author: Lansdon:

text:
    William H. Monk, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. R. J. Milling, Petitioner, v. Commissioner of Internal Revenue, Respondent. Earl R. Gaston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52044-52046.
    Promulgated December 14, 1933.

      Geo. E. H. Goodner, Esq., and Walter K. Smith, Esq., for the petitioners.

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

Lansdon:

The sole question here is whether the distributions of July 14, 1927, were ordinary or liquidating dividends. In conformity with options and contracts each company sold its assets to Stores on July 12, 1927, and on that date ceased business. On July 14 the purchasers made the cash payments provided for in the contracts of sales. On July 12 each company declared a dividend as set out above, payable as and when funds became available. On July 15 such dividends were paid in cash out of receipts from the sale of capital assets and in amounts which exceeded the alleged surplus of each 'corporation. Since final liquidation of both companies was accomplished on September 29, 1927, by the distribution of the preferred stock received by each from Stores, and without any further distributions of cash, it is evident that the amounts received from the purchaser on July 14 were first applied to the payment of obligations of Gaston and Monk and that the remainder thereof was. distributed on July 15, 1927. The respondent has determined that under the terms of the option and sales contracts, and in the light of what was actually done, Gaston and Monk were each in liquidation from July 12, 1927, and that such liquidation was accomplished by the distribution of cash and preferred stock on July 15 and September 29, 1927, on which latter date both corporations were dissolved. This determination is in effect that the distribution of July 15 was “ one of a series of distributions in complete cancellation or redemption of all or a portion of its stock ”, as set out in article 1549 of Regulations 69. Petitioners contend that no steps in liquidation were taken until September 29, 1927, and that within the meaning of section 201 (c) of the Revenue Act of 1926 the distributions of cash on July 15 were ordinary dividends to the extent of the surplus then available for distribution and subject1 only to surtax.

In construing almost identical provisions of the Revenue Act of 1918 in a case involving the question at issue here, Hellmich v. Hellman, 276 U.S. 233, the Supreme Court said:

It is true that if section 201 (a) stood alone its broad definition of the term “ dividend ” would apparently include distributions made to stockholders in the liquidation of a corporation — although this term, as generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going-corporation in the ordinary course of business, which does not reduce then-stockholdings and leaves them in a position to enjoy future returns upon the same stock. (See Lynch v. Hornby, 247 U.S. 339, 344-346, and Langstaff v. Lucas (D.C.) 9 Fed. (2d) 691, 694.)
However, when section 201 (a) and section 201 (c) are read together, under the long-established rule that the intention oí the lawmaker is to be deduced from a view of every material part of the statute (Kohlsaat v. Murphy, 96 U.S. 153, 159) we think it clear that the general definition of a dividend in section 201 (a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by section 201 (c) which, dealing specifically with such .liquidation, provided that the amounts distributed should “ be treated as payments in exchange for stock ” and that any gain realized thereby should be taxed to the stockholders “ as other gains or profits.” This brings the two sections into entire harmony and gives to each its natural meaning and due effect. The Treasury Regulations correctly interpreted the Act as making section 201 (a) applicable to a distribution made by a going corporation to its stockholders in the ordinary course of business, and section 201 (c) applicable to a distribution made to stockholders in liquidation of the corporation. And this is in accord with the rulings of the Board of Tax Appeals. (Appeal of Greenwood, 1 B.T.A. 291, 295; Appeal of Chandler, 3 B.T.A. 146, 149.)

To prevail here the petitioners, under the rule set out above, must show that the distributions in question were made by Gaston and Monk as going concerns in the ordinary course of business. In our opinion no such showing has been made. On July 12 each sold all of its assets and from that date engaged in no business operations. It is, therefore, obvious that funds for the payments of the dividends then declared never could be available from surplus resulting from active operations. As a matter of fact the record clearly indicates that the payments, when made on July 15, were from the receipts from the sale of capital assets. In Tootle v. Commissioner, 58 Fed. (2d) 576, in discussing this identical question the court said:

It is difficult to see how a part of a total price for all assets * * * can be segregated and called “surplus” or “earnings”. It is purchase price and nothing else.

Petitioners argue at great length that the respondent has merely assumed that the distributions in question were made after the two companies in question had decided to discontinue business and liquidate their assets. They also contend that no intention to liquidate is disclosed by the record. What petitioners characterize as a mere assumption by the respondent is, in fact, an authoritative determination of the Commissioner upon which the deficiencies are based and must be regarded as correct until overcome by evidence. It is true that neither corporation took any formal action preparatory to liquidation, but each had sold all its assets and discontinued its business at the date of the distribution in question and each was finally liquidated and dissolved on September 29, less than three months after the contract to sell its assets had been fully accomplished. In these circumstances we think the acts of each company indicated its intention to liquidate and that the distributions on July 15, 1927, were “ one of a series of distributions by a corporation in complete' cancellation or redemption of its stock.” This being true, it is not material that no stock w>as canceled or redeemed on July 15 when the cash distributions were made by Gaston and Monk. In our opinion the evidence adduced by the petitioner is not sufficient to overcome the presumption of correctness which attaches to the determination of the respondent. James P. Gossett, 22 B.T.A. 1279; affd., 59 Fed. (2d) 365; Tootle v. Commissioner, supra; S. J. Blumenthal, 12 B.T.A. 1205; S. B. Dandridge, 11 B.T.A. 421.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Steenhagen:

license: Public Domain

text:
    Elmon C. Gillette, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56736.
    Promulgated December 14, 1933.

      W. C. Magathan, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Steenhagen:

Respondent determined a deficiency of $15,001 in petitioner’s income tax for 1928, in part by disallowing the deduction of inheritance tax paid by petitioner to the State of California on the corpus of a trust of which he was beneficiary and which was made in contemplation of death. Petitioner contends that the amount of this tax, and fees paid an attorney in procuring a refund of part of it, are deductible from gross income. The facts have all been stipulated and are, in brief form, as follows:

Petitioner, an individual residing in New York City, was a beneficiary of a trust created in contemplation of death on May 26, 1923, by Lina Gillette, deceased. By the terms of the instrument decedent transferred in trust to King C. Gillette and Edwin B. Root, trustees, 5,153 shares of stock in the Gillette Safety Razor Co., to pay the income therefrom to decedent and her mother during their lives, and upon the death of the survivor to deliver the corpus to George W. Gillette and petitioner, share and share alike.

Lina Gillette died August 4, 1926, and her mother, December 25, 1926. In the computation of the value of Lina Gillette’s estate the State of California included the corpus of the trust, passing at her death, and assessed against the mother an inheritance tax of $2,125.42 on the value of her life interest in the trust property, appraised at $89,930, and against petitioner an inheritance tax of $159,785.61. By court order dated March 11, 1927, the trustees were directed to pay the mother’s tax, and petitioner to pay the amount assessed against him. Petitioner paid} the tax assessed against him and $1,062.71, or one half of that assessed against the mother, the two payments totaling $160,848.32. These payments were made in two installments, the first, amounting to $80,424.16, was reduced by a rebate of $4,021.21 to $76,402.95, which amount was paid by check dated February 2, 1927. The second was paid by a check for $80,424.16, dated January 4,1928. Equal assessments were paid by George W. Gillette on his half of the trust corpus.

In October 1928 the Superior Court of Los Angeles County, California, reappraised the securities forming the corpus of the trust, and ordered a refund of $31,010.41 of the inheritance taxes paid thereon by petitioner and George W. Gillette. Petitioner’s share of this refund was $15,505.20, of which he received one half, or $7,752.60, in October 1928, the other half being paid to an attorney as a fee for securing the refund.

None of the money or property of the trust ever came into the hands of the executors of Lina Gillette’s estate; they were not accounted for in any proceeding in the probate of the estate, nor did the executors pay any inheritance tax upon said property. The corpus of the trust was at all times, until distribution to the remain-dermen, in the hands of the trustees.

Petitioner reports his income for tax purposes on a cash receipts and disbursements basis. In computing petitioner’s income tax for 1928, respondent disallowed as a deduction for inheritance taxes $72,671.56.

