrated property and a large amount of accumulated income thereon. See also Helen A. P. Merriman, 21 B. T. A. 67; aff'd., 55 Fed. (2d) 879; Commissioner v. Field, 42 Fed. (2d) 820; Thomas Williams, 21 B. T. A. 109.

Judgment will be entered for the resfondent.


author: Black:

text:
    Leo M. Klein, Petitioner, v. Commissioner on Internal Revenue, Respondent. Samuel Jackson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54584, 54585.
    Promulgated July 28, 1932.

      Lawrence Mattingly, Esq., for the petitioners.

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

Black:

It is the contention of petitioners that the Revenue Act of 1928 specifically exempts from income tax interest on obligations of a state or any political subdivision thereof, and that the word “ obligations ” includes in its meaning the obligation of a political subdivision of a state to make just compensation for property taken under the power of eminent domain. The' applicable part of the Revenue Act of 1928 is printed in the margin.

The question involved in the present proceeding is ruled by our decision in Kansas City Southern Railway Co., 16 B. T. A. 665; aff'd., 52 Fed. (2d) 372. In that case we held that interest paid a railroad company by the United States during the period of Federal control is not interest upon “ obligations of the United States ” within the meaning of section 213 of the Revenue Act of 1918, and was not exempt from taxation and should be included in gross income. The taking over of the railroads under the act of Congress enacted in 1917 was an exercise of the power of eminent domain and the payment of compensation to the railroads was in pursuance of the constitutional requirement that just compensation shall be paid for private property taken for public use. We see no difference in principle in the question which we had before us for decision in Kansas City Southern Railway Co., supra, and the one which we now have before us to decide.

The case of H. Oliver Thompson, 17 B. T. A. 987, involved the inclusion of ground rents from property leased to the city of Baltimore in gross income of the lessor. It was contended that rent was in the nature of interest and was an obligation of the city, but we held that even if rent could be considered as interest, it was not interest upon such an obligation as was meant in section 218 (b) (4) (A) of the Revenue Act of 1924, which is the same as section 22 (b) (4) of the 1928 Act.

The Board, in American Viscose Corporation, 19 B. T. A. 937; aff'd., 56 Fed. (2d) 1033, again passed on the meaning of the word “ obligations,” holding that it was restricted to obligations used for the purpose of borrowing money in the nature of bonds or similar securities. In that case we held that interest paid on a refund of taxes by the United States was not tax exempt.

The United States District Court for the Southern District of New York on June 13, 1932, in the case of United States Trust Co. v. Anderson, 60 Fed. (2d) 291, decided the precise question which we now have before us, and decided it against the contention here made by petitioners. The opinion of the court cites with approval our opinions and the opinions of the Circuit Courts of Appeals affirming us in the Kansas City Southern Railway Co. and American Viscose Corporation cases, supra.

Petitioners cite no case in support of their contention, but urge that the repeated reenactment of the statute without substantial change in its language amounts to an implied recognition and approval of prior executive construction of the statute. It is then suggested that Internal Revenue Office Decision No. 591, published in Cumulative Bulletin No. 3, p. 113, ruled that interest received on condemnation awards was exempt from taxation under section 213 (b) (4) of the Revenue Act of 1918, and that subsequent revenue acts adopted the same exemption features of the 1918 Act and thus approved its administrative construction. It should be pointed out, however, that the internal revenue office decision referred to above was expressly revoked by I. T. 2608, C. B. X-2, p. 342, following our decision in Kansas City Southern Railway Co., supra, which latter ruling is as follows: “ Office Decision 591, C. B. 3, p. 118, holding that interest on an award for property condemned for public purposes by a municipality is exempt from income tax, is revoked, in view of General Counsel’s Memorandum 10043 (page 124).”

From the authorities above cited, it follows that petitioners are properly taxable on the interest received by them on the condemnation awards and the determination of the deficiencies was correct.

Decision mil l>e entered for the respondent.

       [Sec. 22.] (5) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
      *******
      (4)-Tax-free interest. — Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia * * *.