text:
    George A. Spencer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gertrude L. Spencer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75258, 75259.
    Promulgated January 22, 1936.

      George V. Whittle, G. P. A., and /S'. E. Katopothis, Esq., for the petitioners.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

McMahon:

These are proceedings, duly consolidated for hearing and opinion, for the redetermination of deficiencies in income taxes for the year 1931, each in the amount of $163.78. It is alleged in each petition that the respondent erred in including in net income an amount of $10,411.02, representing one half of an alleged community profit in connection with a condemnation award by the city of Seattle for a right of way over petitioners’ property.

The petitioners, husband and wife, are individuals with residence at Seattle, Washington. Originally they owned 534 lots in Ladd’s Second Addition to South Seattle, Washington. Up to the time in question herein they had sold over half of such lots on contracts.

During the year in question, 1931, the city of Seattle condemned a 200-foot right of way diagonally across Ladd’s Second Addition to South Seattle for the purpose of erecting a high tension electric line, consisting of towers from which were to be suspended heavy transmission lines. Numerous lots and parts of lots, which belonged to petitioners and had not been sold, aggregating 112,156 square feet, were condemned. There were also condemned a great many lots which petitioners had sold under contracts to others.

By a deed dated October 19, 1931, the petitioners conveyed their lots and portions of lots which were required for the right of way to the city of Seattle. The consideration recited therein was $33,253. The deed contains, among others, the following provision:

This deed includes a waiver of all damages of every hind and nature to the grantors’ property in Ladd’s Second Addition to South Seattle.

Petitioners had previously given the city of Seattle a deed to the properties affected, but such deed did not contain the above-quoted provision. The new deed containing such provision was prepared by the city in order to prevent suits by the petitioners for damages which might be sustained by other property of petitioners by reason of the condemnation of the land and the erection of this high tension line.

In the erection of this power line, there are three elements of damage, namely, the actual taking of property, the severance damage, or the loss in value of remaining fractional lots due to the fact that they are too small for useful purposes, and the loss in value of these fractional lots and other adjoining and adjacent remaining lots due to the proximity of such a high tension power line. People object to being adjacent to such a line, claiming that it affects their radios. There is danger the line may break and thereby damage the remaining property or its occupants.

In arriving at the consideration to be paid petitioners, the parties considered that part of the total amount of $33,253 paid was consideration for damages to adjoining and adjacent property of petitioners. The city recognized that there was actual damage outside of the property actually taken. The figure of $33,253 thus covered the value of the property taken, the severance damage, or damage to remaining fractional lots, and the gross damage to remaining fractional lots and other remaining adjoining and adjacent lots of the petitioners. There was not any definite allocation to these three respective classes of damage. The amount of $33,253 represented an arbitrary settlement arrived at in negotiations between the city and the petitioners. Petitioners were asking a larger amount, $42,000, based on the previous selling price of adjoining lots, plus assessments. The city made a smaller offer than that finally accepted, and after about two weeks of negotiation, the parties agreed upon the settlement of $33,253.

In their income tax returns for the year 1931 the petitioners allocated $22,916.97 of the amount of $33,253 as the amount received for the lots actually taken over by the city, and allocated $10,336.03 thereof as severance damage for the fractional lots and the gross damage to remaining fractional lots and other remaining adjoining and adjacent lots of the petitioners.

In determining the deficiency as to each petitioner the respondent determined that there was a profit on the sale of the property for the right of way in the amount of $20,822.03, that the total profit on the sale in 1928 by petitioners of all real estate was $32,853.76, of which $23,537.01 had already been reported as income, that there was a remainder of profit on sales of real estate which had not been reported of $9,316.75, and that each petitioner was taxable on one half of that amount, or $4,658.38, as representing the community interest of each petitioner in such additional profit on all sales of real estate; and in effect held that each petitioner was taxable on one half of $20,822.03, or $10,411.02, as representing profit on the sale of the property for the right of way.

Of the amount of $33,253 paid by the city of Seattle to petitioners, the amount of $22,431.20 represented remuneration for the property actually condemned and taken over by the city, and the amount of $10,821.80 represented severance damage, or damage to remaining fractional lots from severance, and gross damage to remaining fractional lots and other remaining adjoining and adjacent lots of petitioners occasioned by the proximity of the power line.

Upon the foregoing facts, which we find and which are all we can find from the record, the sole question presented is whether the respondent erred in including in taxable income of each of the petitioners an amount of $10,411.02 as representing one half of community profit arising from the consideration paid to them by the city of Seattle for a right of way over petitioners’ property. In their returns the petitioners claimed, and now contend, that of the amount paid by the city, $10,336.03 is not taxable income to the petitioners since it represents “severance and gross damages to remainder.”

Petitioners do not contend that as a matter of law taxable income may not, in some cases, be derived from the sale or transfer of property as a result of condemnation. In any event, it is well settled that the gain in such a transaction is recognized under subdivision (a) of section 112 of the Revenue Act of 1928, unless one or more of the exceptions contained in subdivision (f) of that section .apply. There are set forth in the margin applicable provisions of the Revenue Act of 1928. See Francis V. duPont et al., Coexecutors, 31 B. T. A. 278; John J. Bliss, 27 B. T. A. 803; Fullilove v. United States, 71 Fed. (2d) 852; certiorari denied, 293 U. S. 586; Bandes v. Commissioner, 69 Fed. (2d) 812; certiorari denied, 293 U. S. 568; and art. 579 of Regulations 74, promulgated under the Revenue Act of 1928. In the instant proceedings, petitioners have not shown that any of such exceptions apply.

Petitioners do contend that the portion of the total consideration representing the “severance and gross damages to remainder” is not income to them but, on the other hand, should be deducted from the basis of the remaining property for purposes of determining gain or loss upon any subsequent disposition of such remaining property. Petitioners, in their returns, claimed that the portion of the consideration which was paid by the city to them as such “severance and gross damages to remainder” amounted to $10,336.03, which is $74.99 less than they allege in their - petitions. While in no event could we award petitioners more relief than they plead for and in the view which we take this discrepancy is of no consequence, upon a consideration of the whole record we have found, as a fact, and now hold that the amount of $10,821.80 of the total consideration paid to petitioners represented severance damage or damages to remaining fractional lots from severance, and the gross damage to remaining fractional lots and remaining adjoining and adjacent lots of petitioners occasioned by the proximity of the power line, and that the amount of $22,431.20 represented remuneration for the property actually condemned and taken over by the city. The deed to the city recognizes and witnesses testified that some of the amount paid represented damages to other remaining property of petitioners. Our allocation of the total amount is based upon all the evidence, particularly that showing that after petitioners made their settlement with the city other property owners in the same subdivision arrived at a settlement with the city through a court order upon the basis of 20 cents per square foot of property actually condemned and taken over by the city. The evidence shows that there were 112,156 square feet of land belonging to petitioners taken over by the city, which, at the rate of 20 cents per square foot, would amount to $22,431.20. This is $485.77 less than the amount shown by petitioners in their returns as the consideration for the land actually taken.

Despite the fact, however, that petitioners have shown that the above allocation should be made, we are forced to hold, upon the whole record, that the petitioners can not prevail here. The determination of the respondent is favored with a presumption of correctness and the burden is upon the petitioners to show error therein. Welch v. Helvering, 290 U. S. 111. The petitioners have failed to meet their burden. In the first place we have no evidence that the respondent, in the determination of the deficiencies, included in taxable income any portion of the amount paid for damages to the remaining property of the petitioners. Assuming, for the purposes of this discussion only, that respondent did, there is no evidence that such action was erroneous. There is no evidence in the record as to the basis of such remaining property for the purposes of determining gain or loss now or in the future, and we therefore can not determine what portion of the amount paid as damage to such other property, if any, constituted taxable gain to the petitioners in the year before us. See I. T. 2599, infra, and discussion thereof which follows.

In the notices of deficiencies the respondent held that there was a profit on the sale of the right of way by petitioners in the amount of $20,822.03. We have found and held that the amount paid by the city to petitioners for land actually taken over was $22,431.20. We are not informed as to how respondent arrived at his determination of profit; nor have the petitioners shown us the basis of the property actually taken over by the city. They have thus failed to show the correct amount of gain upon the disposition of the land or that there was no gam. It may be that of the amount of $22,431.20 paid by the city to the petitioners for the land actually taken over./ $20,822.03 represented gain or profit to petitioners. There is nothing in the record to show the contrary.

Upon the whole record we must, therefore, approve the respondent’s determination.

Petitioners cite I. T. 2599, X-2 C. B. 170, which is set forth in the margin. In the view we have taken above, we find it unnecessary to determine and do not determine whether I. T. 2599 correctly states the law as to the treatment, for purposes of taxable gain, of that portion of an award by a court for damages to property other than that actually condemned and taken over. It may be observed in passing, however, that I. T. 2599 deals only with severance damages awarded by a court. In the instant proceeding, the amount in question was not an award by a court but represented the amount paid the petitioners by the city through settlement. Furthermore, here we have another element of damage besides severance damage, namely, damage to remaining fractional lots and other remaining adjoining and adjacent lots occasioned by the proximity of the power line, and there is no basis for the allocation of the amount of $10,821.80 as between these two types of damage.

None of the other authorities cited by petitioners permit, much less require, a different holding.

Decision will be entered wider Bule 50.

       SEC. 111. DETERMINATION OF AMOUNT OF GAIN.OR LOSS.

        (a) Computation of gain or loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, * * *.
      SEC. 112. RECOGNITION OF GAIN OR LOSS.

        (a) General rule. — upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      # * * * ifc # #

        {†) Involuntary conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.
      SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.

        (а) Property acquired after February 28, 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; * * *
      (б) Property acquired before March' 1, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired' before March 1, 1913, shall be:
      (1) the cost of such property (or, in the case of such property as' is described in subsection (a) (1), (4), (5),.or (12) of this section, the basis as therein provided), or
      (2) the fair market value of such property as of March 1, 1913, whichever is greater.

       Where the court proceedings show a sum paid for acquisition of land separate from the amount paid for severance damages, gain or loss results from the portion of each award paid for the acquisition of land. No taxable gain is recognized with respect to that portion of the award which represents the severance damages, but the amount thereof should be deducted from the basis to be used in determining gain or loss upon the subsequent disposition of the remaining portion of the property, unless the amount of severance damages exceeds the basis of the remaining portion of the property, in which case such excess is taxable gain.


source: Caselaw Access Project

author: Muedock :

license: Public Domain

text:
    Thomas A. Hunter, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58490.
    Promulgated January 22, 1936.

      Herman T. Beiling, Esq., for the petitioner.

      G. B. Marshall, Esq., for the respondent.
   OPINION.

Muedock :

The manner of computing the profit of $47,126.28 need not be set forth since the petitioner makes no attack upon the figures used. His contention is that he realized no profit whatever. The Commissioner, in determining the deficiency, has approved the report of a revenue agent. The latter has held that the petitioner was the owner by purchase of 2,000 shares' of class B common stock of Marshall Field & Co. and became the owner of 459 shares of class A common stock by exchanging therefor 1,459 of the class B common stock. Certain words and provisions of the contracts, when read alone, bear out the interpretation which the revenue agent apparently placed upon them. Nevertheless, the contracts wlien read in their entirety, and the other evidence in the case, show that the petitioner never actually purchased any shares and never became the owner by purchase or exchange of any shares of either class B or class A common stock.

The corporation never delivered and never intended to deliver any certificates to the petitioner so that he would become the owner of the shares. The contracts describe him as a purchaser and a holder of the shares, and the corporation went through the form of issuing stock certificates in his name, but those certificates never went out of the control of the corporation. They were placed before the petitioner in the office of the corporation merely for the purpose of having him endorse them in blank so that they could be retained permanently by the corporation. His testimony shows that he was not free to vote the stock. The contracts provided that under no circumstances could the petitioner ever become the actual unrestricted owner of any class A or class B shares. The shares standing in the name of the petitioner and held by the corporation were never to be delivered to the petitioner. He was never to be permitted to sell them or use them for any purpose whatever. The shares were used merely as a part of a plan for computing an amount to which the petitioner would become entitled at the termination of his employment. The amount was to be paid to him or to his representatives in cash. Under no circumstances could stock be demanded in payment. The general plan was to build up a fund to be paid to the petitioner as compensation over and above his fixed salary upon the termination of his employment. He was charged with the book value of the shares at the approximate dates of the contracts. The equivalent, in amount, of interest was computed on the charges. Entries were made on the credit side corresponding to the dividends declared on the stock. The petitioner was to receive for his own use an amount equal to dividends at the rate oí 7 percent per share per annum upon any class A shares standing in his name. However, no class A shares stood in the name of this petitioner prior to the contract of February 1, 1927, and the question of how any amounts he may have received thereafter are to be taxed to him is not now in issue. The sole question is whether or not the petitioner realized a profit on an exchange. The decision of that question depends upon whether or not the petitioner became the owner of any shares as the result of an exchange giving rise to profit. Individual words in the contracts are not controlling where, as here, the evidence viewed in its entirety, shows that the petitioner was not intended by the parties to own any shares and in fact never became the owner of any shares.

Since the petitioner owned no shares either before or after February 1, 1927, he did not exchange any shares and, consequently, he realized no profit from an exchange on that day. The change which took place put into operation a somewhat different method of eventually determining the amount which the petitioner was to receive at the indefinite time in the future when his employment should terminate. He was on a cash basis and received in 1927 as a result of the new contract neither cash nor its equivalent. The transaction did not result in the realization of any income by the petitioner in 1927.

The revenue agent’s report, upon which the determination of the deficiency was based, simply states that the petitioner received a distribution of $1,118.51 from Marshall Field & Co. on January 5, 1927. However, the petitioner testified that he received no such distribution from Marshall Field & Co. The evidence fails to weaken his direct testimony on the subject. The presumption of correctness attaching to the determination of the Commissioner has been overcome.

Decision will loe entered for the 'petitioner.


author: Teammell :

text:
    A. P. Hunt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76099.
    Promulgated January 22, 1936.

      Jmnes A. OlOdllaghan, Esq., and Harry J. Lurie, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Teammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $32,055.48. Petitioner alleges that in the determination of this deficiency respondent erred (1) in denying the deduction from 1931 income of a “net loss” sustained in 1930 of not less than $214,601.31; (2) in not allowing as a deduction from 1931 income the sum of $43,000, which petitioner was compelled to pay in 1931 as endorser and guarantor on a note executed by the Liquid Dehydration Corporation; and (3) in not allowing as additional bad debt deductions for 1931 the sums of $6,330 and $8,407.59.

Issue 1. — Net Loss Deduction.

In his tax return for 1931 petitioner deducted $214,601.31 as a “net loss” brought forward from 1930. Upon audit of the return, respondent allowed $84,663.11 of the amount so claimed, and disallowed the balance of $129,938.20. Of the amount disallowed by the respondent, the principal item of $72,380 represents the admitted cost to the petitioner of stock in the Liquid Dehydration Corporation, which became worthless in 1930.

In addition to the above mentioned item involved in the net loss issue, respondent in his amended answer affirmatively alleges that in computing the amount of $84,663.11 allowed as the 1930 net loss deductible from 1931 income, he erroneously included $63,260 claimed by petitioner in his 1930 return as a bad debt arising .from loans made to the Liquid Dehydration Corporation; that said amount of $63,260 was erroneously allowed as a part of the net loss for the reason that said item was not connected with the operation of a trade or business regularly carried on by'the taxpayer, but related to transactions pertaining to the investments of the taxpayer. Respondent makes claim for increased deficiency accordingly. Also for the same reasons just stated,' respondent disallowed the $72,380 representing cost of the stock owned by the petitioner in the Liquid Dehydration Corporation.

The specific question for decision here is whether, within the meaning of the taxing statute, petitioner sustained in 1930 a net loss consisting of the cost of the stock of the Liquid Dehydration Corporation in the amount of $72,380, which became worthless in that year, and the petitioner’s loans to' the corporation in the amount of $63,260, which likewise became worthless in said year.

At the hearing the parties stipulated that the petitioner paid $72,380 in cash for stock of the Liquid Dehydration Corporation, and the undisputed evidence shows that the corporation became wholly insolvent in 1930. Petitioner obtained a judgment against the corporation for $137,985, and all of the assets of the corporation were sold to him under execution in November 1930 for $75,000, leaving an unsatisfied deficiency in the judgment of $62,985. The corporation then being without assets, its stock was worthless.

During the period from 1914 to the taxable year, petitioner was interested through stock ownership in a number of corporations engaged in substantially the same general kind of business. In 1914 he acquired a 25 percent interest in the Consolidated Products Co., manufacturing hog and poultry feed from buttermilk. From 1921 to 1926 petitioner owned about 80 percent of the stock of this corporation and was its president and general manager. In 1924 he organized the Pure Products Co. to dehydrate milk. In 1926 he exchanged stock in the Consolidated Products Co. for stock in the National Dairy Products Corporation. In 1922 the Buttermilk Producers Co. was organized and petitioner had an interest in it. He was also interested in the Consolidated Buttermilk Corporation, the Texto Products Co., the Texto Exports Co., the Nashville Buttermilk Co., and the Ever-tite Bolt Co. He owned from 50 to 75 percent of the stock of these companies. He divided his time between the various companies in which he was interested.

The Liquid Dehydration Corporation was organized in 1927. In 1930 petitioner owned a majority of its stock and was president and general manager. He maintained a separate office where ho conducted his personal business. After the Liquid Dehydration Corporation went out of business in 1930 petitioner in 1931 organized the De-Hy Products Co., which is engaged in making powdered milk. He owned 75 percent of the stock.

Petitioner testified that he was engaged in organizing and operating the various companies mentioned for the purpose of making money out of them, and also to sell out Ms interest in them at a profit. In 1927 he began to deal in stocks and bonds, and during each of the years 1930 and 1931 he had about 250 to 350 transactions in buying and selling securities.

In his individual office petitioner had two employees, a stenographer and a bookkeeper, who looked after his personal business. consisting of investments in and the operation of the corporations he promoted, and also his investments in, and the buying and selling of, securities.

The statute applicable here is section 117 of the Bevenue Act of 1928, which, so far as material, provides that, if any taxpayer sustains a net loss in any year attributable to the operation of a trade or business regularly carried on by the taxpayer, the amount thereof shall be allowed as a deduction in computing the net income for the succeeding taxable year.

The issue in this case, therefore, is resolved into the question whether the losses admittedly sustained by the petitioner in 1930 because of the insolvency of the Liquid Dehydration Corporation, consisting of his investment in the stock of the corporation and the loans made to the corporation, are attributable to the operation of a trade or business regularly carried on by petitioner.

Petitioner argues that he was regularly engaged in the business of organizing, developing, and operating corporations for profit, and because of the fact that he devoted a large part of his time to the management of the Liquid Dehydration Corporation, the loss of his investment in its stock and the loss of the loans made to the corporation constituted a net loss within the meaning of the statute.

In support of this contention petitioner cites and relies on the decision of the United States Circuit Court of Appeals for the Eighth Circuit, rendered August 11, 1931, in Washburn v. Commissioner, 51 Fed. (2d) 949, reversing 16 B. T. A. 1091. The cited case undoubtedly supports petitioner’s contention, and reviews a number of our prior decisions to tire same effect, which, for reasons presently apparent, it is unnecessary to refer to in detail here. As pointed out by the Court of Appeals for the Ninth Circuit in McGinn v. Commissioner, 76 Fed. (2d) 680, affirming our memorandum opinion entered October 27, 1933, the Washburn case was decided prior to and was in effect overruled by Dalton v. Bowers, 287 U. S. 404, and Burnet v. Clark, 287 U. S. 410, both of which latter cases were decided on December 12, 1932. In Burnet v. Clark, the Court of Appeals for the District of Columbia took substantially the same view of this question as did the Court of Appeals for the Eighth Circuit in the Washburn case, and was directly reversed by the Supreme Court.

In the Clark case, supra, the facts are materially similar to the instant case. There the taxpayer was the majority stockholder, acting head, and president of a dredging corporation, and devoted himself largely to its affairs. The corporation encountered financial difficulties, and the taxpayer endorsed its obligations to the banks. Later, he had to pay these obligations, the amount of which he lost, and also lost large sums through the sale of his stock in the corporation. In its opinion, the Supreme Court said:

The respondent was employed as an officer of the corporation; the business which he conducted for it was not liis own. There were other stockholders. And in no sense can the corporation be regarded as his alter ego, or agent. He treated it as a separate entity for taxation; made his own personal return; and claimed losses through dealing with it. He was not regularly engaged in endorsing notes, or buying and selling corporate securities. The unfortunate endorsements were no part of his ordinary business, but occasional transactions intended to preserve the value of his investment in capital shares.

See also Wade L. Street et al., Executors, 26 B. T. A. 17; affd., 67 Fed. (2d) 1012; Joseph H. Cavedon, 30 B. T. A. 364.

What was said by the Supreme Court in. the Ciarlo case, has in our opinion equal application under the facts in this case, with one possible exception. There it was stated that Clark was not regularly engaged in buying and selling corporate securities. Here petitioner contends that he was so regularly engaged. However, if petitioner was regularly engaged in such business, which we need not decide, the loss of his investment in the stock of the Liquid Dehydration Corporation was not attributable to the operation of that business. It is clear from the evidence that his investment in this stock was entirely separate and distinct from and had no connection with the operation of the business of buying and selling securities on the market. Wade L. Street et al., Executors, supra, p. 20.

On authority of the decisions above cited, we hold that respondent did not err in excluding from the net loss for 1930, deductible from 1931 income, the amount of $72,380 representing petitioner’s investment in the stock of the Liquid Dehydration Corporation; and on the same authority we allow respondent’s claim for such increased deficiency as results from including in income the amount of $63,260 representing the loans made by petitioner to the corporation to protect his investment therein, which amount was erroneously allowed by respondent in computing the net loss in controversy.

At the hearing the parties stipulated that whatever net loss the Board may determine that petitioner is entitled to deduct from his gross income for 1931 may be increased by the amount of $14,426.52. Proper adjustment, accordingly, will be made under Eule 50.

Issue £. — Deduction for Loss on Payment of Corporation's Note.

Petitioner endorsed and guaranteed the payment of a note executed by the Liquid Dehydration Corporation in the original principal amount of $50,000. In 1931 petitioner was required to pay the balance then due on the note, which amounted to $43,400. This was included in the net loss deduction claimed by petitioner, but at the hearing the parties agreed that whatever amount of loss the Board may determine is sustained by petitioner on account of the payment of the note is properly allowable as a primary deduction from gross income for 1931 rather than as a part of the net loss carried forward from 1930. Petitioner’s liability as endorser on the note was secured by certain real estate owned by the corporation, which was transferred to petitioner for that purpose. The uncontroverted evidence shows that this real estate had a fair market value of $12,000 at the time of the payment of the note, and we hold, therefore, that petitioner is entitled to a deduction in the amount of $31,400.

Issue 3. — Bad) Debt Deductions.

Petitioner asserts that he is entitled to additional deductions for worthless debts in the amounts of $6,330 and $8,407.59, comprising numerous ledger accounts.

Section 23 (j) of the Eevenue Act of 1928 provides that in computing net income there shall be allowed as deductions “debts ascertained to be worthless and charged off within the taxable year * * *, and when satisfied that a debt is recoverable only in. part, the Commissioner may allow such debt to be charged off in part.”

Petitioner testified that at the end of 1931 he marked certain accounts shown on his ledger and. told his bookkeeper to charge them off. He stated:

I wanted to charge them off in 1930, hut they did not get them in, and when 1931 came along, I told my bookkeeper I wanted him to go through my hooks and charge off everything that was not any good, and I went over them with him and marked them * * *

Petitioner now concedes that many specific accounts were worthless in 1930 and, as to these, he has abandoned his claim for deductions in the taxable year, but the evidence, we think, is wholly insufficient to show that the remaining accounts became worthless, and were so ascertained, in 1931. However, it is not enough to show that the debts were ascertained to be worthless in the taxable year. They must also have been charged off within the taxable year, and the record affirmatively shows that this was not done in respect of any of the accounts here claimed as deductions. Petitioner himself testified unequivocally that the accounts were not charged off within the taxable year 1931 nor at any other time. He is, therefore, not entitled to the additional deductions claimed. American Photo Player Co., 2 B. T. A. 419; Warren-Smith Hardware Co., 7 B. T. A. 292; Joseph H. Rudiger, 22 B. T. A. 204; Miles G. Saunders, 26 B. T. A. 519; Avery v. Commissioner, 22 Fed. (2d) 6; Duffin v. Lucas, 55 Fed. (2d) 786; Austin, Receiver v. Helvering, 77 Fed. (2d) 373.

Judgment will be ent&red under Rule 50.


author: Arundell:

text:
    Daniel Upthegrove, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80613.
    Promulgated January 23, 1936.

      Oarleton S. Radley, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Arundell:

This proceeding involves a deficiency in income tax determined by the respondent in the amount of $481.31 for the calendar year 1932. The parties agree that in any event there is a deficiency in the amount of $169.52. The remainder of the deficiency arises from the respondent’s inclusion in petitioner’s income of dividends which had been returned by the petitioner’s wife. The issue is whether such dividends were income to the petitioner.

The facts were stipulated and we adopt the stipulation as our findings of fact. It appears that in 1932 the petitioner and his wife owned corporate stock on which dividends in the amount of $3,567.46 were paid in that year. The petitioner’s wife reported all the dividends in her separate return and the petitioner reported none of them. The respondent excluded one half of the dividends from the return of the wife and added the one half in the amount of $1,783.73 to the income reported by the petitioner.

Both parties argue in their 'briefs that the stocks were owned by the petitioner and his wife as tenants by the entirety and they support their views by abundant authority from the decisions of the courts of Missouri, the state of residence. We accept that premise. We had an identical situation in the case of George E. Saulsbury, 27 B. T. A. 744, where the taxpayer and his wife were residents of the State of Maryland. We there held, following the decisions of the Maryland courts, that the husband was entitled to one half the income from the property in the absence of an agreement with his wife for a different division and that the one half was, therefore, his income and taxable to him. As we read the cases, the Missouri courts hold the same way as do the courts of Maryland. In both jurisdictions it is recognized that the married woman’s acts change the common law rule which gave the husband control of the income of the wife’s property, including that in which her interest was that of tenant by the entirety. In Rezabek v. Rezabek, 186 Mo. App. 673; 192 S. W. 107, the court followed the decisions in other jurisdictions which it said were “in line with the intent and spirit of our Married Woman’s Acts” and held that the husband was “entitled to one half of the rents and profits accruing from the leasehold”, which leasehold was owned by the husband and wife 'by the entireties. There is no evidence in this case of any agreement between the husband and wife as to the division of the income from the entirety property. Consequently, on authority of the Rezabek case, supra, and following our holding in George E. Saulsbury, supra, we hold here that one half the dividends were income to petitioner and were properly added to his income by the respondent.

Decision 'mill be entered for the respondent.


author: Mellott:

text:
    Eric E. Hall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52555, 71062.
    Promulgated January 24, 1936.

      James PL. Winston, Esq., and E. G. Ince, Esq., for the petitioner.

      Paul D. Page, Jr., Esq., for the respondent.
   OPINION.

Mellott:

Petitioner contends that the compensation received by him from Cook County is exempt from the Federal income tax. He argues that his “office, position or place of employment” as county architect is an integral part of the board’s regular establishment for the management of the affairs of the county and one of the means by which it exercises its sovereignty or performs its usual and essential governmental functions. If it is, then the exemption must be recognized, for the state must be “left free from undue interference” by the Federal Government in order that it may administer its affairs within its own sphere. McCulloch v. Maryland, 4 Wheat. 316; Collector v. Day, 11 Wall. 113; Pollock v. Farmers Loan & Trust Co., 157 U. S. 429; Ambrosini v. United States, 187 U. S. 1; Flint v. Stone Tracy Co., 220 U. S. 107; Metcalf & Eddy v. Mitchell, 269 U. S. 514; Helvering v. Powers, 293 U. S. 214.

While the rule exempting from Federal income tax the compensation of an officer or employee of a state or political subdivision thereof engaged in the performance of a usual and essential governmental function is well settled, and has been applied by the courts and by this Board in many cases, a “twilight zone” yet exists and “just what instrumentalities * * * are exempt from taxation * * * can not be stated in terms of universal application.” There is no formula which can be applied in every case (Metcalf & Eddy v. Mitchell, supra) but each must be decided upon its own facts. Do the facts which we have found require recognition of such immunity or should the respondent’s determination of deficiencies be approved?

Petitioner asserts that he was either an officer or an employee of a political subdivision of the State of Illinois. We will first pass upon his contention that he was an officer.

The Revised Statutes of the State of Illinois provide that the president of the board of county commissioners shall appoint all officers and employees of Cook County and fix their salaries or rate of compensation prior to the adoption of the annual appropriation (ch. 34, sec. 66 (9), Callaghan’s Illinois Revised Statutes), and further provide that the president of the board shall, with the advice and consent of the board, appoint the warden of the county hospital, the county agent, the county physician, the county attorney, the county architect, etc. Ch. 34, sec. 66 (20), Callaghan’s Illinois Revised Statutes.

In support of his contention that he was an officer, petitioner argues that he and each of his predecessors accepted the “office” upon the basis of the compensation fixed by resolution of the board of county commissioners — fixed in obedience to the specific direction of the statute so to do; and each incumbent filed a bond conditioned “for the faithful discharge of the duties of his office.”

We do not believe that the giving of a bond, though in form an official bond, requires us to find that the principal therein named is necessarily an officer. While the taking of an oath and the giving of a bond are sometimes said to be indicia of an officer, the mere fact that a bond is given or an oath is required, does not ipso facto make one an officer.

In Metcalf & Eddy v. Mitchell, supra, the Supreme Court of the United States defined an office in the following language:

An office is a public station conferred by tlie appointment of government. Tlie term embraces tbe idea of tenure, duration, emolument, and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. * * * The term “officer” is one inseparably connected with an office. * * *

A search of the record fails to disclose that petitioner’s term and duties were fixed by law. Moreover, it does not show any “fixing” of petitioner’s compensation, at least as defined by the courts of Illinois. “Fixing”, as construed by such courts, means making definite and certain. As the court said in McGovney v. Village of Melrose, 145 Ill. App. 329 (affd. by the supreme court, 89 N. E. 264), in construing a similar statute, “This is apparent from the words following ‘such fees or compensation shall not be increased or diminished, to take effect during the term for which any such officer was selected or appointed.’ Manifestly, unless the compensation be a sum certain, it cannot be told whether it has been increased or diminished.” Cf. Koons v. Richardson, 227 Ill. App. 477: Koons v. City of Mt. Vernon, 245 Ill. App. 165; George M. Stevens, 31 B. T. A. 1035. Sec. 10, art. 10, Constitution of Illinois.

We have found that petitioner was paid his compensation, not out of the general funds of the county, but out of the money raised by the sale of bonds issued in connection with the construction projects which he planned and supervised. While this is the usual method adopted in paying the fees of an architect, it is not the method apparently required by the constitution and the general statutes of Illinois for the payment of “county officers.”

Thus, under the sixth subsection of section 64 of chapter 34, Smith-Hurd’s Eevised Statutes, it is provided that the board shall adopt a resolution appropriating “such sums of money as may be necessary to defray all necessary expenses and liabilities * * * to be * * * paid or incurred”; that “said appropriation bill shall specify the several objects and purposes for which such appropriations are made, and the amount appropriated for each object or purpose.” Included within the appropriation bill are such items as current salaries of county officers and employees, provision for the payment of principal and interest on county indebtedness, maintenance of county property and institutions, including courts and juries, dieting occupants of the jails, prisons, hospitals, and industrial schools, and the cost of elections. But no sum would be appropriated in such an appropriation bill for the payment of the compensation of this petitioner.

It is our conclusion that petitioner has failed to sustain the burden cast upon him of establishing that he was an officer of a state or political subdivision thereof, for clearly, neither the tenure, duration, emoluments, nor duties of county architect were fixed by law.

Petitioner devotes little space in his brief to his contention that he was an employee. He merely states: “But admitting for the purpose of consideration, without conceding it to be the fact, that some attribute that usually attends an office is absent in the case of the county architect of Cook County, yet the consequence of such absence could only be to lower the rank of county architect from that of ‘office’ to that of ‘employee.’ ” This does not necessarily follow, especially where, as here, there is no evidence of that direction and control so essential to the relationship of employer and employee. A careful study of the record convinces us that petitioner was not an employee, and we so hold.

It is argued that the fact petitioner was appointed to “an office, position or place or employment” is sufficient in itself to compel i'ecognition of the exemption. This statement, however, is too broad. As said by the Supreme Court in the recent case of Helvering v. Powers, supra: “If the dealers in South Carolina, or those employed to operate the state stores in Ohio, had been denominated public officers, and., as such, had been assigned definite tenure and duties, the same result would have been reached, as the principle involved would be equally applicable.” (Italics supplied.) The immunity does not attach simply because one may be designated an officer — or employee — but, as the court stressed in the above case, the “nature of the activity” and “the fundamental reason for denying federal authority to tax” must be considered.

The “fundamental reason” requiring the recognition of the exemption or immunity is “that each government, in order that it may administer its affairs within its own sphere, must be left free from undue interference by the other. * * * Neither government may destroy the other nor curtail in any substantial manner the exercise of its powers. * * * direct interference with the functions of government itself * * * (is) * * * beyond the taxing power.” (Metcalf & Eddy v. Mitchell, supra.)

The limitation must receive a practical construction. Exemption should be denied unless the failure to recognize it will result in a “direct interference with the functions of government itself” — the “usual governmental functions”- — or curtail in any substantial manner its sovereign powers. It should be allowed if failure to do so “impairs in any substantial manner the ability” of the one receiving the compensation to discharge his obligation to the state, or impairs the “ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings.” (Metcalf & Eddy v. Mitchell, supra.)

Petitioner bad tbe burden oí establishing by satisfactory and competent evidence that the respondent erred in determining the above deficiencies. Possibly evidence could have been produced justifying us in finding as a fact that failure to recognize the claimed exemption would impair the ability of Cook County “to procure the services of” an architect; but no such evidence was introduced. On the contrary, petitioner testified that the county paid him the same compensation as that prescribed by the Illinois Society and the American Institute of Architects for such work.

Q. Do Uiey Rave any schedule, or prescribed fees, any limitation with regard to fees?
A. Yes.
Q. State wliat they are.
A. They are substantially the same as I am getting from the county; I think their percentage is a little different from the county, but the total amount is the same.

In other words, he received a total of 6 percent — exactly the amount which a private employer would have paid him, and the same amount that he, or any other member of the associations would have charged any municipality. It is clear, therefore, that the incidence of taxation or exemption upon the compensation received by him from the county did not “impair in any substantial manner” his ability to discharge his obligation to the state, nor impinge upon the ability of the county to have its necessary architectural work done for it.

Both parties cite and rely upon — or attempt to distinguish — John Reid, Jr., 28 B. T. A. 1217. In that case we held that one holding the position and discharging the functions of city architect of San Francisco, by virtue of a resolution of the board of public works defining his duties and making provision for his compensation upon the basis of a percentage of the cost of construction projects in respect of which his services were performed, was not entitled to have such compensation exempted from the Federal income tax. The facts in that case are quite similar to the facts in the instant case. The appointment of each petitioner was sanctioned by law; the resolution in the Reid case designated him “City Architect” while the one in this case designated petitioner “County Architect.” The compensation of each was 6 percent — the amount scheduled by the American Institute. Each rendered substantial services for which he received no compensation. Each maintained a staff of assistants and engineers to aid in completing the tasks assigned, and each maintained a private office. Reid was furnished an office and staff in the City Hall, but petitioner was not furnished any office or assistants by the county. Each was paid out of the funds allocated to the improve-irient which be planned and supervised rather than out of the “general fund” or the fund derived from the imposition of direct taxes levied for the payment of salaries of officers and employees.

Petitioner in his brief directs our attention to certain language in the John Reid, Jr., case, which, he says, “expressly recognizes the exemption of the compensation of one who, like Hall, is an integral part of the regular establishment of a state or political subdivision.” The language relied upon is:

On the otlior hand, if an architect, lawyer, physician, or other professional man is employed by a state to perform whatever tasks may be assigned him (although not precluded from accepting other employment), if his service is continuous and regular, if his work is of a routine and recurring character, or if no definite object is to lie accomplished, he has been held an officer or employee ami not an independent contractor. United States v. J. Turner Butler, 49 Fed. (2d) 52; Burnet v. Livezey, 48 Fed. (2d) 159; affirming 15 B. T. A. 806, et al.

While the quotation is correct, the remainder of the paragraph is quite pertinent and likewise should be considered. Immediately following the quoted portion, we said:

Although petitioner’s service was in fact regular and continuous, this was because of the city’s building activity; had it ceased, he would have been without work or remuneration. While he did much routine, attended meetings, and made recurring reports, and in fact gave recommendations whenever asked, these services were beyond the express contemplation of the resolution and had no effect upon his compensation. Bach task which the resolution authorized had to be specially assigned, and any compensation which he might draw had to rest entirely on such special assignment, which, moreover, the Board of Public Works was not legally bound to give in any instance. Had it become dissatisfied with his services, no discharge would have been necessary to dismiss him; a mere failure to assign him new projects would instantly have left him without responsibility of any kind and without compensation. If his services were continuous, the continuity resulted from no term employment, but from a series of fresh employments which kept him steadily engaged. This is characteristic of an independent contractor, not an employee.

Numerous cases have come before us where architects or engineers, having performed services for states or political subdivisions, have claimed that the compensation received was exempt from the Federal income tax. Some of the architect cases are Emma B. Brunner, Executrix, 5 B. T. A. 1135; Clarence H. Johnston, 14 B. T. A. 605; R. Clipston Sturgis, 10 B. T. A. 1394; H. A. Underwood, 20 B. T. A. 1117 (Underwood v. Commissioner, 56 Fed. (2d) 67); John E. Beaman, 22 B. T. A. 1387; John Reid, Jr., supra. Engineer cases—Fred H. Tibbetts, 6 B. T. A. 827; George W. Fuller, 9 B. T. A. 708; John R. Spelman, 18 B. T. A. 313; Joseph Milton Howe, 19 B. T. A. 849; Edward M. Lynch, 30 B. T. A. 727; F. A. Pease, 30 B. T. A. 17. In all the above cases exemption was denied.

We refuse to exalt artificiality above reality or to give effect to form rather than substance. Our findings show that petitioner was in fact an independent contractor. He performed the same services as were performed by the taxpayers in the above cited cases; he received his compensation on the same basis. He selected his own office, employed his own assistants, retained the right to discharge them and to use them indiscriminately in his work either for the county or for others. He was not required to work any particular number of hours or days, or to report for work at any particular time. He selected his own instrumentalities, employed such methods as he saw fit to accomplish the given tasks, and was paid upon the basis of completed work. The county was not interested in where or how the tasks were completed; and only to a limited extent in when they were completed; petitioner completed such tasks in his own way and as his judgment dictated, and was free to adopt any means to accomplish the desired results.

We hold that the compensation received by petitioner from Cook County is not exempt from the Federal income tax and the respondent did not err in determining the deficiencies.

Judgment will he entered for the respondent.


author: Seawell: Matthews,

text:
    Robert P. Scripps, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert P. Scripps, Trustee, E. W. Scripps Trust Fund, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77116, 77117, 77602, 77603.
    Promulgated January 24, 1936.

      Paul Patterson, Esq., for the petitioners.

      Paul G. Crowhm, Esq., and W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Seawell:

These proceedings, consolidated for healing and report, involve the redetermination of the following deficiencies in income tax:

Petitioner Scripps, a beneficiary of the E. W. Scripps Trust Fund, alleges no error in the determination of the deficiency for 1927. For 192G he alleges as error the disallowance as a deduction to the E. W. Scripps Trust Fund of the sum of $89,880.99, representing inheritance taxes paid to the State of Ohio. For the remaining years the issue is whether the E. W. Scripps Trust Fund is entitled to deduct estate taxes and interest thereon paid on behalf of the estate of E. W. Scripps. Refunds are claimed by petitioner Scripps for 1928 and by the other petitioner for 1928, 1929, 1930, and 1932. The facts were stipulated, and are, briefly stated, as follows:

Each of the great number of newspapers founded or purchased by E. W. Scripps prior to 1922 was owned in that year by a corporation organized in the state in which the newspaper was published. To carry out a plan of unified control of the chain of newspapers, in 3922 he organized the E. W. Scripps Co. under the laws of Ohio, with a capital stock of 1,000' shares of voting class A common stock, and 4,000 shares of class B common stock without voting rights. Pursuant to a contract of July 6, 1922, between Scripps and the E. W. Scripps Co., all of the class A and 3,000 shares of class B stock were issued to Scripps in exchange for his stock of the various newspaper companies.

On November 23, 1922, Scripps transferred his stockholdings in the E. W. Scripps Co. to Bobert P. Scripps, his son, in trust. The trust agreement contains provisions for voting the stock during the lifetime and after the death of the grantor, distributions of the income from the corpus during such periods, appointment of new trustees based upon certain contingencies, and other provisions designated to carry out the desire of the grantor for continuing unified control of the companies. The grantor reserved the right to revoke the trust in whole or in part and modify it in any respect by a written instrument delivered to the trustee. Upon termination of the trust part of the corpus is to be distributed to certain specified individuals and organizations and the residue is to go to grandchildren of Robert P. Scripps. In case there be no sucli living children, 51 percent of the voting stock of the E. W. Scripps Co. is to go to such child or children of Thomas 0. Scripps as he designates in writing, and the remainder to heirs of the grantor. Article nine of the trust agreement reads as follows:

ITrom the gross income derived from the trust estate or from tlie principal thereof, if tlie Trustee deem that necessary or advisable, the Trustee shall first pay and discharge as and when due, any and all taxes and assessments, (including federal estate taxes, if any, but not state inheritance or succession taxes, if any, which shall he paid by each of the several beneficiaries hereunder), insurance, charges and all other expenses of every kind and nature expended or incurred in the. management and protection of the trust estate and of this trust. All income taxes, real and personal property taxes and assessments, levied or assessed upon principal and/or income of any beneficiary hereunder, shall be borne and paid individually by each such beneficiary. The decision of the Trustee shall be final in determining as between the trust estate and the beneficiaries hereunder what taxes and assessments are to be paid out of the trust estate and/or by the beneficiaries individually.