Petitioner, having paid the aforesaid inheritance taxes to the State of California., claims that such payment is an income tax deduction under the Revenue Act of 1928, section 23 (c) , allowing generally the deduction of taxes, notwithstanding that by the last clause of that statutory provision the deduction shall only be allowed to the estate itself; further, that when the tax was paid he alone acquired a right to deduct it by virtue of article 134 of Regulations 69, promulgated under the Revenue Act of 1926; and, further, that if section 23 (c) bars a deduction it is unconstitutional in making an unreasonable distinction in inheritance taxes and an unfair dis-criminaton among those who pay them.

We are of opinion that both the wording and history of section 23 (c) prohibit the deduction by him. The direction of the final clause that inheritance taxes “shall be allowed as a deduction only to the estate ” is too free of ambiguity to admit of any expansive interpretation by recourse to its legislative history.

But this history lends additional support to respondent’s strict construction. The corresponding sections of prior acts did not specify by whom the deduction might be taken, but the concurrent regulations provided that it be allowed to the estate where the tax was laid on the right to transmit and to the beneficiary where the tax was laid on the right to receive. Art. 134, Regulations 62, 65, 69. Serious doubt as to the validity of this rule arose from Keith v. Johnson, 271 U.S. 1, and United States v. Mitchell, 271 U.S. 9. To clarify the resulting confusion as to years prior to 1928, Congress enacted section 703 of the Revenue Act of 1928, which arbitrarily allowed the deduction sometimes to the beneficiary and sometimes to the estate. This, however, affected only the years prior to 1928. In supporting his construction of section 23 (c), petitioner stresses the words of the Senate Finance Committee Report, page 24, declaring the purpose of section 703:

* * * to make it certain that the deduction will be allowed either to the estate or to the beneficiary in any event, * * *

a purpose which is apparent from the section itself. Petitioner’s position is not advanced by this manifest intent in the enactment of the temporary and remedial measure in respect of prior years based on considerations of expediency rather than a theory.

In enacting section 23 (c), the permanent provision governing these deductions, on which alone petitioner must depend, Congress deliberately adopted a different scheme from that of section 703, and made the deduction allowable only to the estate. This is in accord with the Supreme Court’s decisions above cited, and since the funds on which the estate tax is imposed are not gross income in petitioner’s hands, a literal application of section 23 (c) is not so clearly at variance with orthodox principles as to induce interpretation. In our opinion, respondent correctly disallowed the deduction.

Petitioner’s contention that the limitation of section 23 (c) is not effective because he paid the taxes before the Revenue Act of 1928 had ‘been enacted, is also without merit. By sections 1 and 65 it is provided that, with certain exceptions not here material, the act shall take effect as of January 1,1928, and, hence, computation of petitioner’s income for 1928 is subject to the restriction of section 28 (c).

Petitioner next attacks the constitutionality of section 23 (c), if it be construed to bar his deduction, arguing that it makes an arbitrary and unreasonable distinction between the treatment of inheritance taxes paid on property passing to an executor and those paid on property transferred in contemplation of death. This argument is based on the false premise that petitioner alone was liable for the tax and that if the deduction is denied him, there is no one to take it under any circumstances. By section 9 of the California Inheritance Tax Act, 1921 Statutes of California, chapter 821,

* * * Any * ⅜ * trustee having in charge or trust any * * * property for distribution, subject to the said tax, shall deduct the tax therefrom, * * * and he shall not deliver, or be compelled to deliver, any * * * property subject to tax to any person until he shall have collected the tax thereon; * ⅜ *

Obviously the trustees, and not petitioner, were primarily liable for this tax, and by their failure to pay it acted contrary to the precise direction of the statute. The tax judgment, entered against petitioner alone, which he stresses as evidence of his sole liability, was pursuant to the later section 17 (1), which makes provision for collection where transfers have occurred in disregard of section 9. Under these circumstances it becomes unnecessary to decide whether section 23 (c) is unconstitutional on the ground urged, for the factual basis of that ground does not here appear. Had the trustees paid the tax as directed, a claim for its deduction by the estate would seem warranted by section 23 (c). Thus there is no discrimination against property transferred in contemplation of death.

Petitioner also seeks to deduct a fee of $7,752.60 which his attorney retained from a tax refund as compensation for his services. This refund represented an overpayment of the state inheritance tax involved in the foregoing issue. Petitioner cites no section of the act to support this deduction. If we assume that he relies on section 23 (a), allowing the deduction of ordinary and necessary expenses incurred in carrying on a trade or business, the fee paid may not be deducted, since the refund was unrelated to any trade or business. Hutchings v. Burnet, 58 Fed. (2d) 514; Marion Stone Burt Lansill, 17 B.T.A. 413; affd., 58 Fed. (2d) 512; Commissioner v. Marshall Field, 42 Fed. (2d) 820; Grace McBride Crile, 26 B.T.A. 1020; Alice P. Bachofen von Echt, 21 B.T.A. 702.

Judgment will be entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net incme there shall he allowed as deductions:
      *******
      (c) Taxes generally. — Taxes paid or accrued within the taxable year * * *. For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.


author: Sternhagen :

text:
    Augusta Bliss Reese, Petitioner, v. Commissioner of Internai Revenue, Respondent.
    Docket No. 62424.
    Promulgated December 14, 1933.

      Laurence Graves, Esq., for the petitioner.

      Elmer L. Gorbin, Esq., for the respondent.
   opinion.

Sternhagen :

Respondent determined a deficiency of $4,200.16 in petitioner’s income tax for 1929. The proceeding was submitted upon a stipulation of facts.

1. The first issue grows out of the facts contained in subdivision (2) of the stipulation, and since the respondent concedes that his determination was to this extent in error, it is unnecessary to set forth this part of the stipulation or to discuss the issue.

2. Another issue, growing out of the facts contained in subdivision (6), is disposed of favorably to petitioner by respondent’s concession that his determination was erroneous, and this subdivision (6) is also omitted.

3. The remaining issues are twofold and arise from the following stipulated facts:

(1) The petitioner, Augusta Bliss Reese, is the beneficiary under a trust set up by the fourteenth clause of the will of her father, George Bliss, deceased, who died in 1896. A copy of said will is attached hereto and marked “ Exhibit A” and by reference made a part hereof. The provisions of said fourteenth clause are as follows:
Fourteenth. — The sixth of said shares, designated as the share of my daughter, Augusta, I give devise and bequeath to my said Executors, the survivors and survivor of them and their successors, In Teust, for the uses and purposes following, that is to say:
To retain and hold the said share as Trustees under this my will, with all the powers and authority hereinafter given to such Trustees; to invest and keep invested said share as and in the manner hereinafter provided; to collect and receive the rents, issues, income, dividends and interest of the said share; and after paying all taxes and assessments that may be imposed thereon, or any part thereof, and all other expenses incidental to the execution of the trusts hereby created, including the legal compensation of the trustees therein, to apply the net income of said share half-yearly, or as the same shall be received, to the use of my said daughter Augusta during her natural life, and upon her death * * *
(3) In 1925 the trustees filed a petition in the Surrogates’ Court of New York County for a judicial settlement of their accounts for the period from February 1913 to January 1924 and objections to such petition were filed by attorneys for the petitioner upon the ground that certain cash and stock dividends allocated to principal in the trustees’ accounts should have been paid to her as income beneficiary. On May 24, 1929 the referee’s opinion and report were handed down awarding the petitioner as income beneficiary the following stock and cash dividends:
Of the foregoing cash dividends the Phelps-Dodge Corporation dividends received in 1917, 1918 and 1919 in the total amount of $36,750, were subject to Federal income tax.
(4) In 1929 the trustees paid $4,018.42 as referee’s fees and expenses in connection with the litigation resulting in the referee’s opinion and report referred to above, which has been disallowed by the respondent as a deduction in determining the amount of fiduciary income.
(5) In 1929 the petitioner paid her attorneys, Webb, Patterson & Hadley, $25,281.90 for their services in connection with the objections filed by her to the trustees’ accounting, which has been disallowed by the respondent as a! deduction in determining net income.
(7) The amount of dividends reported by the petitioner upon her return for 1929 was $249,727.71 and of this amount $130,082.68 represented the dividends; received from the Trust under the Will of George Bliss and $119,645.03 represented dividends upon stocks owned by the petitioner personally. She maintains an office at 350 Madison Avenue, New York City, in which regular books; of account are kept and which is under the general supervision of Mr. W. Willis; Reese, her husbatod and one of the Trustees under the Will of George Bliss, and' she employs an accountant, Mr. John J. Corell, who spends his entire time at. such office engaged in the handling of her business affairs.

