author: Matthews ;

text:
    O. P. P. Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60674.
    Promulgated April 10, 1934.

      Louis A. Gravelle, Esq., and A. Loeb Scdkin, Esq., for the petitioner.

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

Matthews ;

This proceeding is for the redetermination of a deficiency in income tax asserted against the petitioner for the fiscal year ended July 31, 1930, in the amount of $2,664.18. It is alleged in the petition that the respondent erred in failing to allow as a deduction for the taxable year interest paid on debenture bonds in the sum of $20,000. The notice of deficiency discloses that the deduction claimed by the petitioner was disallowed by the respondent for the reason that “ this item represents a dividend and not deductible interest paid on bonds which were máre of the nature of preferred stock and hence did not constitute indebtedness.” -

The case was submitted upon an agreed statement of facts which we adopt as our findings of fact, and we set out here only those necessary to an understanding of the issue presented.

The petitioner is a corporation, organized under the laws of the State of New York on june 20, 1929, with its principal office in Brooklyn, New York. Its certificate of incorporation shows that its authorized capital stock was limited to $20,000, consisting of 2,000 shares of common stock of the par value of $10 each.

Among the purposes for which it was formed are: (a) To purchase and sell stocks, bonds, and ■ other securities of corporations; (b) to purchase or otherwise acquire the business, good will,, and property of any other corporation; (c) to borrow money, contract debts, and issue and dispose of its obligations.

On June 25, 1929, the owners of all the outstanding capital stock, being 1,000 shares of common stock having a par value of $100 each, of Oneida Paper Products, Inc., a New York corporation, sold to the petitioner all the common stock of Oneida Paper Products, Inc., in consideration of the delivery to them by the petitioner of 1,000 shares of the common stock of the petitioner corporation and $250,-000 in amount of petitioner’s 8 percent debenture bonds dated as of July 1,1929, and maturing June 30,1954.

The book value of the 1,000 shares of common stock of Oneida Paper Products, Inc., as shown by its balance sheet dated July 31, 1929, was $129,185.51. The figures shown in this balance sheet with respect to the plant and equipment represented the cost figures, and the statement of assets did not include anything for good will or other intangibles.

The net sales, net income, and compensation of officers of Oneida Paper Products, Inc., for the 11 months ended July 31, 1927, and for the years ended July 31, 1928, 1929, and 1930, were as follows:

After the consummation of the purchase by the petitioner of all the capital stock of Oneida Paper Products, Inc., the balance sheet of the petitioner was as follows:

Assets
Stock of affiliated company (1,000 shares of Oneida Paper Products,
Inc.)'_______$260,000
260, 000 Total Assets.
Liabimues
Notes payable and bonds payable-¡---$250,000
Capital___:----10,000
Total liabilities and capital_■- 260,000

The debenture bonds in the sum of $250,000 have at all times been set up and recorded in the books and records of the petitioner as “ Notes Payable and Bonds Payable, $250,000,” distinct and apart from its outstanding capital stock of 1,000 shares of common stock having a par value of $10 each, and the payments on tbe debenture bonds were at all times recorded in the. books as “ Interest.”

During the period August 1, 1929, to July 31, 1930, Oneida Paper Products, Inc., declared a dividend in the sum of $20,000 upon its outstanding common stock and paid the same to the petitioner.

The petitioner maintains its books and records on the accrual basis, with its fiscal year ending on July 31.

For the fiscal year ended July 31, 1930, the petitioner filed a corporation income tax return upon Form 1120-A, consolidating the return of the petitioner corporation and its wholly owned operating corporation, Oneida Paper Products, Inc. Included in the gross expense shown on this return was the sum of $20,000, which the petitioner paid during the taxable year to the holders of the debenture bonds. The respondent disallowed the deduction from' gross income of this amount on the theory that it represented dividends on preferred stock instead of interest paid on indebtedness.

The instrument reads in part as follows:

No.- , $-
O. P. P. Holding Corporation 8% Debenture Bonds
O. P. P. Holding Corporation, a corporation organized and existing under tbe laws of tbe State of New York, (hereinafter called tbe corporation), for value received hereby promises to pay to- or registered, assigns, tbe sum of-:-dollars, on June 30, 1954: at tbe office of the corporation in the City of New York, New York and until tbe principal hereof shall be payable, to pay interest on the said principal amount from July 1, 1929 at the rate of eight per centum (8%) per annum, by equal semi-annual payments, on the 1st day of January and July in each year, such interest to be payable to the registered owner hereof at the office aforesaid or by mail to the registered address of the owner hereof.
This debenture bond is one of a duly authorized issue of debenture bonds of the corporation, fully registered, of -like date, tenor and effect, except as to the denomination, known as its 8% debenture bonds, limited to an amount not exceeding, in the aggregate, • the principal sum of Two Hundred and Fifty Thousand ($250,000) Dollars. ..
*' * * * * * *
2. This debenture bond and all debenture bonds of this issue are subject in all respects and subordinate, both as to principal and interest, to the claims of all creditors of the corporation, and upon dissolution or liquidation of the corporation no payment shall be due or payable upon this debenture bond unless and until all other creditors of the corporation shall have been paid in full.
3. Interest on the debenture bonds of this issue may, at the option of the corporation, be deferred or suspended without limit of time and may be paid at the option of the corporation, in whole or in part, in cash or in interest bearing debenture bonds of the corporation, but such suspension of payment shall in no wise relieve the corporation of the obligation to pay the same at some future time. The corporation covenants, however, that it will pay no dividends upon any issue of stock of the corporation unless all interest on the debenture bonds shall have been paid in full, and it shall have redeemed or paid in full any debenture bonds or other obligations previously issued in payment of interest on the debenture bonds of this issue.
4. No holder of this debenture bond shall have any right to institute any suit, action or proceeding in equity or at law upon this debenture bond, unless the holders of seventy-five per centum (75%) in amount of all debenture bonds of this issue join in such suit, action or proceeding.
5. Upon the consent in writing or at a meeting called for this purpose, by the holders of two-thirds (%) in amount of the outstanding debenture bonds of this issue, the time of payment of the bonds of this issue may be extended and any such change or extensions so authorized or so consented to shall be as valid and as binding upon the holders of all the debenture bonds of this issue as if originally incorporated herein.
6. After first paying or providing for the payment of all other creditors of the corporation, the corporation may redeem the debenture bonds of this issue at par and accrued interest, on any interest date, in whole or in part, and if in part, then pro rata at any time on not less than thirty days’ prior notice given to each registered owner, in such manner as the board of directors may authorize. * * *

It is the generally accepted rule that the name given to the instrument is not conclusive of its character and that inquiry may be made as to its real character, but it is not lightly to be assumed that parties have given an erroneous name to their transaction. Leasehold Bldg. Co., 3 B.T.A. 1129; Kentucky River Coal Corp., 3 B.T.A. 644. Its true nature will be determined by looking to its terms and its legal effect. I. Unterberg & Co., 2 B.T.A. 274.

It is fundamental that the debenture bonds cannot be both evidences of indebtedness and stock. - Their holders must be either creditors or stockholders. Bolinger-Franklin Lumber Co., 1 B.T.A. 402. A creditor of a corporation is one who has advanced to it money or its equivalent, usually for compensation or interest, at a fixed rate, to be repaid at a designated time or in a designated manner. The stockholder has hope or expectation of receiving income or profit from the operations of the company. The creditor is confined to a return of principal and interest and is not entitled to share in additional assets as a coowner of the business. Ordinarily, dividends on stock are payable only from the net earnings of the corporation, but creditors may resort to the body of their debtor’s property for interest as well as principal. Warren v. King, 108 U.S. 389.

In the case of In re Fechheimer Fishel Co., 212 Fed. 357, the certificates were designated on their face as debenture bonds. These so-called bonds prescribed a certain date of payment, and a certain amount of interest, but also contained a provision that the interest should he paid out of earnings and that all of these instruments should be subordinated to the claims of creditors. They further provided that, upon liquidation or dissolution of the company, the holders of the bonds should, after payment of debts, be entitled to the residue of the company’s assets. In reaching the conclusion that the instruments in question were shares of stock, the court said:

The distinguishing feature of a bond is that it is an obligation to pay a fixed sum of money with stated interest. The distinguishing feature of stock is that it confers upon its holder a part ownership of the assets of the corporation and gives him a right to participate in the management of the corporation and to share in the surplus profits and on dissolution to share in the assets which remain after the debts are paid.

In the instant case there is nothing in the instrument to make the holder thereof a stockholder. It is true that the debenture bonds are subordinate to the claims of all creditors of the corporation, but this does not mean that the holder of a debenture bond is not also a creditor. There is no provision that interest on these bonds shall be paid out of the net earnings of the corporation. On the other hand, the bonds possess the true characteristics of an evidence of indebtedness, which are: A definite obligor; a definite obligee; a definitely ascertainable obligation; a time of maturity, either definite or that will become definite. Northern Fire Apparatus Co., 11 B.T.A. 355, 360. In other words, the holders of these debenture bonds would seem to have enforceable evidences of indebtedness, ahead of which would come the claims of general creditors, but which must be satisfied before any distribution of assets is made to stockholders in liquidation. H. R. DeMilt Co., 7 B.T.A. 7.

We hold, therefore, that the instruments in controversy are certificates of indebtedness and that the amount of $20,000 which the petitioner paid during the taxable year to the holders thereof as interest is a legal deduction from gross income. Cf. Angelus Bldg. & Investment Co., 20 B.T.A. 667; aff'd., 57 Fed. (2d) 130; certiorari denied, 286 U.S. 562; Elko Lamoille Power Co., 21 B.T.A. 291; aff'd., 50 Fed. (2d) 595; Kentucky River Coal Corp. v. Lucas, 51 Fed. (2d) 586.

[Reviewed by the Board.

Judgment will Ire entered for the petitioner,

Blace and Seawell dissent.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    Emily King Parker and St. Louis Trust Company, a Corporation, Trustees, Residuary Legatees Under the Will of Herbert L. Parker, Deceased, and Transferees, Estate of Herbert L. Parker, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53320.
    Promulgated April 10, 1934.

      Abraham Lowenhauyt, Esq., and Stanley S. Waite, Esq., for the petitioners.

      J. H. Teatman, Esq., for the respondent.
   OPINION.

Matthews :

In the stipulation of facts filed by the parties to this proceeding it is agreed that if there is any deficiency in estate tax due from the estate of Herbert L. Parker not barred by the statute of limitations, the petitioners, who were appointed trustees of the estate under the decedent’s will, are liable for the tax as transferees under section 316 of the Revenue Act of 1926. We shall first consider the question whether the proposed deficiency is barred by the statute of limitations.

The decedent died on December 15, 1924, and the estate tax return was filed on December 15, 1925, by the present petitioners in their capacity of executors. Section 310 (a) of the Revenue Act of 1926 provides for assessment of estate taxes within three years after the return was filed and prohibits any proceeding in court without assessment for the collection of such taxes after the expiration of this three-year period. Assessment against the transferees of the estate, under section 316, must be made within one year after the expiration of the period of limitation for assessment against the executors.' Thus, if the running of the statute of limitations had not been suspended, the three-year period of limitation for assessment against the executors and the one-year extension as to the transferees would have expired on December 15,1929, which date is after the enactment of the Revenue Act of 1928. Section 402 of the Revenue Act of 1928, which is specifically made to apply in all cases where the period of limitation has not expired prior to the enactment of the 1928 Act, amends section 310 (b) of the Revenue Act of 1926 to read, as follows:

The running of the statute of limitations provided in this section or in section 311 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under subdivision (a) of section 308) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for 60 days thereafter.

A notice of deficiency was addressed to the petitioners herein as “ executors ” on July 5, 1927, and a petition, Docket No. 30630, was filed with the Board on August 22, 1927, by these petitioners in their then capacity of “ trustees.” In the hearing before the Board it was developed that Emily King Parker and the St. Louis Union Trust Co. had been discharged as executors by the Probate Court on June 23, 1926, and had thereafter, in accordance with the provisions of the decedent’s will, turned over the estate to themselves as trustees. It was held that since the executors and the trustees of the estate were separate and distinct legal entities, the Board had no jurisdiction of a petition filed by the latter for the redetermination of a deficiency determined against the former. That proceeding was accordingly dismissed on October 20, 1930, for lack of jurisdiction, 21 B.T.A. 76. The notice of deficiency in the instant proceeding was mailed on February 16, 1931.

In the view we take of the case it is not necessary to discuss the point that the first petition was filed in the names of the petitioners as trustees, although the notice of deficiency dated July 5, 1927, was addressed to them as executors, and in the instant proceeding they describe themselves as trustees and admit their liability as transferees of the property of the deceased taxpayer. The deficiency in controversy was asserted against the estate of the deceased taxpayer. It was clearly a “ proceeding in respect of the deficiency ” which was placed on the docket of the Board on August 22, 1927, and that proceeding suspended the running of the statute of limitations in accordance with the provisions of section 402, quoted above.

The proceeding in Docket No. 30630 was pending before the Board for more than three years, and when the period of suspension is added to the date the period of limitation would have expired if no appeal had been taken to the Board, which was December 15, 1929, it is clear that the notice of deficiency involved in the instant proceeding, dated February 16, 1931, was forwarded well within the extended period. We hold, therefore, that the deficiency asserted herein is not barred by the statute of limitations.

The position which this Board takes with respect to the suspension of the running of the statute after the filing of a petition with the Board, where the proceeding is later dismissed by the Board for lack of jurisdiction, has been approved by the Circuit Court of Appeals for the Second Circuit in its opinion dated December 11, 1933, in the case of American Equitable Assurance Co. of New York v. Helvering, 68 Fed. (2d) 46; affirming 27 B.T.A. 247. This case involved a deficiency in income tax, but the provisions of the statute with respect to the suspension of the running of the statute of limitations are the same as to deficiencies in income and estate taxes. The court held that the mere placing on the docket of the Board of a proceeding in respect of a proposed deficiency suspends the running of the statute of limitations with respect to the deficiency, even though the Board subsequently dismisses the proceeding for want of jurisdiction. The court said:

* * * At any rate, a proceeding had been commenced which required the Board of Tax Appeals to malee a decision though not necessarily on the merits. Because the effect of the passage of' time would be the same whether the Board made its decision on the merits or on some other ground, if the period stated in the statute of limitations meantime expired, it is reasonable to believe that Congress did not intend to have the time a proceeding was pending before the Board counted any more when the decision was a dismissal for want of jurisdiction than when it was not. In other words, the time after such a proceeding was placed on the docket was not to be added to what had gone by since the return had been filed until the Board disposed of the matter in some way and sixty days had passed thereafter in which further action could be taken. Certainly, the words Congress used have this meaning literally and we are disposed to believe that such is their intended effect.

We pass now to the sole question raised on the merits, whether the proceeds of four certain insurance policies should have been included in decedent’s gross estate. The petitioners in the stipulation have conceded the correctness of respondent’s inclusion of real and other property in the gross estate in the amounts of $20,000 and $1,400; and also the inclusion of the proceeds of other insurance policies in an aggregate amount of $162,192.23 over and above the $40,000 exemption allowed by the statute. The applicable provisions of the 1924 Revenue Act are set out in the margin.

Under the express provisions of the statute the amounts receivable by the beneficiary under the four policies here in question are required to be included in the gross estate.

So was the value of the trust estates before the Supreme Court in Nichols v. Coolidge, 274 U.S. 531, and in Reinecke v. Northern Trust Co., 278 U.S. 339, under the terms of the statutes there applicable.

In Nichols v. Coolidge, supra, it was held that property transferred in trust, long prior to the passage of any estate tax act, and not in contemplation of death, under which the beneficiary took a vested interest, could not be subjected to the estate tax merely because the conveyance took effect in possession after death.

In Reinecke v. Northern Trust Co., supra, the Court ruled that the five trusts created in 1919, where the grantor reserved the right to modify the trusts with the consent of the beneficiary, were not subject to estate tax, but that the two trusts created in 1903 and 1910, where the grantor alone reserved the right to change the trust, were subject to the estate tax.

On the same day that the Reinecke v. Northern Trust Co. decision was rendered, the Court in Chase Nat. Bank v. United States, 278 U.S. 327, following the principle applied in the Northern Trust Co. case, held that the proceeds of life insurance policies in which the decedent had until the moment of death the right to change the beneficiary were includable in gross estate, such right giving the insured the power to control the policies and their proceeds until death.

Under the authority of these decisions petitioners submit that the question for determination is whether the insured until his death possessed any of tbe powers enumerated in the Chase Nat. Bank case, the termination of which by death alone constituted a transfer. It is contended that in the four policies here in question decedent had none of the powers enumerated in the Chase Nat. Bank case at his death and therefore that no taxable interest was thereby transferred.

The New York Life policy became paid up on March 7, 1913, and was continued. No loans on the policy could be obtained or continued after the end of the accumulation period, March 7, 1913, and after that date the insured could not surrender the policy. It became a paid-up policy for $10,000 to be paid upon the death of the insured to the wife of the insured, the beneficiary, or in the event of her prior death, to the executors, administrators, or assigns of the insured.

The provision in the policy that in case of death of beneficiary prior to that of insured, the insurance would be payable to the executors, administrators, or assigns of the insured, is not sufficient to prevent the vesting in the beneficiary from being complete. No act of the insured could prevent the beneficiary from receiving the full $10,000 of insurance on his death. Her interest could be defeated only by her death prior to that of the insured. In James B. Duke Estate, 23 B.T.A. 1104, in which the settlor of a trust provided in the trust deed that if the beneficiary should predecease him the trust res should revert to him, we said that “ such possibility of reversion did not prevent the gift from being complete”, citing McCormick v. Commissioner, 283 U.S. 784. Our decision in the Duke case was affirmed by the Circuit Court of Appeals, 62 Fed. (2d) 1057, and affirmed per curiam by the Supreme Court (divided), 290 U.S. 591.

After March 7, 1913, the only interest which the insured had in the policy was in the dividends to be apportioned to it. We do not know how the insured elected to take the dividends accumulated during the accumulation period, but the endorsement on the policy dated January 28, 1913, a little over a month before the end of the accumulation period, provided that any profits after the accumulation period were to be apportioned at the end of every one year instead of at the end of every five years as the policy provided, and at the end of each year the insured had the option of taking such profits in one of three ways; but if the insured did not elect within three months of the notice requiring election, the profits would be applied to the purchase of paid-up additions.

Presumably the excess over the face of the policy, $105.36, was the paid-up addition purchased with the profits accrued in the year of decedent’s death, which had not been paid to him in cash. As decedent had control over such profits until his death, the paid-up addition which such profits purchased, $105.36, should be included in the gross estate. Chase Nat. Bank v. United States, supra. But since the insured had no power the exercise of which could affect the beneficiary’s right to the full amount of the insurance, $10,000, the proceeds of the policy in such amount are not includable in decedent’s gross estate. Levy's Estate v. Commissioner, 65 Fed. (2d) 412.

We come now to the three Union Central Life Insurance policies which were taken out in 1903. Although the parties stipulated that the last premiums due on the three Union Central policies were paid in 1922, and that after that date the policies became paidrup policies, we have not found such to be the fact. The policies, photostatic copies of which were received in evidence, show that the premiums were to continue for the life of the insured and there is no provision in the policies providing that they will be paid up in 20 years. In the application for the policies signed by the insured, which is attached to and made a part of the policies, there is written in the space after “ Kind of Policy ”, “ Ord. Life Bond 20 Yr. Installment Participating.” Each policy is described on the back as “ Participating Life 20 Inst. Bond.” They do not purport to be 20-payment life policies.

The policies do provide for paid-up insurance in case of default in payment of premiums. Under this provision, after the twentieth year, if no further premiums had. been paid, the policies would have been continued in force as paid-up nonparticipating term policies for 8 years and 136 days; but if the death of the insured occurred within 3 years from default of premium there would have been deducted from the amounts payable under the policies a sum equal to the regular premiums with interest, which would have been paid had the original policies been kept in force. The insured died 2% years after the 1922 premiums were paid. The evidence does not show that any amount was deducted from the amount payable to the beneficiary on the death of decedent, hence we assume that the insured continued to pay the premiums until his death.

In each of the three Union Central Life insurance policies the insured had the right to surrender the policy on July 15, 1923, and receive its reserve value in cash and the reserve value of any reversionary additions less any indebtedness to the company. That is the only date on which the insured did have the right to surrender the policy. Cash loans could be made on the policy after the third year in the amounts designated in the table of loan values. The provision of the policy permitting the loan does not state that the loan will be made to the insured, but that “ upon legal assignment of the policy to the company as collateral security ”, the loan will be made. As the beneficiary was required to sign, and did sign, the application for the insurance, it would appear that no legal assignment could be made of the policy without the joining in of the beneficiary. But, aside from this, and whether the insurance policies are to be construed as Ohio contracts, as the policies provide, or as made in Missouri, where the application for the insurance was made, the insured lived, and the policies were delivered, the rule applied by the courts in both Ohio and Missouri is that the insured can not borrow on life insurance policies in which there is no right to change the beneficiary without the consent of the beneficiary. The rule in Missouri is thus stated in Missouri State Life Ins. Co. v. California State Bank, 202 Mo. App. 347; 216 S.W. 785:

Where there is no provision in the policy that the insured may change his beneficiary, the rule is “.that the issue of the policy confers immediately a vested right upon, and raises an irrevocable trust in favor of, the party named as beneficiary, a right which no act of the insured can impair without the beneficiary’s consent.” Blum v. N.Y. Ins. Co., 197 Mo. 513, 523, 95 S.W. 817, 319 (8 L.R.A. [N.S.] 923, 7 Ann. Cas. 1021); Bank v. Hume, 128 U.S. 195, 206; Cornell v. Insurance Co., 179 Mo. App. 420, 429, 165 S.W. 858. * * *

And a rule to the same effect had been announced in Union Central Life Ins. Co. v. Buxer, 62 Ohio St. 385; 57 N.E. 66. The insured, therefore, could not borrow on the three Union Central Life policies without the consent of the beneficiary.

These policies, like the New York Life policy, also provided that in case of the wife’s death prior to that of the insured, the insurance was payable to the executors of the insured. What was said with respect to a similar provision of the New York Life policy also applies here and this provision did not prevent the beneficiary from having an irrevocable vested interest in the policies.

Under each of these policies the insured at the time of his death had no rights in the policy which could be exercised without the consent of the beneficiary. The beneficiary’s right to the full face amount of the policies was not affected by his death, for there was no possibility of the exercise by the insured of any power which might have diminished the amounts receivable by the beneficiary. The proceeds of the three Union Central Life policies should not be included in the gross estate of the decedent. Nichols v. Coolidge, supra; Reinecke v. Northern Trust Co., supra; Levy's Estate v. Commissioner, supra.

Reviewed by the Board.

Judgment will ~be entered u/nder Bule 50,

       Sec. 302. (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life;
      (h) Subdivisions (b), (c), (d), (e), (f) and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.


author: Marquette:

text:
    Continental Baking Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61603.
    Promulgated April 11, 1934.

      Raymond F. Garriiy, Es-q., for the petitioner.

      E. L. Corbin, Esg„ tor the respondent.
   OPINION.

Marquette:

The issue to be decided is whether the capital stock tax of the Bakeries Service Corporation accrued in 1925 or in 1929, in which latter year the respondent determined it was not exempt from such tax. If it was a proper accrual for 1929 the petitioner prevails; otherwise, it is not entitled to deduct the amount of the tax in its income tax return for that year. Russell-Miller Milling Co., 27 B.T.A. 405; aff'd., 67 Fed. (2d) 392. The applicable provisions of the Revenue Act of 1924 and of the respondent’s regulations are set forth in the margin.

The petitioner maintains that inasmuch as the capital stock tax return filed claimed the corporation was exempt as one not “ engaged in business ” and by the regulations “ the determination of liability rests with the Commissioner ”, this decision of liability by the Commissioner was a “ fact ” necessary to fix the liability, and no tax could be said to have accrued until such decision was made. There appears to be no dispute between the parties as to the law of the case. They both cite and rely upon practically the same decisions, but differ in their application. The question is narrowed then to this: Was the determination of liability by the respondent such an event or fact as would postpone the accrual of the liability until such determination was made? We are constrained to answer this question in the negative. At June 30, 1925, all the facts existed and were known upon which the liability to the tax was to be predicated; it was then ascertainable as a matter of law whether the corporation was “ carrying on or doing business ” within the intent and meaning of the statute, and we do not think the incidence of the tax or its accrual could be postponed by the filing of a return in which exemption from the tax was claimed.

Since the accounts were kept on the accrual basis, the liability became fixed at July 1, 1925, if the corporation was not exempt, and it having been so determined by the respondent, the liability'' to the tax accrued in 1925 and not in 1929. United States v. Anderson, 269 U.S. 422; Aluminum Castings Co. v. Routzahn, 282 U.S. 92; Continental Tie & Lumber Co. v. United States, 286 U.S. 290; Brooklyn Union Gas Co., 22 B.T.A. 507; aff'd., 62 Fed. (2d) 505; Columbian Carbon Co., 25 B.T.A. 456; Permanent Homes Land Co., 27 B.T.A. 142; Russell-Miller Milling Co., supra.

The respondent therefore correctly denied as a deduction in the year 1929 the amount of the capital stock tax which accrued in 1925. The parties have stipulated that the Bakeries Service Corporation is entitled to a deduction in the amount of $43,439.84 from its 1929 income for depreciation on certain letters patent, and an allowance will 'be made therefor upon recomputation.

Judgment will be entered wnder Rule 50.

       Sec. 700. (a) * * * (X) Every domestic corporation shall pay annually a special excise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. * * *
      ^2) * * * (b) The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business (or, in the case of a foreign corporation, not engaged in business in the United States) during the preceding year ending June 30 * * *.
      [Regulations 64.] Art. 31. Corporation claiming exemption. — * * * Organizations claiming exemption should fill out Form 707 but instead of computing the tax should enter in the space provided for the computation the notation ** Exemption claimed.” The determination of liability rests with the Commissioner of Internal Revenue and without complete information it is impossible to make a decision. Therefore in all such cases the return so filled out must be filed with the collector, together with a comprehensive statement of the reasons for claiming exemption * * *.


author: McMahon :

text:
    Mary Lee Winger, Executrix of the Estate of R. O. Winger, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60330-60344.
    Promulgated April 12, 1934.

      Charles E. Rendlin, Esq., and Dulaney Mahan, Esq., for the petitioners.

      James H. Yeatmam,, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: D. H. Hafner, Jr.; George D. Clayton, Sr.; C. E. Rendlen; E. F. Mangels; J. W. Hood Estate; C. C. Harris; J. H. G. Grimaud; L. H. Quirk; C. D. Streeter; John Tumelty; R. & J. Rollins; Jerry M. Stack; J. R. Currier; and James Leach.

   OPINION.

McMahon :

These are consolidated proceedings for the redetermi-nation of the liabilities of the petitioners, as transferees, under section 280 of the Revenue Act of 1926, in respect of a deficiency of $3,522.47 in income tax for the year 1927 of the Aero Oil Co., a dissolved corporation.

There is no controversy concerning the correctness of the deficiency determined by the respondent, and the petitioners concede they are transferees of the assets of the dissolved corporation, liable as such for its tax to the extent of the assets received by each, provided assessment and collection are not barred. The sole issue is whether or not the tax, under the facts disclosed, is barred by the provisions of section 277 (a) (4) of the Revenue Act of 1926, as amended by section 503 of the Revenue Act of 1928.

The facts were stipulated by the parties, which stipulation in full is adopted as our findings of fact, and only so much thereof as is deemed necessary to an understanding of the conclusions reached by us is here set forth.

The Aero Oil Co. was a corporation organized under the laws of Missouri in 1919. In December 1921 the physical assets and good will of the corporation were sold for a cash consideration. On or about December BO, 1927, the stockholders of the corporation decided to have it dissolved, and the proper officers were directed to do all things necessary to effect dissolution. The former directors of the corporation were appointed trustees, and all the property of the corporation was turned over to them for the purpose of liquidation and distribution to the stockholders. An affidavit of dissolution was filed March 24, 1928, with the Secretary of State of Missouri, in accordance with Missouri law.

At the time the affidavit of dissolution was filed, there had been a distribution of $1.50 per share to the stockholders, and a small part of the corporate debts had been paid. Thereafter, all the corporation’s debts, except the tax liability involved in these proceedings, were paid and all the remaining assets distributed to the stockholders pro rata. On such final liquidation, petitioners received as stockholders the additional amounts set out opposite their names below:

On March 15, 1928, the Aero Oil Co. filed with the collector of internal revenue a Form 1120 which purported to be its income tax return for the calendar year 1927 and disclosed no tax due.

On March 20, 1928, Rendlen & White, attorneys for the Aero Oil Co., addressed a letter to the collector of internal revenue at St. Louis, Missouri, reading in part as follows:

In re: Audit of Aero Oil Company, Hannibal, Mo.
The Aero Oil Co., a Missouri corporation located at Hannibal has dissolved and is winding up its affairs and in order to make final distribution of funds on hand, it desires that the Federal Government make an audit as quickly as same can be done to determine any tax liability of the Aero Oil Co. to the Government. We are writing you this letter as attorney for the Aero Oil Co., and if there be any other or further or more formal request necessary under your regulations we would be pleased to be advised thereof and if not, this will answer that purpose and we await with interest your reply and early attention to the matters herein.

The collector of internal revenue at St. Louis, Missouri, forwarded this letter to the Commissioner of Internal Revenue, and under date of April 5, 1928, C. B. Allen, Deputy Commissioner of Internal Revenue, by A. B. Niess, Head of Division, addressed a letter to Rendlen & White, reading in part as follows:

The Collector of Internal Revenue, St. Louis, Missouri, has forwarded to this office for attention your letter dated March 20, 1928, relative to an early determination of the income tax liability of the Aero Oil Company, Hannibal, Mo., a dissolved corporation.
You are advised that your request is receiving consideration but before you can receive further information it will be necessary for you to furnish this office with a power of attorney authorizing you to act in behalf of the Trustees in Dissolution together with documentary evidence showing the trustees’ appointment,

Oil April 6, 1928, Rendlen & White, attorneys for the Aero Oil Co.j addressed a letter to the collector of internal revenue at St. Louis, Missouri, reading in part as follows i

In re: Audit of Aero Oil Co., Hannibal, Mo.
Some days ago we wrote you a letter requesting if you would please to have an audit made, if your Department desired such, of the Aeko On Co., which has filed certificate of dissolution and the Trustees of the undistributed assets desires to liquidate and distribute the same at the earliest possible moment and if the Government desires to or purposes to mate an audit, we should like to have it done and if not, we should like to have your statement absolving this Company from any further claims on account of Federal income or other tax, so that the affairs of the Aero Oil Co., may be entirely completely liquidated. * * *

The letter of April 6, 1928, was forwarded by the collector of internal revenue at St. Louis, Missouri, to the Commissioner of Internal Revenue and on June 16, 1928, Rendlen & White, attorneys for the Aero Oil Co., addressed a communication to the Commissioner of Internal Revenue, reading in part as follows:

In re: IT: R: F: G: BD—Aero Oil Company, Hannibal, Mo.
In response to yours of April 5th, 1928, in reply to letter we wrote to the Collector of Internal Revenue in St. Louis, Mo., dated March 20th 1928 requesting an early determination of the income tax liability of the Aero Oil Company of Hannibal, Mo., a dissolved corporation, herewith enclosed you will find certified and verified copy of the minutes of the Aero Oil Company transferring its assets upon dissolution to liquidating trustees showing such trustees appointment, also herewith enclosed you will find power of attorney from said trustees through their Chairman and Secretary, authorizing the undersigned to act as their attorneys in the matter of having an early determination of tax liability; if it be for any reason these documents are not sufficient for that purpose, if you will indicate what other or additions are required they will be supplied.
The books of the Aero Oil Company are in storage here in temporary quarters of the liquidating trustees who are rapidly closing up the affairs of this dissolved corporation and the bookkeepers of the company are at present employed in this community, but may at any time have employment elsewhere and it would be difficult and expensive to check up their tax liability, ii any there be, and in order to have a final determination of any and all tax liability, satisfactory alike to your department and this dissolved corporation, it is desirable that a checking up and determination be arrived at speedily.

Accompanying the letter of June 16,1928, was a power of attorney running from L. H. Quirk and J. H. G. Grimaud, liquidating trustees of the Aero Oil Co., to the law firm of Rendlen & White, composed of Charles E. Rendlen and Harrison White, appointing the firm as attorneys to act in behalf of the liquidating trustees in the matter of the determination of income tax liabilities of the Aero Oil Co.

Also accompanying the letter of June 16,1928, was a certified copy of the minutes of a meeting of the board of directors of the Aero Oil Co. held on December 30, 1927, at which, as appears from the minutes, a resolution was adopted directing the proper officers to execute and file immediately all necessary papers to accomplish the dissolution of the company, and further directing that all the assets and records of the company be turned over to four former directors of the corporation, among whom were L. H. Quirk and J. H. G. Grimaud, as trustees for the stockholders and those beneficially interested in the corporation, the assets to be distributed to the stockholders from time to time as and when reduced to cash.

Under date of July 9, 1928, C. B. Allen, Deputy Commissioner of Internal Revenue, by A. B. Niess, Head of Division, addressed a letter to Rendlen & White, reading in part as follows:

Receipt is acknowledged of your letter dated June 16, 1928, relative to the income tax liability of the Aero Oil Company, I-Iannibal, Missouri.
You are advised that returns for the years up to and including 1927 have been audited, disclosing no further tax to be assessed. The case is regarded as closed unless subsequent information should be received which would materially change the amounts reported, in which event the Bureau will be obliged to redetermine the income tax liability.

The letters above set forth were written and duly mailed at the times and by the persons indicated thereby, and were duly received by the addressees.

During the month of August 1930 a revenue agent made an examination and audit of the books of account of the Aero Oil Co. and found that its income for the year 1927 was materially different from that reported in its return for that year, and that there was a deficiency in tax for 1927 of $3,522.47. This information was communicated to the respondent and a deficiency of $3,522.47 was assessed against the Aero Oil Co. on December 10, 1930. No part of this assessment has been paid.

The notices of deficiency asserting liability against the respective petitioners herein as transferees were duly mailed on September 4, 1931, and all were duly received by the respective addressees.

The corporation’s return for the taxable year having been filed on March 15, 1928, the three-year period of limitation for the assessment of any additional tax, as provided in section 277 (a) (1) of the 1926 Act, expired March 15,1931. Assessment of the tax against the corporation on December 10, 1930, therefore, was timely and, since the respondent had one year from that date, under section 280 (b) (1) of the same act, within which to assert transferee liability, the notices mailed to the petitioners in September 1931 were also timely.

The petitioners contend, however, that assessment of their liability as transferees is barred because assessment of the tax against the corporation was barred long prior to December 10, 1930, by virtue of a request for prompt assessment made under section 2Y7 (a) (4) of the 1926 Act, as amended by section 503 of the 1928 Act.

Respondent’s position is that the letter of June 16, 1928, did not constitute a valid request within the requirements of the applicable statute, and hence was insufficient to start the running of the one-year period of limitation provided therein; and that if any valid request was made, it was prior to. the enactment of the Revenue Act of 1928. Respondent’s contentions, we think must be sustained.

The letter of June 16, 1928, written by Rendlen & White, as attorneys for the dissolved taxpayer corporation, addressed to the Commissioner of Internal Revenue, neither referred to the statute nor by implication made any specific request thereunder for a prompt determination or assessment of the corporation’s tax liability. That letter contained no request of any kind for a determination or an assessment of the corporation’s tax. The primary purpose as stated in this letter was to transmit to the Commissioner a certified copy of minutes of a directors’ meeting of the Aero Oil Co., at which liquidating trustees were appointed to whom its assets were transferred, and a power of attorney from the trustees authorizing Rendlen & White to act as their attorneys.

It is tru"e that the letter of June 16, by way of identification only, referred to a prior letter written by the same attorneys, under date of March 20, 1928, to the collector at St. Louis, as a letter “ requesting an early determination of the income tax liability ” of the trans-feror; but we are not bound by such construction of the letter of March 20. We must put our own construction upon it. As we construe it the letter merely requested an “ audit * * * to determine any tax liability ” of the transferor. It did not “ request ” an “ assessment ” as contemplated by the amendment to the statute.

Furthermore, the letter of June 16 did not again present the same request for an “audit” or make a new request of any kind, and this letter was the only communication from the attorneys to either the Commissioner or the collector subsequent to May 29, 1928, the effective date of the Revenue Act of 1928.

It is clear, therefore, that no request was made in compliance with the statute subsequent to May 29, 1928, the date of enactment of the Revenue Act of 1928; and, since section 503, supra, by itg express terms provides that it shall not apply in the case of income of a corporation “ unless the written request is filed after the enactment of the Revenue Act of 1928 ”, no request adequate to put the statute in motion was made.

Rot only was the request for an “ audit ” contained in the letter of March 20,1928, made prior to the enactment of the statute under and by virtue of which the petitioners now claim that their liability is barred, but on April 5, 1928, also prior to the enactment of the statute, the attorneys were advised by the deputy commissioner that such request was then receiving consideration.

Furthermore, the stipulated facts, we think, show that the attorneys for the dissolved corporation had no intention of requesting a determination or an assessment of tax liability under the statute in question, or of starting the running of the one-year period of limitation prescribed therein. It is clear that the respondent did not understand the request to be such, for he stated in his letter of July 9, 1928, that “ The case is regarded as closed ” unless subsequent information should be received which would materially change the amounts reported, “ in which event the Bureau will be obliged to redetermine the income tax liability.”

Where a taxpayer intends to claim the benefit of a special statutory limitation, such as we have here, on the Government’s right to assess and collect a tax, the request for assessment within the specified period must meet all the statutory requirements and be sufficiently clear to put the Commissioner on notice of such intention; and the taxpayer corporation in this proceeding failed to meet the requirements of the statute or put the respondent on notice. In the case of Mrs. Niels (Mellie) Esperson, Executrix, 13 B.T.A. 596, we held that a letter requesting an “audit” “at once” of the decedent’s income tax returns covering years prior to his death, in order that the estate tax might be definitely determined, did not constitute the “ specific request required by the statute,” for a determination and assessment of such income taxes, under the provisions of section 250 (d) of the Revenue Act of 1921, and that the deficiency was “ not barred because of a failure of the Commissioner to make such determination and assessment within one year [the limitation of time prescribed in the statute after such request was made].” In our opinion at page 607, we said:

It is to be noted that the letter in question contains no reference to the section of the statute in question, nor shows on its face that it purported to claim the benefit of this special statute of limitations. * * * Subsequent events tend to confirm the conclusion that the letter of January 7, 1924, was not intended as a request of the character contended for. The record indicates that' the revenue agent’s examination requested in this letter was submitted on July 1, 1924. Whether any action was taken between this date and February 16, 1925, we do not know, but on this last named date Newton wrote another letter similar in character to the one of January 7,1924. * * * In neither case was any mention made of the section of the statute of which the petitioner now claims the benefit, nor suggestion offered from which it could be implied that' they purported to start running this special statute of limitations. * * * but the absence of any reference throughout the case, except at a conference after the statute had run, argues strongly for the position that' the letter of January 7, 1924, was not intended originally for the purpose now contended for.

Our decision in the above cited case was affirmed at 49 Fed. (2d) 259, and certiorari was denied at 284 U.S. 658. Cf. Lucas v. Pilliod Lumber Co., 281 U.S. 245.

For the reasons hereinbefore indicated it is our opinion that no request for prompt assessment of the tax liability of the corporation within the purview of section 277 (a) (4) of the Revenue Act of 1926, as amended by section 503 of the Revenue Act of 1928, was made; and that assessment of the taxpayer corporation’s fax was not barred under the provisions of that statute on or before December 10,1930. It follows that the liability of the petitioners as transferees is not barred.

In view of our conclusion, as heretofore set forth, it is unnecessary to consider whether Rendlen & White had authority to thus act for the dissolved corporation at the time they wrote the letter of March 20,1928, or whether, under all the facts and circumstances, any request for an assessment made subsequent to May 29, 1928, by or on behalf of these liquidating trustees, who were authorized to act only for the stockholders and those beneficially interested in the corporation, would satisfy the requirements of the special statute in question, or any other questions suggested by the record.

Reviewed by the Board.

Decision will 5<? entered for the respondent.

       SEC. 503. REQUEST FOR PROMPT ASSESSMENT.
      Section 277 (a) (4) of the Revenue Act of 1926 is amended to read as follows:
      “(4) In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within one year after written request therefor (filed after the return is made), by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of the period prescribed for the assessment of the tax * * *. This paragraph shall not apply in the case of a corporation unless (A) such written request notifies the Commissioner that the corporation contemplates dissolution at or before the expiration of such year; and (B) the dissolution is in good faith begun before the expiration of such year; and (C) the dissolution is completed; nor shall it apply in the case of income of a corporation or of an estate during the period of administration unless the written request is filed after the enactment of the Revenue Act of 1928.”


text:
    Joseph Cavedon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62278.
    Promulgated April 12, 1934.

      James F. Armstrong, Esq., for the petitioner.

      I. Graf, Esq., for the respondent.
   OPINION.

McMahon :

The question here presented is whether the petitioner sustained net losses during the years 1927 and 1928, within the meaning of section 117 of the Revenue Act of 1928, which may be applied as deductions against the petitioner’s income for the year 1929. Portions of section 117 of the Revenue Act of 1928 are set forth in the margin. See art. 651, Reg. 71, as amended by T.D. 4849. The definition of “ net loss ” is substantially the same in the Revenue Act of 1926 as it is in the Revenue Act of 1928.

The net loss of $8,662.75 shown by petitioner’s return for the year 1927 was due to the deduction of an amount of $59,039.84 which represented the petitioner’s loss upon endorsement of a note of the Glenbrook Worsted Co. The net loss of $43,071.48 shown by the petitioner’s return for the year 1928 (without deducting the net loss of $8,662.75 shown for the year 1927) was due to the deduction of an amount of $86,442.61. This last figure was made up of an item of $56,246.66 representing petitioner’s loss upon the endorsement of indebtedness of the Planet Worsted Co. and an item of $30,195.95 representing petitioner’s loss of his investment in the Planet Worsted Co. when that company became bankrupt. In addition to such losses in 1928, the petitioner at the hearing showed that he also sustained a loss of $64,370.27 upon his investment in the Crown Piece & Dye Works. Such loss, so far as we can gather from the evidence, was sustained upon loans which he had made to that corporation and upon his investment in its second mortgage.

The respondent concedes that the petitioner has shown that he sustained a loss in the amount of $64,370.27. There is no question as to the deductibility of these various losses in the years in which they were sustained, 1927 and 1928, for purposes of determining the taxes for those years. The question presented is whether the petitioner sustained net losses in the years 1927 and 1928, within the meaning of section 117 of the Revenue Act of 1928, which may be allowed as deductions in computing the petitioner’s net income for the year 1929. This, in turn, depends upon whether the losses sustained by the petitioner as set forth above are “ attributable to the operation of a trade or business regularly carried on by the taxpayer.”

Petitioner concedes in his brief that he was not a dealer in securities, but contends that he was engaged in the textile industry in its various ramifications during the years 1927 to 1929, inclusive, as a stockholder, officer, director, and organizer and in every other aspect of the industry, and that he has been so engaged for a period of more than 50 years.

Upon consideration of all the facts and circumstances and authorities cited by both parties, it is our opinion that the losses sustained by the petitioner were not attributable to the operation of a trade or business regularly carried on by the petitioner, within the meaning of the statute. It is our view that the instant proceeding is governed in principle by the decisions in Burnet v. Clark, 287 U.S. 410; and Dalton v. Bowers, 287 U.S. 404. In both of those cases the Supreme Court stated that the circumstances were not so unusual as to create an exception to the general rule for tax purposes that a corporation is an entity distinct from its stockholders. In our opinion, it has not been shown in the instant proceeding that the circumstances are so unusual as to create an exception to such general rule.

The occupation of the petitioner in the instant proceeding was that of officer and director of the various corporations. The greater part of his income was derived from salary from them. The petitioner was not regularly engaged in endorsing notes, making loans, or buying and selling corporate securities. The transactions resulting in the losses were no part of a trade or business regularly carried on by the petitioner, but were transactions entered into from time to time. There is nothing in the evidence to indicate that the corporations were his agents. The textile business was that of the corporations, and the petitioner, as director, officer, and dominant factor of such corporations, was merely carrying on the business for the corporations.

In John C. Shaffer, 28 B.T.A. 1294, the stipulated facts showed that from 1901 to 1928, inclusive, the taxpayer was engaged in the business of editing and publishing newspapers through the medium of several corporations which he owned and controlled. The taxpayer disposed of his interests in one of such corporations at a loss, in 1924 and 1926. His total investment therein was made up of various items such as cost of stock and bonds, cash advances, and payment of notes held by other companies. In 1926 he disposed of his interests in another of such corporations at a loss. His investment in the second corporation consisted of similar items. We held, among other things, upon authority of Burnet v. Clark, supra, that such losses were not sustained in the operation of a trade or business regularly carried on by the taxpayer and hence were not deductible in computing statutory net losses for those years. We there stated in part:

He was not a dealer in securities; and he was not engaged in buying and selling newspaper publishing corporations as a business. The stipulation states that the petitioner “ was engaged in the trade or business of editing and publishing newspapers through the medium of several corporations which he owned and controlled.”

See Benjamin I. Powell, 26 B.T.A. 509; Winthrop Ames, 27 B.T.A. 729; aff'd., Ames v. Commissioner, 68 Fed. (2d) 801; and Philip Rhinelander, 30 B.T.A. 121.

We have not overlooked Security First Nat. Bank of Los Angeles et al., Executors, 28 B.T.A. 289, which is relied upon by the petitioner. However, it is our view that that case is not controlling here. Obviously, the facts in all cases of this character are somewhat different, and each case must be decided upon its own peculiar facts.

The determination of the respondent is approved.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 117. NET LOSSES.

      (a) Definition of “ not loss.” — As used in this section the term “ net loss ” means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations:
      (1) Non-business deductions. — Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;
      * * * * * * *
      (b) Net loss as a deduction. — If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “ third year ”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
      # * ‡ # * sjt *
      (e) Net loss for 1926 or 1927. — If for the taxable year 1926 or 1927 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1926, the amount of such net loss shall be allowed as a- deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.


author: Smith:

text:
    St. Louis Union Trust Company, a Corporation, Richard McCulloch and Lawrence A. Olwell, Co-trustees of the Testamentary Trusts Created by the Will of John I. Beggs, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65675.
    Promulgated April 13, 1934.

      Henry J. Richardson, Esq., and C. P. Fordyce, Esq., for the petitioners.

      Mason B. Leming, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Smith:

The first question presented by this proceeding is the cost basis to be used in determining the amount of profit realized by the petitioners from the sale in 1929 of 60,263 shares of North American Co. common stock for $6,561,914.62. The petitioners contend that the correct basis is the fair market value of the shares at the time received by them as trustees and that such fair market value is the sum of the products obtained by multiplying the number of shares received from the executors on certain dates by the closing quoted selling price of the shares on the New York Stock Exchange on such dates, which amount the petitioners compute as $6,258,999.50.

The respondent, on the other hand, contends (1) that the petitioners received the securities by specific bequest from John I. Beggs and that the correct cost basis is the value of the securities at the date of the death of the decedent; that for the purpose of determining the estate tax liability the value was fixed at $58 per share and that the correct basis was 60,263 times $58, or $3,495,254; (2) that if his first contention is not sustained, then the correct basis is the fair market value of the shares on June 2,1928, the date upon which the Beggs Investment Co. was dissolved and its assets distributed to the executors — the same persons who later received the assets of the estate as trustees and are the petitioners herein. It is contended that the quoted selling price of the stock on June 2, 1928, was $75,125 per share; that this price should be reduced $10 per share, or to $65,125, to arrive at the fair market value of the large number of shares received on the liquidation; and that the correct basis on such computation is $4,104,627.87; (3) that if neither of the above contentions is sustained, then the correct basis is the fair market value of the shares on January 2, 1929, the date of the first distribution by the executors to themselves as trustees; and (4) finally it is contended that in any event the petitioners are estopped from contending that the fair market value of the shares at the date actually received by them as trustees was any greater than the quoted prices at the dates of distribution reduced by 14.7 percent, the amount of the reduction of the cost basis used in the deficiency notice. The predicate for this last contention is that the estate tax liability of the estate of John I. Beggs was settled upon the basis that the fair market value of a large block of common stock was subject to a reduction of approximately 14.7 percent from the quoted price. The further argument is made that there was a like reduction from the quoted prices in determining the profit of the estate from the liquidation of the Beggs Investment Co. in the determination of the income tax liability of the estate for 1928.

The applicable provision of the Revenue Act of 1928 is section 118 (a), which, so far as material, provides as follows:

SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February S8, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
*******
(5) Property transmitted at death. — If personal property was acquired by specific bequest, * * * the basis shall be the fair market value of the property at the time of the death of the decedent. * * * In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *

The above provision of the Revenue Act of 1928 effected a change in the basis to be used for the computation of gain or loss upon the sale of personal property acquired by general bequest. Brewster v. Gage, 280 U.S. 321. In the Revenue Acts of 1926, 1924, and 1921 the basis was “ the fair market price or value of such property at the time of such acquisition.” We are concerned in this proceeding with the fair market value of certain shares of North American Co. common stock at the time distributed to the petitioners in 1929.

It is the first contention of the respondent that the petitioners received the shares of stock of the North American Co. by specific bequest and that therefore the basis to be used in determining the profit from the sale in 1928 is the fair market value of those shares on October 11, 1925, the date of the death of the decedent. The respondent submits:

* * * that under Section 14 of tbe decedent’s will there was a specific bequest to tbe trustees of the capital stock of tbe Beggs Investment Company. Section 14 of the will is patently a limitation on provisions of Section 2 of the will. Section 14 seems clearly to pass to the trustees the capital stock of the Beggs Investment Company as a specific bequest and authorizes the trustees alone to dissolve that corporation. There seems a lack of ambiguity in Section 14 where the privileges, rights, powers and duties of the trustees in respect of any corporation owned by the decedent at the time of his death such as that of the Beggs Investment Company are clearly set forth. * * * It follows that the trustees became entitled to receive and did receive the proceeds of the liquidation of the Beggs Investment Company at the time of its liquidation June 2, 1928. The basis therefore of the trustees, under this alternative proposal, for determining gain or loss upon subsequent sales of the assets of the Beggs Investment Company, including the shares of stock of the North American Company here in question, was their value at the date of the liquidation of the Beggs Investment Company.