The respondent disallowed both (a) the deduction by the trustees; of the referee’s fee and expenses of $4,018.42, and (b) the deduction-, by petitioner of the lawyers’ fee of $25,281.90, and these disallow-, anees are assailed by the petitioner with the contention that they are within the statutory deduction of the Revoque j^qt 0⅞ 1928,. section 23 (a), “ ordinary and necessary expenses paid and incurred during the taxable year in carrying on any trade or business.”

(a) Tbe petitioner’s contention as to tbe referee’s fee and expenses is apparently derivative from the trustees by whom they were paid and by whom, if any one, they are deductible. Thereupon, they would reduce distributable income and tbe amount thereof to be included in tbe income of the beneficiary petitioner. Tbe disallowance of the deduction to the trustees thus serves to enlarge tbe distributable income which she includes in her individual gross income. She argues, citing Muriel H. Wurts-Dundas, 17 B.T.A. 881, and Kornhauser v. United States, 276 U.S. 145, that the administration by the trustees of the affairs of the trust was per se the carrying on of a trade or business, and that the accounting and defense thereof was a routine duty the expense of which was ordinary and necessary and hence a statutory deduction. Revenue Act of 1928, secs. 23 (a) and 162 (b). The respondent defends his determination on the ground that these payments to the referee were in defense of the corpus of the trust and the remainder interest, and hence not an ordinary and necessary expense of carrying on trade or business.

Since the issue presented is in a proceeding brought by the beneficiary of distributable income, we are not called upon to consider directly whether the amount paid by the trustees to the referee is as to the trust a tax deduction reflected in its taxable net income. The statute imposes the tax directly upon the beneficiary in respect of distributable net income of the trust, but only to the extent of the petitioner beneficiary’s distributable share thereof. The trust instrument expressly provides that all expenses “ incidental to the execution of the trusts hereby created, including the legal compensation of the trustees therein,” shall be first applied against the trust income before arriving at the amount thereof to be distributed; and the petitioner thus could only receive a distributable share of the net income thus reduced. She is therefore not claiming a tax reduction under section 23 (a) applicable to herself in the determination of her individual net income, but that the amount which she is required to include in her gross income as her distributable share of the income of the trust is only the amount of trust income as reduced as above. While, therefore, there may be a question as to whether, if the trust income were taxable to the trustees, a deduction would be permitted to them of the referee’s fee, that question is academic in this proceeding involving the extent of the beneficiary’s distributable share of trust income. Cf. Mary Helen Cadwalader, 27 B.T.A. 1078. Under section 162 (b) it seems clear that the amount to be included in computing the net income of the beneficiary is the amount which the fiduciary may under the same subdivision deduct because distributed currently to the beneficiary. In our opinion, therefore, the amount to be included in the beneficiary’s gross income by way of her distributable share of trust income may not include the $4,018.42 paid by the trustees to the referee before distribution.

(b) The $25,281.90 which the petitioner claims as a deduction has nothing to do with her distributable share of trust income. It represents an amount which she paid her lawyers to represent her in the contest of the trustees’ final accounting. The simple question is whether amounts so paid are as to her ordinary and necessary expenses of carrying on a trade or business. There is nothing in the evidence to indicate that she was engaged in carrying on a trade or business. She was merely, so far as the record shows, a passive recipient of trust income. The facts that she maintained an office, hired an accountant and kept books do not prove a trade or business, and the extent of her income from the trust throws no light upon that question. As in Commissioner v. Marshall Field, 42 Fed. (2d) 820, the attorneys’ fee is not among the deductions enumerated in the statute. If it be contended that a business is indicated by the last phrase of the stipulation, to the effect that the accountant was “ engaged in the handling of her business affairs,” there are two answers — one, we think it would be unreasonable to assume that by this phrase th¡e parties intended to withdraw this issue from controversy, and, two, it is not shown that the business referred to in this phrase is one to which the lawyers’ employment and fee had any direct relation. Assuming that the petitioner, aside from her interest in this trust, was actively carrying on some sort of trade or business, the nature of which is not disclosed in the stipulation, it would not follow that the lawyers’ fee was properly deductible unless it was shown to be an ordinary and necessary expense of the business thus assumed. This has not been shown, but on the contrary it is apparent from the evidence that the lawyers’ fee was related only to the petitioner’s interest in the trust. Clara Hill Lindley, 26 B.T.A. 741; affd., 63 Fed. (2d) 807; Gertrude D. Walker, 20 B.T.A. 937; affd., 63 Fed. (2d) 351; certiorari denied, 289 U.S. 746.

Judgment will be entered wider Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
      SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that — ■

        *******

      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.


author: Blaok:

text:
    Mitten Management, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42494, 53990, 61861.
    Promulgated December 15, 1933.

      William R. Spof’ord, Esg., for the petitioner.

      Mason B. Leming, Esg., for the respondent.
   OPINION.

Blaok:

At the hearing in these cases a number of issues raised by the pleadings were withdrawn and others were settled by stipulation, leaving for our consideration and determination the following:

1. Whether the petitioner may deduct as an ordinary and necessary business expense in the year 1926 the sums of $175,612.52 and $35,590 paid to depositors and stockholders of the insolvent Producers & Consumers Bank of Philadelphia, under the circumstances narrated in our findings of fact.

2. Whether the amount of $100,000 advanced by the petitioner to T. E. Mitten for research and development of an air transport service is deductible either as an ordinary and necessary business expense for 1926 under section 234 (a) (1) of the Revenue Act of 1926, or as a loss sustained during the taxable year under section 234 (a) (4) of that act.

3. Whether the amounts of $67,732.95 and $21,654.64 expended by the petitioner during the years 1927 and 1928, respectively, for commissions on the sale of stock of the Mitten Bank Securities Corporation may be deducted as ordinary and necessary business expenses under section 234 (a) (1) of the Revenue Act of 1926 and section 23 (a) of the Revenue Act of 1928.

We will discuss these issues in the order of their statement.

Issue Wo. 1.

In support of its contention that the amounts paid the depositors and stockholders of the insolvent Producers & Consumers Bank in 1926, represent ordinary and necessary business expenses within the meaning of section 234 (a) (1) of the Revenue Act of 1926, petitioner cites, as one of its leading cases, Harris v. Commissioner, 48 Fed. (2d) 187.

In that case the taxpayer was the owner of a large department store in Dallas, Texas, and had effected a composition with its creditors by which it was relieved of a large amount of indebtedness. Its credit with banks thereafter was impaired, and in order to reestablish its credit it paid off the balance of the indebtedness voluntarily.

It claimed deductions for these payments. The Circuit Court of Appeals for the Fifth Circuit allowed the deductions on the ground that the expenditures were made to rehabilitate the taxpayer’s credit and were ordinary and necessary business expenditures within the meaning of the applicable statute. In that case the court, among other things, said: “ Each case depends for decision upon its own facts and it would be impossible to formulate a uniform rule to govern all cases.”

The facts in the instant case are altogether different, as we view them, from those in the Harris case, supra. Whether, if the new bank had made the payments here in question out of its first profits as agreed upon in the contract detailed in our findings of fact, the payments would have been deductible as ordinary and necessary business expenses under Harris v. Commissioner, supra, and other cases cited by petitioner in brief, we are not called upon to decide. It is sufficient to say that the payments in question were not made by the new bank out of its first profits as the original agreement provided, but were made by the petitioner, Mitten Management, Inc., out of its own earnings.

The payments were made in the same year that the new bank was organized. They were voluntarily made by petitioner and we do not think the circumstances of their payment warrant their deduction as ordinary and necessary business expenses. A voluntary agreement to pay the expenses or obligations of some one else does not entitle the taxpayer to a deduction. Such a promise could rise no higher than a voluntary assumption of an obligation of another and such assumption does not come within the revenue act as an ordinary and necessary business expense. Robinson v. Commissioner, 53 Fed. (2d) 810; Natl. Bank of Commerce v. Allen, 223 Fed. 472; certiorari denied, 239 U.S. 642; Porter v. United States, 27 Fed. (2d) 882.

Petitioner’s principal argument in support of its contention, that the expenditures in question should be allowed as ordinary and necessary business expenses, is to the effect that by making the voluntary and generous payments at Thanksgiving and Christmas time it secured widespread and favorable publicity in the Philadelphia newspapers and that as a result of this favorable publicity and also the good feeling which was created among the depositors and the stockholders of the old bank, the feeling of organized labor toward petitioner was changed from one of open hostility to one of pronounced friendship.

We think the evidence fully justifies petitioner’s contention that valuable good will amongst the ranks of organized labor was created by these payments, not only for the newly organized bank, the Mitten Bank & Trust Co., but for petitioner as well in its management of public utilities. Nevertheless we do not believe the expenditures in question were such as is contemplated by the Revenue Act of 1926, which in section 234 (a) (1) allows a taxpayer as deductions “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

. In Thomas H. Welch, 25 B.T.A. 117, the taxpayer, in order to reestablish his credit and to secure customers for 'his individual business from among those who had been customers of a corporation of which he was an officer, partially reimbursed those who had sustained losses when the corporation was discharged in bankruptcy. On these facts we held that the amounts so paid were not deductible by the taxpayer as ordinary and necessary business expenses. In affirming our decision at 63 Fed. (2d) 975, the court, in speaking of the voluntary payments which the taxpayer had made, said:

There may be room for argument and difference as to whether payments of this character, under the circumstances here, are “ necessary ” or not. It would be rather clear that they would be helpful in a business way and that helpfulness might approach or reach necessity. However, we can see no possible basis upon which payments of this character can be treated as “ ordinary ” expenses of his business (Robinson v. Commissioner, 53 Fed. (2d) 810, Lloyd v. Commissioner, 55 Fed. (2d) 842, and Hubinger v. Commissioner, 36 Fed. (2d) 724). In fact they are very extraordinary payments and not expenses of the business at all. They are unlike the payments in Harris v. Lucas, 48 Fed. (2d) 187, but are voluntary payments similar to those treated in Robinson v. Comr., 53 Fed. (2d) 810, and Mastin v. Commissioner, 28 Fed. (2d) 748. While these payments are highly commendable from an ethical standpoint, we are bound by the law as written. The determination of the Board was correct and the petition for review must be and is dismissed.

This case was recently affirmed by the Supreme Court of the United States. See Welch v. Helvering, 290 U.S. 111.

Under the authorities above cited, we sustain respondent in his disallowance of the claimed deductions embraced in assignment of error No. 1.

Issue No. A

Petitioner claims the right to deduct $100,000 which it advanced to its president, T. E. Mitten, in 1926 to make investigations with reference to the installation of a commercial aviation service to be operated by a subsidiary of the P.R.T.

Such facts as there are with reference to this item have been stated in our findings of fact. We do not believe these facts are sufficient to justify us in allowing the claimed deduction either as an ordinary and necessary business expense or as a loss.

Petitioner does not claim it made any investment in the stock of the Philadelphia Rapid Air Service, Inc., or advanced it any money. What it does claim is that prior to the launching of the venture it advanced its president, T. E. Mitten, $100,000 and that he went to Europe in company with his brother, A. G. Mitten, and a secretary and made extensive investigations of aircraft and commercial aviation over there and on his return to the United States continued these investigations. No evidence was introduced showing how much of this $100,000 was spent in Europe and how much of it was spent in the United States. In fact no itemization of any kind as to how this $100,000 was spent was introduced in evidence.

Petitioner is a corporation with only a nominal capital stock, but earned very large fees in the taxable years from management services rendered to public utilities. The salaries which it paid its officials, especially its president, were large. For 1926 its president, T. E. Mitten, received $299,272.06 salary, and for each of the years 1927 and 1928 he received $800,000 as salary. Respondent has allowed these salary deductions to petitioner. But to say that a corporation can advance its president $100,000 and then claim it as a deduction for ordinary and necessary business expenses without any sort of itemization is going beyond what we think the law allows.

The finding of the respondent in disallowing this item is prima facie correct and we do not think the petitioner has sustained the burden to show its error, or to establish the correct amount to be deducted. We know of no law which authorizes us to hazard a guess at it. We have examined the cases of Cohan v. Commissioner, 39 Fed. (2d) 540; Julia Dahl et al., Executors, 24 B.T.A. 1167; R. P. Shea, 24 B.T.A. 798; and A. F. Rees, 21 B.T.A. 698, cited by petitioner, and do not consider them decisive of this case. They were cases of individuals claiming deductions for expenses for travel and entertainment under section 214 (a), Acts of 1924 and 1926, which expressly provides for such deductions. In those cases the individuals were present at the hearings and testified under oath as to the approximate amounts expended and for what purpose.

Neither do we think that petitioner is entitled to take this $100,000 as a deduction for a loss in 1926. As we have already stated, petitioner did not have any investment in the capital stock of the Philadelphia Rapid Air Service, Inc., nor did it advance it any money. It had no capital1 investment, so far as we can see, in the aircraft enterprise. It did have a management contract with the Philadelphia Rapid Air Service, Inc., from which it collected in 1926 the sum of $2,013.26 which it returned as income. This was not a dividend on a capital investment, but was payment for services rendered.

We sustain respondent in his disallowance of this claimed deduction of $100,000.

Issue No. 3.

This assignment of error relates to commissions paid in 1927 and 1928 to employees of the P.R.T. for sale of stock of the Mitten Bank Securities Corporation, an investment trust. The evidence shows that the sale of the stock in the Mitten Bank Securities Corporation was conducted by petitioner at its own expense. The stock was sold to the public and to employees of Mitten managed properties. Petitioner paid a commission of $1 per share to P.R.T. employees for selling the stock.

The petitioner, as we view it, was merely acting as a broker or agent in these transactions, which it had the right to do under its articles of incorporation, and any expense it incurred in making a sale of the stock was a business expense. It seems clear that if petitioner had been receiving a commission for selling the stock of the Mitten Bank Securities Corporation it would have had the right to deduct from its income the selling expenses of such stock. In the instant case the petitioner charged no commission for selling the stock of the Mitten Bank Securities Corporation, but made its profit from the use of the money derived from such sales.

On these facts we think petitioner is entitled to deduct the commissions which it paid P.R.T. employees for selling the stock. The transactions occurred in the regular course of the business carried on by petitioner. This is not a case of a corporation selling its own stock. In that case the cost of selling stock is a capital expenditure and is not deductible.

On Issue No. 3 we sustain petitioner.

It was stipulated that petitioner’s income from net management fees should be reduced by $57,461.78 and $92,249.30 for 1926 and 1927, respectively, and should be increased by $58,819.61 for 1928. Due to this stipulated increase in income for the year 1928, the respondent, upon permission granted, filed a claim for increased deficiency for the year 1928. Effect will be given to these stipulations in a redetermination of the deficiencies and if on redetermination it is disclosed that there is an increased deficiency for 1928 it will be allowed.

Decision will be entered, wider Rule 50.


author: Smith:

text:
    David Blum, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bessie Blum, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52220, 52221.
    Promulgated December 15, 1933.

      Paul E. Short, Esq., and M. P. Wormhoudt, Esq., for the petitioners.

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

Smith:

The questions in issue in these proceedings are:

(1) The amounts of gain realized by petitioners in 1924 from the redemption of certain shares of . first preferred stock of the Great Western Smelting & Refining Co.

(2) The amount of taxable gain realized by Bessie Blum in 1925 from the redemption of the balance of her holdings of first preferred stock of the Great Western Smelting & Refining Co. for cash and stock of the Federated Metals Corporation.

In their income tax returns for 1924 David Blum reported a profit of $124,645.49 from the redemption of 1,452 shares of first preferred stock of Great Western and Bessie Blum a profit of $56,364 from the redemption of 1,680 shares of first preferred stock of the same company. In her income tax return for 1925 Bessie Blum reported a profit of $11,368.10 from the redemption of 302 shares of first preferred stock of Great Western, but did not report any gain or loss from the redemption of the balance of her holdings of first preferred stock of that company for shares of stock of Federated Metals.

The contention of the petitioners in these proceedings is that there was a partial liquidation of Great Western in 1924 and that they are liable to income tax in respect of the profits which they received upon such liquidation; that the basis for the computation of that profit under section 204 has been stipulated and that the amount of their gains is the excess of the cash received over the cost to them of the shares redeemed. The respondent’s contention, on. the other hand, is that, pursuant to a reorganization, Great Western in 1924 distributed cash to its shareholders and that under section 203 (d) (1) of the Revenue Act of 1924 account must be taken of distributions to the shareholders in 1925 as well as in 1924 in the determination of the gain realized by the petitioners in 1924; that upon such computations all of the cash received by the petitioners in 1924 from the redemption of their first preferred shares constitutes taxable income to them in that year.

With respect to the tax liability of Bessie Blum for 1925, the respondent contends that she realized a taxable profit in 1925 of the total amount of cash received in that year on the redemption of the balance of her first preferred stock.

From an analysis of the Revenue Act of 1924 it will be noted that section 201 is concerned with the method of computing gains and losses from “ distributions by corporations.” Subdivisions (c) and (g) provide:

(e) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. In the ease of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
* * * ⅜ * * *
(g) As used in this section the term “ amounts distributed in partial liquidation ” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

Section. 202 is concerned with the “ determination of amount of gain OR loss ” from the sale or other disposition of property. Section 203 is concerned with the “ Recognition of gain oe loss feom sales and exchanges.” The pertinent provisions of this section are as follows:

Seo. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except/ as hereinafter provided in this section.
* * * * * * *
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
*******
(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distribu-tee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.
(e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange * * ⅜.

Section 204 provides the “basis roe determining gain or loss, depletion, and depreciation.” It is unnecessary to discuss the provisions of this section since the parties have stipulated the basis for the computation of the gains received by petitioners in the taxable years.

So far as the year 1924 is concerned we need concern ourselves only with the applicability of section 203 (d) of the Revenue Act of 1924. The respondent contends that inasmuch as Great Western distributed most of the cash which it received from Federated Metals in 1924 to the first preferred stockholders of Great Western in redemption of a part of their shares, Great Western was not liable to income tax under section 203 (e) (1). The assumption is then made that inasmuch as the first preferred stockholders received the cash distributed they must be liable to income tax upon a different basis from that which would apply if there had been no reorganization of Great Western.

Even if the redemption of the first preferred stock in 1924 might be regarded as a distribution pursuant to a reorganization of Great Western, it does not follow that the distributions made by Great Western to its stockholders in 1925 have a bearing upon the computation of these petitioners’ incomes for 1924. Manifestly, these petitioners may not be. held liable to income tax in 1924 in respect of amounts which were distributed to them in 1925. Under section 203 (d) (1) a taxpayer is not liable to income tax except upon “ property received.” These petitioners received cash in 1924 in exchange for certain shares of first preferred stock of Great Western. Clearly they parted with something in 1924. What they parted with cost them something. The basis for the computation of the gain realized by the petitioners in 1924 from the redemption of their preferred stock has been stipulated. The petitioners are not denying that they are liable to income tax for 1924 in respect of the profits realized by them from the redemption of their preferred stock in that year. We are of opinion that the claim of the respondent that the petitioners realized profits in excess of that amount is without merit.

It will be noted from our findings that it has been stipulated that a portion of the amount received by the petitioners in 1924 from the redemption of their shares represents a dividend by Great Western. Apparently the petitioners and the respondent have treated the entire amount received by each petitioner as a distribution in redemption of the shares. The record does not show whether a portion of the amount received equivalent to $2 per share of stock redeemed represents a dividend paid out of earnings accumulated by Great Western subsequent to February 28, 1913. The petitioners have alleged no error on the part of the respondent in treating the entire profit received by them on the redemption of their shares as consisting of capital gain. In the absence of evidence upon the point or any allegation of error in respect thereto we do not pass upon the question as to whether the stipulated amount of $2 per share represents a dividend paid out of earnings accumulated subsequent to February 28, 1913.

So far as the tax liability of Bessie Blum is concerned for 1925, it appears that in 1925 she exchanged the balance of her first preferred shares in Great Western for cash and shares of stock of Federated Metals. Upon the facts in this case it is immaterial whether the deficiency be computed under section 201 of the statute or under section 203 (d) (1), for if computed under the last named section the profit which she realized was less than the amount of cash received. We therefore find it unnecessary to determine whether the cash and shares of Federated Metals turned over to her in 1925 in redemption of her first preferred shares represented a distribution pursuant to a reorganization of Great Western or not. Since the evidence does not show whether the dividend of $6 per share received on the shares redeemed in cash was from earnings accumulated by Great Western subsequent to February 28, 1913, and since there is no allegation of error upon the point, it is unnecessary for us to pass upon the question of the correctness of the treatment accorded the item by the petitioner and by the respondent.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Goodeich dissents.


author: Smith :

text:
    William Gordon Means, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53376.
    Promulgated December 15, 1933.

      Earle W. Carr, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Smith :

In this proceeding the respondent contends that the correct basis for the determination of the gain realized by the petitioner from the sale of his partnership interest in OBrion, Russell & Co. is $11,294.34, the cash outlay made by the petitioner in the acquisition of tlie fractional parts of the interest sold. The petitioner, on the other hand, contends that the correct basis is $86,878.65, representing the cash outlay of $11,294.34 plus $59,098.58, the claimed value of the interest acquired without any cash outlay on January 1, 1918,'plus $16,485.73, the claimed March 1, 1913, value of the interest acquired on June 2, 1924.

The basis of the petitioner’s contention is that there was a gift to him of the above mentioned values of the interests acquired in 1918 and in 1924, the petitioner admitting that so far as the interest acquired in 1924 is concerned the basis for the computation of the gain upon the sale is the March 1, 1913, value of the interest. The methods of computing the January 1, 1918, value of the interest acquired on that date and of computing the value on March 1, 1913, of the interest acquired in 1924 is set forth in our findings as stipulated by the parties.

There is no evidence that the petitioner’s associates had any dona-tive intent in permitting the petitioner to acquire the interests in 1918 and in 1924. The facts appear to be that the petitioner had proved his value as an insurance man. In order to make his employment attractive they permitted him to acquire an interest in the partnership, which was operated without capital and with tangible assets of a negligible value. The arrangements made with the petitioner were apparently to the mutual advantage of all concerned. There is no evidence that the petitioner could have sold his interests immediately after acquisition. In any event it was not contemplated that he should do so.

The petitioner testified that when he acquired his additional interest in 1924 he paid $1.25 a share upon the acquisition of 2,500 units or shares; that “ it was a custom to pay that amount of money to the other subscribers outside of ” his own firm when a member was permitted to increase his interest by the acquisition of additional shares. This testimony to our minds indicates that there was no intention on the part of the petitioner’s associates to make a gift to the petitioner.

We sustain the respondent’s contention that the basis for the computation of the gain upon the sale of the petitioner’s interest in 1928 was $11,294.34, the cost to the petitioner of acquiring his total interest.

The respondent has moved to increase the deficiency determined for the year 1928 upon the ground that the sale price of the petitioner’s interest was not $100,000, but was in truth $150,000, $100,000 of which was paid in cash in 1928 and the balance of $50,000 to be paid at the rate of $10,000 a year for a period of five years.

The burden of proving that the petitioner received a consideration of more than $100,000 in 1928 is upon the respondent. In our opinion he has not carried that burden. The evidence shows that the petitioner was required to perform services for the company during the five-year period in question and that it was for those services that the petitioner was to be paid $10,000 a year. It is furthermore to be noted that the cash paid to the petitioner in 1928 was paid by Bayard Tuckerman, Jr., and not by the firm of OBrion, Bussell & Co. The firm paid the compensation at the rate of $10,000 a year, and not Tuckerman, who acquired the petitioner’s interest. The petitioner testified that he had always considered the amounts paid to him by OBrion, Bussell & Co. during the five-year period as compensation for services rendered and so reported that compensation on his income tax returns. We are of the opinion that the petitioner properly reported such compensation.

Judgment will he entered under Bule 50.


author: Seawell :

text:
    N. H. Hazlewood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61334.
    Promulgated December 15, 1933.

      Sam E. Whitaker, Esq., for the petitioner.

      T. M. Mather, Esq., and R. H. Transue, Esq., for the respondent.
   OPINION.

Seawell :

The amount of distributable net income of the partnership is not the subject of controversy. The contention of the respondent that no partnership existed between the petitioner and his wife and two daughters in 1929 is based primarily upon the assumption that the Chattanooga corporation and the Atlanta corporation did not give their consent to the assignment of undivided interests in the June 1, 1926, contract until August 1931, more than a year and a half after the close of the taxable year. The premise is not supported by the record.

Promptly upon the execution of the assignment the petitioner sought the approval of the necessary parties to the conveyance and in doing so transmitted to them the original instrument of transfer. It would appear that the assignees executed an assignment of their interests in the contract to the partnership. In its letter of January 8,1929, to the Chattanooga corporation, the Atlanta corporation expressed the opinion that the transfer from the assignees to the partnership was unnecessary and stated that “ only the transfer from Hazlewood to his wife and daughters is necessary. He may then form a partnership with them, or take them into his present business. This transfer should include a space thereon for approval by your company and The Coca-Cola Company.” In transmitting the letter of the Atlanta corporation to the petitioner the Chattanooga corporation informed the petitioner that “ The parties, if they own a one-fourth interest in the contract can simply operate as a partnership. If you desire to handle the matter in that way, simply the first assignment of a one-fourth interest in the contract by you to the other parties is all that is necessary.”

The petitioner concluded that the letters written by the Chattanooga and Atlanta corporations contained their consent to his transfer of interests in the contract and made no effort to obtain the formal consent of the corporations on the instrument of assignment until August 1931. Formal approval was then made promptly by both corporations with the statement that they regarded their letters written in January 1929 as equivalent to formal consent to the assignment.

There is not a word of objection in the letters of the corporations to the assignment. Both show agreement to the petitioner’s action. Any doubt about the intent thereof is completely eliminated by the letters of the corporations written in August 1931. We think there is ample justification for our finding of fact that the letters of the Atlanta and Chattanooga corporations dated, respectively, January 8 and 10, 1929, contain their consent to the assignment made by the petitioner on December 28, 1928.

The intention and agreement to form a partnership is shown beyond question by the partnership articles. The laws of Virginia are not against the formation of a partnership between husband and wife. B. M. Phelps, 13 B.T.A. 1248. Where the partners provide for sharing profits without an expression of how losses shall be borne, nothing appearing to the contrary, as here, the law will imply an agreement to share losses. Miller v. Simpson, 107 Va. 476; 59 S.E. 378; Brooke v. Tucker, 149 Ala. 96; 43 So. 141. Neither is it essential that all the partners contribute services toi the enterprise. B. M. Phelps, supra.

The fact that the petitioner withdrew practically all of the net income of the partnership during the taxable year is not fatal to the petitioner’s claim. At least two of his partners had actual knowledge of and gave their express or implied approval to the withdrawals in excess of his share of the profits. It appears to have been regarded at the time as an advance, and not a modification of the partnership articles as to a division of the profits. This, we think, is shown by the fact that in 1931 the petitioner gave his partners notes for the amount of their distributable share of the income. The notes have not been paid, but we find no reason in the record to question the bona fides of the transaction.

We are of the opinion, and so hold, that the assignment of December 28, 1928, was valid and in effect throughout 1929 and that a valid partnership existed between the petitioner and his wife and two daughters during the taxable year. It follows that the respondent erred in taxing the petitioner on the net income of the partnership in 1929 in excess of the share provided for him in the partnership articles. B. M. Phelps, supra; Millard D. Olds, 15 B.T.A. 560; affd., 60 Fed. (2d) 252.

Decision will he entered under Bule 50.


author: Lansdon :

text:
    Carlton Building Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68540.
    Promulgated December 19, 1933.

      Charles Bosenbaum, Esq., for the petitioner.

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

Lansdon :

The petitioner is a Colorado corporation with its principal office at Denver. The respondent has determined a deficiency in income tax for' the year 1926 in the amount of $1,241.99, to which he has added a 50 percent fraud penalty and interest in the respective amounts of $621 and $406.91. No evidence was introduced as to the deficiency asserted. The determination of the respondent is affirmed.

The respondent supported his affirmative allegation of fraud by oral and documentary evidence. From such evidence we find as a fact that in the taxable year the petitioner deducted from gross income the amount of $6,925 as a commission paid to one Sam Levy in connection with the sale of a property known as the Carlton and that such amount was never so paid. Levy testified that he signed a receipt acknowledging such payment, but that he never received the same or any part thereof. He signed such document at the request of Joseph Buchhalter who, for his own purposes, desired to show a large selling cost in the disposition of the building. Petitioner’s return shows that this amount was deducted from gross income in the taxable year. The evidence shows that it was not paid out by petitioner as an ordinary and necessary expense in that or any other year. In the absence of any rebutting evidence or of any reasonable explanation of the deduction here involved, the respondent’s determination of fraud must be affirmed.

Decision will Toe entered for the respondent.


text:
    Joseph Buchhalter and Wife, Libbie Buchhalter, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68539.
    Promulgated December 19, 1933.

      Gharles Rosenbaum, Esq., for the petitioners.

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

Lansdon :

The petitioners are husband and wife, residing in Denver, Colorado. The respondent has determined deficiencies for the years 1925 to 1929, inclusive, in the respective amounts of $2,269.17, $699.39, $47.48, $326.57, and $1,900.17, to which he has added 50 percent fraud penalties in the respective amounts of $1,134.59, $349.70, $23.74, $163.39, and $950.09, and interest in the respective amounts of $879.60, $229.14, $12.71, $67.85, and $280.52. The petition alleges that the respondent committed some 23 errors in computing the asserted deficiencies, but as the petitioners have failed to prosecute the proceeding by adducing evidence to overcome the presumption that the determinations of the respondent are correct, no statement or summary of the pleaded errors is necessary. The Board will make its order redetermining deficiencies in the amounts originally determined by the respondent.

The 50 percent penalties rest upon the affirmative allegations of the respondent who charges that for each of the years under review, the petitioners understated their true income in certain very, substantial amounts. In each of the years involved petitioners filed a j oint return and each such return discloses that no tax liability was reported. Upon investigation of the petitioners’ affairs and audit of their returns, the respondent determined gross income for each of the respective taxable years in the amounts of $35,856.25, $22,133.66, $11,425.10, $15,581.16, and $34,629.68 and computed the deficiencies, penalties, and interest here in controversy.

The respondent, in support of his affirmative allegation of fraud, introduced the revenue agent and the investigator who conducted the inquiries which led to the deficiency notice. Each testified that he had examined the books of the petitioners and collected evidence from other sources that established the basis for the additions made to the petitioners’ income for each of the several years. He also introduced in evidence the sworn statement of Joseph Buchhalter made during the investigation in which Buchhalter admitted that he received substantial amounts of income in each of the taxable years that were not included in his report of gross income for any of such years. Another witness, at one time a business associate of Buchhalter, testified that in several of the taxable years he paid commissions to Buchhalter and the record shows that none of such payments were included in gross income reported in any of the years under review. Although served with ample notice, petitioner Joseph Buchhalter failed to appear at the hearing or to testify by deposition in his own behalf. His only statements for the record are his admissions in his sworn testimony before the revenue agents that many items of income received in each of the taxable years were omitted from gross income by oversight and inadvertence. We are of the opinion that something more than the plea of inadvertence is necessary to shoAV that such understatements of income as are disclosed in this proceeding are not false and fraudulent and made to defraud the revenues and, accordingly, we affirm the respondent’s determination of fraud.

Counsel for the petitioner asked many questions in cross-examination for the purpose of showing that Libbie Buchhalter had no part in making the false and fraudulent returns and therefore that no penalty should attach to her share of the income jointly reported. In each of the years Joseph Buchhalter filed a joint return for himself and wife. The deficiencies and the resulting penalties and interest apply to the joint income reported in such returns. There is no segregation of the amounts of gross income received severally by the petitioners, nor any data indicating the deductions applicable to that part of the joint gross income received by Libbie Buchhalter in any of the years in question. In our opinion the filing of joint returns by husband and wife establishes joint and several liability of the parties thereto and the Commissioner may proceed against either or both for the collection of any deficiencies, penalties, and interest which he may determine as to such return.

Decision will Toe entered for the respondent.


text:
    Frida Hellman Cole, Executrix, Estate of Louis M. Cole, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66237.
    Promulgated December 19, 1933.

      Joseph D. Brady, Esq., for the petitioner.
    • P. M. Ciarle, Esq., for the respondent.
   opinion.

Lansdon :

The respondent has determined a deficiency in income tax for the year 1929 in the amount of $74,059.17, which he now stipulates should be reduced to $27,568.59. In the original petition the statute of limitations was pleaded. Petitioner now abandons such defense and in an amended petition pleads that the income in question belonged to the wife of the decedent and is taxable to her on the basis of a separate return. All the facts have been stipulated as follows:

Petitioner is the duly appointed and acting executrix of the estate of Louis M. Cole, who died a resident of the city of Los Angeles, State of California, on September 29, 1930. The Farmers & Merchants National Bank of Los Angeles, which joined with the petitioner in filing the original petition herein, has resigned as co-executor of the above-mentioned estate and is not now acting as such. Petitioner is now an inhabitant of the city of Los Angeles, State of California.
Petitioner’s decedent and Frida Heilman Cole inter-married January 6, 1904, and lived together continuously as husband and wife until the death of petitioner’s decedent on September 29, 1930.
On or about March 15, 1930, there was filed with the Collector of Internal Revenue at Los Angeles, on Form 1040, of the Treasury Department Internal Revenue Service, a return of the income of Louis M. Cole and Frida Heilman Cole for the calendar year 1929.
The questions appearing on the face of said return and reading “ 3. Is this a joint return of husband and wife? ” and “ 5. Were you married and living with husband or wife on the last day of your taxable year?” were answered “ Yes ”.
The question likewise appearing on the face of said return and reading, “How many dependent persons (other than husband or wife) under 18 years of age or incapable of self-support were receiving their chief support from you on the last day of your taxable year ? ” was answered “ Two
The Louis M. Cole, by whom said return was filed, is petitioner’s decedent, and the answers made to the questions above referred to were true and correct.
In computing the deficiency respondent has allowed petitioner’s decedent a personal exemption of $3,500 and a credit for dependents of $800.
Said joint return showed a net income on line 20 of $60,776.61 and a total tax liability on line 52 of $4,984.64; the entire amount of which was assessed and has been reflected in the computation of the deficiency.
The principal basis for the Commissioner’s action in asserting the deficiency here in controversy was the ruling of said Commissioner that taxable gain resulted in the taxable year from certain exchanges of stock by which said Louis M. Cole and said Frida Heilman Cole parted with certain shares of stock of Merchants National Trust & Savings Bank and after certain intermediate steps acquired the shares of stock of Transameriea Corporation. The details of said transactions were fully disclosed in a memorandum attached to said return by the taxpayers who claimed therein that they constituted a nontaxable reorganization.
Since the issuance of the deficiency notice herein the Commissioner has reconsidered his ruling with reference to the transactions referred to and is now of opinion that while certain of said transactions were taxable, others were non-taxable; and the Commissioner now asserts that the deficiency is $27,568.59 and not $74,059.17.
A segregation of the amount of net income which the Commissioner has redetermined as a basis for his present claim for a deficiency of $27,568.59, between the income of petitioner’s decedent and the income of Frida Heilman Cole, will show a total net income for petitioner’s decedent of $9,614.47, of which $4,279.88 is income from dividends not subject to normal tax; and separate income of Frida Heilman Cole in the amount of $253,479.41,- of which $238,855.76 is subject to tax at the capital gain rate of 12½ per cent, and $14,623.65 is subject to normal tax.
The estate of petitioner’s decedent is now in process of probate in the Superior Court for Los Angeles County, State of California, and provable claims (not including the deficiency here in controversy) have been filed against said estate in an amount substantially in excess of the value of the assets of said estate.
If petitioner is wrong in her claim that as a matter of law the estate of her decedent is not liable for any portion of a deficiency attributable to the separate income of Frida Heilman Cole, then it is stipulated that the correct amount of the deficiency is $27,568.59.

The respondent based his determination on the provisions of section 51 of the Kevenue Act of 1928, and on article 381 of Begulations 74. It often happens that in the same taxable year one spouse has income and the other sustains losses. It is obvious that an inflexible rule requiring each to file a separate return might result in collecting a substantial amount of tax from a family in a year in which, regarded as a single entity, it had sustained losses. In recognition of such contingencies and of the long established principle that the family is an economic, as well as a social unit, Congress enacted section 51 (b) (2) of the Revenue Act of 1928, which authorizes husband and wife to file a joint return but prescribes that the tax shall be computed on the aggregate income.

The deficiency here has been determined on a joint return filed for the year 1929 by the decedent for himself and his wife, who is now the executrix of her deceased husband’s estate. There is no controversy over the amount of the deficiency, which is not outlawed and for which some one is liable. Counsel for petitioner argues at length that inasmuch as the income in question was received by the wife, liability for the tax thereon cannot be asserted against the husband. In short, his contention is that the joint return is filed for computing purposes only and that each of the spouses is liable for tax only on the proportion of income separately received. He would have us regard the joint return as if it were the consolidated return of an affiliated group and arbitrarily hold that tax should be ratably allocated to the two taxpayers who have joined in a single return.

In our opinion the theory of the petitioner’s counsel requires little discussion. In the first place the joint return contains no data upon which the separate taxable income of the two spouses can be computed. There is no segregation of the amounts of gross income severally received or any designation of the deductions to which each would be entitled. Since the joint return, though made by the husband, reports the income as a unit, we think it is perfectly clear that liability for the tax is joint and several and may be asserted against and collected from either spouse. See Grant v. Rose, 24 Fed. (2d) 115; affd., Rose v. Grant, 39 Fed. (2d) 340; appeal to Supreme Court dismissed in Rose v. Grant, 283 U.S. 867.

The position of the petitioner is in effect a demand for the withdrawal of the joint return duly filed in the taxable year and the substitution as amendments thereto of individual returns representing the separate income of each of the spouses. It is now well established that the right of election granted in section 51 of the Revenue Act of 1928 and in similar provisions of prior acts is exhausted when a joint return is filed. McIntosh v. Wilson, 36 Fed. (2d) 807; Herman Einstein, 10 B.T.A. 240.

Decision will he entered for the respondent.

       Akt. 381. Individual returns. — For each taxable year every single person and every married person not living with husband or wife whose gross income as defined in sections 22 and 116 is $5,000 or over, or whose not income as defined in section 21 is $1,500 or over, must make a return of income. The return shall be for his taxable year, whether calendar or fiscal. Whether or not an individual is the head of a family or has dependents is immaterial in determining his liability to render a return. A husband and wife living together for the entire year need make no returns unless their aggregate gross income for tile taxable year is at least S5.000 or their aggregate net income is at least $3,500. If their aggregate not income for the taxable year is $3,500 or more, or their aggregate gross income is $5,000 or more, cither must make a return or the income of each must be included in a single Joint return. A husband and wife living together for a period which is less than the entire taxable year must make a return or returns if their aggregate gross income for the taxable year is $5,000 or more, or their aggregate net income is equal to, or in excess of, the credit allowed them by section 25 (e) (2). (See article 295). Where the income of each is included in a single joint return, the tax is computed on the aggregate income and all deductions and credits to which either is entitled shall be taken from such aggregate income. The husb'and shall include in his return the income derived from services rendered by the wife or from the sale of products of her labor if she does not file a separate return or join with him in a return setting forth her income separately. A joint return of husband and wife may be filed only if they were living together at the close of their taxable year. Where one spouse dies prior to the last day of the taxable year, the surviving spouse should not include the income of the deceased spouse in a joint return for such taxable year. For returns by fiduciaries, see section 143 and articles 741-746; by partnerships, see section 189 and articles 941 and 942; and by nonresident alien individuals, see section 217 and article 1081. See also section 53 and articles 401 — 404.


author: Matthews:

text:
    Silas H. Burnham, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Stuart, Petitioner, v. Commissioner of Internal Revenue, Respondent. George W. Holmes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53795-53797.
    Promulgated December 21, 1933.

      Frank D. Williams, Esq., for the petitioners.

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

Matthews:

Respondent contends that the distribution here made was in pursuance of a plan of merger which required the petitioners to transfer a portion of the stock dividend to an agent of the First' National Bank and to receive cash in exchange and that the transfer, therefore, falls squarely within section 115 (g) of the Revenue Act of 1928, quoted in the margin, as essentially equivalent to the distribution of a taxable dividend. The petitioners contend that a stock dividend was declared and paid by the First National, that no part of the stock was canceled or redeemed, that none of the assets of the First National were distributed to its stockholders, that the cash received by the petitioners for their stock in the First National was received from the stockholders of the City National and could not, therefore, constitute a cash dividend from the First National.