We are of the opinion that this contention of the respondent is not well founded. By paragraph 2 of his will the decedent stated that it was his intent “ to clothe my said representatives and then-successors, with full power and discretion to act in relation to the management, * * * of my estate in the same manner that I might do, if living.” The representatives referred to were the executors as well as the trustees. They were clothed with this authority while acting as executors as well as afterwards when they were acting as trustees. By paragraph 9 of the decedent’s will the residue of his estate was bequeathed to his trustees and that included the entire residuary estate. It is true that under paragraph 14 the trustees were given authority to continue or dissolve any corporation that the decedent might have organized. But the mere fact that the trustees were given such authority is not the equivalent of saying that the trustees alone had such authority. The executors clearly had, under paragraph 2 of the will, the authority to dissolve any corporation which the decedent might have organized and of which he owned at least beneficially all of the stock. They exercised such authority and there is no reason to assume that they exercised it arbitrarily or illegally. There is always a presumption that acts done by executors and approved by a probate court are legal. In the absence of any evidence whatever that the action of the executors in dissolving the Beggs Investment Co. was illegal, the Board must assume that their actions were legal.

In our opinion the petitioners, the trustees of the estate of Beggs, did not receive the shares of North American Co. stock here in question by a specific bequest. In Kenaday v. Sinnott, 179 U.S. 606, the Supreme Court of the United States quoted with approval the following definition of the term “ general legacy ”:

Williams says in reference to the different kinds of legacies that: “A legacy is general when it is so given as not to amount to a bequest of a particular thing or money of the testator, distinguished from all others of the same kind. A legacy is specific when it is a bequest of a specified part of the testator’s personal estate, which is so distinguished. ***”*** And be adds: “ The courts in general are averse from construing legacies to be specific; and tiie intention of the testator, with reference to the thing bequeathed, must be clear."

The second contention of the respondent is that, inasmuch as the trustees and the executors were one and the same persons, the shares of North American Co. common stock were distributed to the petitioners at the time of the liquidation of the Beggs Investment Co., which is shown by the record to have been June 2, 1928. We likewise think that there is no merit in this contention. Manifestly, while the assets of the estate were in the hands of the executors they were owned by the estate and were subject to the liabilities of the estate. When certain assets were legally transferred to the trustees they were freed from the liabilities of the estate, and any profits realized from their sale became profits of the trust and not profits of the estate. The estate in process of settlement was a separate taxable entity from the trust or trusts set up by the will of Beggs. Cf. Anderson v. Wilson, 289 U.S. 20.

In I.T. 2441, Cumulative Bulletin VII-2, p. 65, it was held that where a corporate trustee takes a residuary bequest under a will the basic date for valuing the stock received by it is the date of distribution to it as trustee, and not the date of the testator’s death. In General Counsel Memorandum 6195, Cumulative Bulletin VIII-1, p. 99, it is said that where under a general bequest a bank as executor distributes shares of stock to itself as trustee the basis to be used for determining gain or loss in the event of a sale thereof by the trustee is the fair market value of the stock at the time of its distribution by the executors. To the same effect is I.T. 2539, Cumulative Bulletin IX-1, p. 139. These legal principles are well established. This contention of the respondent is not sustained.

The third contention of the respondent is that the correct basis is the fair market value of the shares on January 2, 1929, when the executors made the first distribution of shares of stock to the petitioners as trustees. This claim is based upon the assumption that the executors deliberately withheld the distribution to the trustees of the bulk of the assets of the estate and awaited a rise in the market for the shares in order that they might be turned over to the trustees and then sold by the trustees at a price which would minimize the income tax payable by the trustees from the profits on the sale. The evidence shows that no such assumption is proper. The estate was under a heavy estate tax liability and under other liabilities as well. We can not assume without evidence that the executors knew that there would be a rise in the price of the shares after January 2, 1929, which would work to the detriment of the Government revenues on the sale of a portion of the shares by the trustees. So far as anything is shown to the contrary, the executors might just as reasonably have expected a decline in the price of the shares. Furthermore, there is no evidence that the then executors, who afterwards became the trustees and the petitioners herein, at the time the distributions were made contemplated the sale at a future time of any of the shares.

The final contention of the respondent upon this point is that the petitioners are estopped to deny that the fair market value of the shares at the time received by them from the executors should be reduced to the extent of 14.7 percent by reason of the fact that a corresponding reduction was made in the computation of the value of the shares of the Beggs Investment Co. in the estate tax return. The stipulated facts show that the quoted price for North American Co. common stock at the date of the death of Beggs was $68,625 per share. In the settlement of the estate tax liability the shares were valued at $58 per share, equaling a percentage reduction of 15.48. It appears, however, from the revenue agent’s report upon an investigation of the income tax liability of the estate for 1928, that the percentage 14.7 was obtained in the following manner: The revenue agent states: “In other words, the market quotation at the time of the death of Mr. Beggs, the market was $68 per share and in the final settlement it was allowed at $58 per share.” This reduction of $10 per share equals 14.7 percent of the assumed market quotation of $68. The argument of the respondent is, therefore, that, inasmuch as the estate was given the benefit of a reduction of $10 per share in the determination of the estate tax liability and likewise a reduction of a corresponding amount in the determination of the income tax liability of the estate for 1928 and was thereby saved total tax liabilities in excess of $500,000, the petitioners are estopped to deny that a corresponding reduction should be made from the market quotations for the purpose of arriving at the base in the determination of the profit upon the sale by the petitioners in 1929 of 60,263 shares of North American Co. common stock. In making this contention the respondent does not contend that the fair market value of the shares at the several dates of distribution as determined by the quoted prices of the stock was not $6,258,999.50. The only contention is that the petitioners are estopped to deny that that base should be reduced by 14.7 percent.

The facts in the proceeding at bar are substantially different from those which obtained in Stearns v. United States, 291 U.S. 54. In this proceeding we are concerned with the fair market value of the shares at the time they were distributed to the petitioners in 1929 and not with their fair market value at the date of the death of the decedent on October 17, 1925, or with the fair market value of the shares on June 2, 1928, the date of the dissolution of the Beggs Investment Co. Not only are the basic dates different, but also the number of shares is different, the quoted prices are different, and, what is more to the point, we are here dealing with a different taxable entity from that involved in the prior proceedings. For these reasons we think that the doctrine of estoppel has no application to the proceeding.

We do not know what representations were made to the respondent which led him to accept a value of $58 per share for North American Co. common stock on October 17, 1925, when the market value for those shares was $68,625. Neither do we know what considerations led him to reduce the market value of the shares $10 per share in the determination of the profit realized by the estate from the liquidation of the Beggs Investment Co. in 1928.

The only evidence in the record as to the fair market value of the shares of the North American Co. common stock on the dates that the petitioners received those shares from the executors is the closing prices of the shares on the New York Stock Exchange at the several dates of distribution. We can not assume without proof that the fair market value for a large block of the stock was different from the fair market value of a small block. In Frank J. Kier et al., Executors, 28 B.T.A. 633, we sustained the respondent’s determination of fair market value of corporate stock based upon sales of scattered shares, where facts concerning financial conditions and business prospects of the corporation and record of stock sales on the exchange indicated that the stock owned by decedent’s estate could have been marketed within a reasonable time at prices at least equal thereto. In T. W. Henritze, 28 B.T.A. 1173, we held that evidence of the prices of shares of stock -in active trading on the New York Curb market at the time when the shares were received by the taxpayer was more probative of the fair market value of such shares than evidence of book value or past earnings of each of the corporations involved in a reorganization.

Even though the fair market value of large blocks of North American common stock on October 17, 1925, the date of decedent’s .death, and on June 2, 1928, the date of the dissolution of the Beggs Investment Co., may have been less than the quoted prices for those shares, we can not assume that a like reduction from the quoted prices should be made for the shares received by the trustees from the executors in 1929 in arriving at the fair market value. The evidence of record indicates that the prices of the shares rose very rapidly in 1929, and, in the absence of evidence to the contrary, we must assume that the quoted market prices reflected the fair market value. We sustain the petitioners’ contention that the fair market value was $6,258,999.50.

The second question for consideration is whether the petitioners are entitled to deduct a loss of $1,173,206.27 or some such amount because of the sale or worthlessness in 1929 of 209,674 warrants evidencing the right to subscribe to new common stock of the North American Co. In article 58 of Regulations 74 it is stated:

Where a corporation issues to its shareholders rights to subscribe to its stock, the value of the rights does not constitute taxable income to the shareholder, although gain may be derived or loss sustained by the shareholder from the sale of such rights. In this connection the following rules may be stated:
(1) If the shareholder does not exercise, hut sells his rights to subscribe, the cost or other basis of the stock in respect of which the rights are issued shall be apportioned between the rights and the stock in proportion to the respective values thereof at the time the rights are issued, and the basis for determining gain or loss from the sale of a right on one hand or a share of stock on the other will be the quotient of the cost or other basis assigned to the rights or the stock, divided, as the case may be, by the number of rights issued or by the number of shares held.