Prior to February 25, 1927, a national bank could not lawfully declare a stock dividend; see 32 Op. Atty. Gen. 325, holding that under sections 57, 58, and 60 of Title 12, TJ.S. Code Annotated, national banks cannot lawfully declare stock dividends. On February 25, 1927, the National Banking Act was amended so that section 57 of Title 12, TJ.S. Code Annotated (sec. 5142 U.S. Revised Statutes), reads as follows:

Any national banking association may, with the approval of the Comptroller of the Currency, and by a vote of shareholders owning two-thirds of the stock of such associations, increase its capital stock to any sum approved by the said comptroller, but no increase in capital shall be valid until the whole amount of such increase is paid in and notice thereof, duly acknowledged before a notary public by the president, vice president, or cashier of said association, has been transmitted to the Comptroller of the Currency and his certificate obtained specifying the amount of such increase in capital stock and his approval thereof, and that it has been duly paid in as part of the capital of such association: Provided, however, That a national banking association may, with the approval of the Comptroller of the Currency, and by the vote of shareholders owning two-thirds of the stock of such association, increase its capital stock by the declaration of a stock dividend, provided that the surplus of said association, after the approval of the increase, shall be at least equal to 20' per centum of the capital stock as increased. Such increase shall not be effective until a certificate certifying to such declaration of dividend, signed by the president, vice president, or cashier of said association and duly acknowledged before a notary public, shall have been forwarded to the Comptroller of the Currency and his certificate obtained specifying the amount of such increase of capital stock by stock dividend, and his approval thereof.

The “ Instructions of the Comptroller of the Currency, Relative to the Organization and Powers of National Banks,” 1928 edition, in chapter 6, Earnings and Dividends, contains this instruction with respect to the increase of capital by the declaration of a stock dividend:

If it is desired to increase the capital stock of the bank out of its surplus and profits, this can be done either by the declaration, of a stock dividend or by the declaration of a dividend payable in cash, the dividend checks being accepted in payment for the new stock. If it is decided to increase it by the payment of a stock dividend, the statute requires that the surplus of the bank be continued at an amount equal to 20 percent of its capital stock after the increase. Funds in the surplus account exceeding that amount may be withdrawn and credited to undivided profits. A dividend can then be declared therefrom by the directors payable in stock, but the stock certificates can not be issued as a dividend until after all the legal requirements have been complied with and the comptroller’s certificate authorizing an increase received. If the officers advise that a stock dividend is contemplated, a special form of the resolution of shareholders providing for the increase in capital and the certificate of the president or cashier certifying- to the increase will be furnished.

The First National complied -with the requirements of the statute and the instructions of the Comptroller of the Currency, in increasing its stock by the declaration of a stock dividend. Its capital was $525,000 and surplus $575,000 prior to the declaration of the stock dividend. It carried $275,000 to the undivided profits account, leaving $300,000 in the surplus account, and declared a stock dividend of $275,000. The $300,000 left in the surplus is more than the necessary 20 percent of the capital after the proposed increase required by the statute to be retained in surplus.

Although the assumption of the deposit liabilities of the City National by the First National and the sale of 1,800 shares of First National stock by its stockholders to City National stockholders were related and dependent propositions, the fact that First National shareholders had agreed to sell stock to City National shareholders, prior to the receipt of the dividends, does not make the payment for such stock in the manner described in the findings of fact a payment by the First National to its stockholders in redemption of a portion of the stock dividend. The First National, before the increase of the stock, had capital, surplus, and undivided profits of $1,100,000. After the increase of the stock and the distribution of stock dividends, the First National still had capital, surplus, and undivided profits of $1,100,000. The sale by the First National stockholders to City National stockholders of a portion of the stock received as dividends did not affect the amount of capital, surplus, and undivided profits, which was still $1,100,000. At no time was any of the stock of the First National redeemed or canceled, and petitioners received no cash from the First National or an agent of the First National.

The provision of the statute on which respondent relies contemplates a distribution in cancellation or redemption of stock. Here there was no cancellation or redemption by First National of any portion of its stock. The money which was distributed to petitioners for the shares of stock sold came from stockholders of the City National. The fact that City National stockholders borrowed such amount from the First National, in the first instance, does not make this a payment by the First National. The stockholders of the City National repaid the notes to the First National out of the proceeds of the excess assets after paying the note covering the deposit liabilities assumed by the First National.

Petitioners received a stock dividend from the First National and sold some of the stock received immediately for $137.50 per share. Any gain on such sale is includable in gross income and subject to both normal tax and surtax. Any loss sustained is deductible. Secs. Ill and 112 (a).

The basis for determining the gain or loss on the shares of stock sold is'the cost of the stock held on March 31, 1928, apportioned between such stock and the stock dividends distributed on May 7, 1928. From the opening statements made by counsel for the parties, it was understood that there was no dispute as to the cost of the stock held by these petitioners on March 31, 1928. The computation of the cost of the stock sold is, therefore, merely a mathematical computation which can be made in the recomputation of the deficiency under Rule 50.

Judgment' will he entered under Rule 50.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      * ⅛ ⅜ * 4 # *
      (g) Redemption of stooh. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, tbe amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earning's or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the ease of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.


text:
    Edna Smart Sherman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65593.
    Promulgated December 21, 1933.

      E. ID. Turner, Esq., for the petitioner.

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

Lansdon:

The respondent has determined a deficiency in income tax for the year 1929 in the amount of $7,243.90. The issues pleaded by the petitioner are (1) that the respondent erred in computing her income from a certain trust in the taxable year, and (2) in determining that one half the salary of her husband is taxable to her. In his brief counsel for petitioner abandons the first issue. The parties have filed a stipulation which, the Board has accepted and from which the material facts are summarized as follows:

The petitioner is, and lor a long time prior to the taxable year, was the wife of Frederick Royal Sherman. Husband and wife are residents of San Francisco, California, but since some time in 1926 have lived separately. On May 12, 1926, they entered into an agreement in which the husband agreed to transfer all his rights, title, and interest in certain real and personal property to the petitioner. The instrument evidencing such agreement specifies and describes all the assets to be transferred. It makes no mention of community property or community interests. In it there is no mention of income or of the right to receive income. This agreement was subsequently somewhat amended but the changes are not material to the issues here. In the taxable year the husband received a salary of $22,600 and in his Federal income tax return included the whole amount thereof in his gross income. Upon audit the respondent determined that one half the husband’s salary, or $11,250, should be taxed to the wife and determined a refund in the amount of $1,007.19. In her return for 1929 the petitioner reported no part of her husband’s salary as income. Upon audit of such return the respondent added the amount of $11,250 representing one half the husband’s salary for the taxable year to petitioner’s gross income, made other adjustments not now material here, and determined the deficiency under review.

The petitioner contends that the agreement of May 12, 1926, broke the community relationship which had theretofore existed between herself and her husband and that thereafter all income earned or otherwise received by either was separate property. To maintain this position her counsel argues that in California a husband and wife may enter into binding contracts with each other. This may be admitted without in anywise deciding or affecting the issue here. The contract in evidence does not specify that it is a full property settlement. After the transfers therein proposed were made there may have been left a considerable amount of community property. It contains no provisions that indicate the termination of the marital community. In it the wife nowhere waives her right to her vested interest in the salary of her husband under the laws of California as specifically set out in the Civil Code of California, 1931, at section 161 (a). In United States v. Malcolm, 282 U.S. 792, the Supreme Court held that under such section the wife has an interest in community income which should be separately reported for income taxation.

Unless the agreement of May 12, 1926, destroyed the community, it is obvious that the respondent must prevail here. If it was intended to be a waiver of the wife’s right to a vested interest in community income, it must be held that it is ineffective for that purpose, since the Supreme Court has held, in Lucas v. Earl, 281 U.S. 111, that no anticipatory arrangement can be effective to shift tax liabilities in respect of community income. In the absence of any divorce petitioner and her husband constituted a marital community under the laws of California in 1929. If an interlocutory decree of divorce has been granted in California, the parties are still husband and wife until such decree becomes final, and if in the interim one dies the survivor has the same rights as if no such decree had been issued. Estate of Leiter, 164 Cal. 181; 128 Pac. 334; Olson v. Superior Court, 175 Cal. 250; 165 Pac. 706; Brown v. Brown, 170 Cal. 1; 147 Pac. 1168.

Since the agreement is not a waiver of community rights and the marital community in question survived through the taxable year, the determination of the respondent must be affirmed.

Decision will he entered for the respondent.

       Section 161. (a) Int&'ests in community pro'perty. The respective interests of the husband and wife in community property during continuance of the marriage relations are present, existing and equal interests under the management and control of the husband as is provided in section 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property.