The computation of the petitioners of the claimed loss is as follows:

We are of opinion that the computation made by the petitioners is not justified either by the Commissioner’s regulations or by the facts in this case. The facts are that on and after October 7, 1929, the petitioners were the owners of 209,674-2/40 shares of the common stock of the North American Co. Later in October they received 209,674 rights entitling them to purchase 20,967-4/10 additional shares of common stock of that company at $100 per share, the rights expiring by limitation on November 15, 1929. They did not exercise the rights and they became worthless in their hands.

The petitioners paid nothing for the rights. Only a very small fraction of one percent of the total rights issued was ever exercised, and at the time those rights were exercised the market value of the stock was less than the subscription price. The petitioners held substantially the same interest in the corporation after the rights expired which they held before. It is impossible therefore to find any valid basis for a claim of loss.

For some reason which is not apparent from the record the petitioners paid a commission of $50 plus $419.36 for internal revenue stamps in effecting a sale of the rights for a consideration of $5 on November 14, 1929. Clearly this was not a transaction which was entered into for profit, nor was it a normal business transaction. We think that the petitioners sustained no deductible loss from such transaction. The amount paid for revenue stamps constitutes a legal deduction from gross income as taxes paid. The determination of the Commissioner that the petitioners sustained no deductible loss from the sale of the rights is sustained. Cf. Sidney Z. Mitchell, 18 B.T.A. 994; aff'd., Mitchell v. Commissioner, 48 Fed. (2d) 697; certiorari denied, 284 U.S. 646.

Keviewed by the Board.

Judgment will he entered under Rule 50.


author: Seawell:

text:
    Resthaven Memorial Cemetery, Incorporated, Formerly Resthaven Memorial Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51743.
    Promulgated April 13, 1934.

      Frank J. Aldus, Esq., and W. P. Hollinger, C.P.A., for the petitioner.

      Bernard D. Hqthcock, Esq., and John M. Morawski, Esq., for the respondent.
   OPINION.

Seawell:

The record shows that on November 21, 1927, there was incorporated under the laws of Kentucky the Kesthaven Memorial Cemetery, Inc., the petitioner herein, which by deed of January 10, 1928, acquired the assets of the Kesthaven Memorial Trust and issued therefor its capital stock and agreed in writing to pay the debts of the trust. Having acquired all the assets and assumed all the liabilities of the Kesthaven Memorial Trust and having received, as stated herein, the deficiency notice and filed petition and amended petition as heretofore set forth, petitioner, in our opinion and we so hold, is properly before the Board as a transferee of the Resthaven Memorial Trust. See Burnet v. San Joaguin Fruit & Investment Co., 52 Fed. (2d) 123; Commissioner v. New York Trust Co., 54 Fed. (2d) 463. And as such transferee, petitioner, in the circumstances detailed in our findings of fact, is liable for whatever income tax may be due from the Resthaven Memorial Trust for the fiscal year in issue. Federal Oil Corp., 24 B.T.A. 622, 626, and authorities therein cited. What the correct amount of the tax so due is, if any, we will consider in discussing the errors assigned.

(1) Failure of the respondent to add to the cost of petitioner’s land an amount of $3,000 per acre, or at the rate of $20 per burial lot (there being 150 such lots to the acre), to provide a trust fund for perpetual care of the cemetery is the first error assigned. The agreement of January 26,1927, relative to such trust fund was not entered into with the purchasers of burial lots by the trustees of the Rest-haven Memorial Trust, but by the latter with a corporation, the Resthaven Memorial Park & Cemetery Association, and the trustees were not obligated thereby to set aside 20 percent, or. any other amount of money received from the sale of lots, to provide for a perpetual care fund until they should have first received from such sales the sum of $75,000. The record fails to show that any certain part or percentage of the amounts paid by purchasers of lots was paid by them with the understanding on their part that the same was paid and would be received by the trustees of the Resthaven Memorial Trust as a trust fund for perpetual care of the cemetery. The record shows that by the termination of the fiscal year ended November 30, 1927, there had been set aside for the trustees of the perpetual care endowment fund, in the manner indicated in our findings of fact, only $769.55. The owners were entitled (under the agreement with the Association) to receive $75,000 from the sale of lots in the Resthaven Memorial Park and Cemetery before the 20 percent provision of the agreement was to become operative and it is not shown that any more than the $769.55 should have been set aside for the trustees of the perpetual care endowment fund.

Under the circumstances disclosed by the record, we are of the opinion and hold that the respondent did not commit error in failing to add to the cost of petitioner’s land an amount of $3,000 per acre to provide a trust fund for perpetual care of the cemetery. In determining profits on the sale of lots in the year in issue there may not be added to the cost of lots sold a sum representing an amount which may have been merely intended to be set aside for perpetual care. Acacia Park Cemetery Assn., Inc., 27 B.T.A. 233; aff'd., 67 Fed. (2d) 700.

(2) The petitioner in its second assignment of error asserts that respondent erred in not increasing the initial cost of the land (sections 1 to 6, inclusive) by the amounts actually expended on its development up to and including expenditures to November 30,1933, to wit, $142,918.98.. The respondent in his amended answer denies error in the regard asserted, but, on the other hand, affirmatively alleges that he did err in his determination of tax deficiency in that in the cost of land he included the development expense incurred in 1928, after the taxable year, in the sum of $40,031.48 and that, therefore, the deficiency in tax should be increased by the correction of this error. Neither the development expense of $40,031.48 in 1928 nor any thereafter is shown to have been either incurred or borne by the Resthaven Memorial Trust and did not increase the initial cost of the land to it. We are of the opinion and hold that respondent did not err as asserted by petitioner, but did err as he affirms, and that the deficiency asserted should be increased by excluding $40,031.48 as part of the cost of the lots to the Resthaven Memorial Trust.

(3) The record shows that before the end of the fiscal year in issue there was a meeting of the trustees and beneficiaries of the Resthaven Memorial Trust on November 9, 192T, at which it was agreed and resolved by! them to dispose of all its assets to a separate entity, a corporation to be formed, which would assume and pay all the debts of the Resthaven Memorial Trust. The proposed corporation, the Resthaven Memorial Cemetery, Inc., the petitioner herein, was incorporated on November 21, 1927, and to it by deed dated January 10, 1928, were conveyed all the assets of the Rest-haven Memorial Trust and all the latter’s liabilities were assumed by the corporation, which issued its capital stock to the Resthaven Memorial Trust, etc., as set forth in our findings of fact.

In view of the action taken and the resolutions adopted 'by the trustees of the Resthaven Memorial Trust prior to the close of the fiscal year in issue, it can not, in our view of the matter, reasonably be presumed that the trust itself contemplated or intended future development of the land, which it was preparing to dispose of absolutely, and definitely so determined on November 9, 1927. While the record indicates that the trustees of the Resthaven Memorial Trust had, in a sense, contemplated the construction on the land of an elaborate water system costing in excess of $20,000 and an administration building costing about $25,000, no definite or even approximate date had been determined at which such developments would be made, and such future development by the Resthaven Memorial Trust appears from the record to have been abandoned, so far as any action by it was concerned, when it disposed of the land to the corporation. We are of the opinion and hold that the respondent did not commit error with respect to the disallowance of future development expense claimed by petitioner.

(4) In reference to the fourth assignment of error, the record fails to show that there were ever any trustees appointed for the perpetual care endowment fund. While the evidence shows there was kept in the office of the petitioner a record of the amounts which should have been collected under the terms of the agreement between the owners and the association by the three trustees of the fund, who were to keep the principal of the fund inviolate and constantly invested in certain securities, etc., as the agreement provided, it fails to show that any trustee so acted and dealt with any perpetual care endowment fund or that any such fund was actually in existence, though there was a record showing what money was realized from lot sales for such fund. In the circumstances, we are of the opinion and hold that the respondent did not commit error as herein assigned and the petitioner’s contention is not sustained.

(5) Our determination on prior assignments of error being in favor of the respondent, there is not in our opinion, and we so hold, any sufficient evidence in the record showing the respondent failed to carry forward a proper net loss for the year 1926 as alleged by the petitioner, and, therefore, such assignment of error is not sustained.

Reviewed by the Board.

Judgment will be entered under Bule SO.