The decedent died March 12, 1926. In his last will and testament he made several specific bequests and left the residue of his estate to Robert P. Scripps in trust for the uses and purposes set forth in tlie trust instrument of November 23, 1922.

The respondent determined that the decedent left a gross estate of the value of $17,795,834.49 and a net estate of the value of $10,660,801.74. Of the decedent’s gross estate, $1,882,690.64 constituted the value of property passing under the decedent’s will. The personal debts of the decedent amounted to $5,568,471.90. The respondent determined a tax of $1,207,964.69 on the net estate.

In 1926 the trustee of the E. W. Scripps Trust Fund paid the sum of $89,880.99 to the State of Ohio for inheritance taxes imposed upon him on account of bequests made in the trust instrument to unknown beneficiaries, namely, the appointee of Thomas O. Scripps and the one heir of the grantor.

The trust instrument provided that, after payment of certain annuities, 70 percent of the remaining income of the trust was to go to Robert P. Scripps and the remainder was to be accumulated in (.he trust for designated purposes.

The E. W. Scripps Trust Fund filed a fiduciary return on -form 1041 for 1926, showing net income arrived at by claiming as a deduction, among other items, the inheritance tax paid to the State of Ohio. Of the net income, $69,503.78 remained in the trust and $117,175.49 was distributed to petitioner Scripps. The petitioners reported such amounts in their respective income tax returns for 1926. In bis audit of the returns, the respondent disallowed the deduction taken in the fiduciary return but allowed it as a deduction in the income tax return of the trustee after increasing gross income by $26,964.30, an amount equal to 30 percent of the tax payment. He also increased the individual taxable income of Bobert P. Scripps by $62,916.69, the remainder of the tax payment. The allowance of the item as a deduction in the income tax return of the E. W. Scripps Trust Fund resulted in an overpayment of tax in the amount of $5,975.64, collection of which is barred by the statute of limitations.

The liability of the estate of E. W. Scripps for estate taxes and interest thereon was liquidated by payments made each year from 1928 to 1934, inclusive. The payment in 1928 and a portion of the payment in 1929 were made by the executor of the estate of E. W. Scripps. All of the other payments of estate tax and interest were made by the E. W. Scripps Trust Fund.

Section 219 (b) of the Bevenue Act of 1926 provides, with exceptions not of importance here, that the net income of an estate or trust shall be computed as provided in section 212. This section defines net income as gross income less deductions authorized by sections 206 and 214. Section 214 (a) (3) provides that in computing net income there shall be allowed as a deduction “Taxes paid or accrued within the .taxable year * * *. For the purpose of this paragraph, 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.”

After the decisions in Keith v. Johnson, 271 U. S. 1, and United States v. Mitchell, 271 U. S. 9, section 703 was incorporated in the Bevenue Act of 1928 to simplify the administration of section 214 (a.) (3) of the 1926 Act. This section is retroactive to prior revenue acts and provides, in part, that in determining the net income “of an estate for any taxable year * * * the amount of estate, inheritance, legacy, or succession taxes paid or accrued within such taxable year shall be allowed as a deduction as follows:”

(1) If the deduction has been claimed by the estate, but not by the beneficiary, it shall be allowed to the estate;
(2) If the deduction has been claimed by the beneficiary, but not by the estate, it shall be allowed to- the beneficiary.

The respondent contends that the E. W. Scripps Trust Fund is neither the estate of E. W. Scripps nor a beneficiary, within the meaning of section 703, and in paying the succession tax to the State of Ohio it acted as a volunteer. The substance of his argument is that the term “estate” means the property being administered by the decedent’s executor. He does not contend that the E. W. Scripps Trust Fund did not claim the deduction in its return for 1926.

The respondent made substantially the same contention in Junius Beebe, Trustee, 26 B. T. A. 190; affd., 67 Fed. (2d) 662. There, in discussing the meaning of (he term as used in section 23 (c) of the 1928 Act allowing deductions for taxes “only to the estate”, we said:

Tlie word “estate” was used in a sense sufficiently broad to include any and all fiduciaries required by the laws of the state to respond in the payment of estate, legacy, inheritance;or succession taxes, whether it bo a trust estate or an estate presided oyer by executors and administrators, usually and commonly referred to as legal representatives.

See also Pennsylvania Co. for Insurances on Lives & Granting Annuities, Executor, 32 B. T. A. 449.

The deductibility of taxes in computing net income turns upon the entity against which the taxes accrued. Herbert G. Perry et al., Executors, 32 B. T. A. 513. Only such taxes as are imposed upon the taxpayer are deductible. Samuel Riker, Jr., 15 B. T. A. 1160. Here the tax was imposed by the state upon the E. W. Scripps Trust Fund on account of bequests of property in the hands of the trustee. The property never passed to the executor and he was not liable for the tax assessed. In paying the tax the E. W. Scripps Trust Fund did not act as a volunteer, but was liquidating a liability imposed upon it, not the executor of the decedent’s estate.

The trustee was required by the provisions of section 225 of the Revenue Act of 1926 to file a fiduciary return showing thereon items of gross income, and deductions and credits allowed by the statute. The return prescribed by the Commissioner in his regulations provides for a statement of the beneficiaries’ shares of income and credits. Such a return is an information return necessary to enable the Commissioner to determine the income of the trust and fix the amounts taxable to beneficiaries, if any, and the trust. Where, as here, a portion of the income of the trust is retained, the trustee is required to file an income tax return. The amount so taxable is fixed by the fiduciary return, and, if the net income of the trust was erroneously computed by reason of an overstatement of deductions allowed by the statute, the adjustments should be made in the fiduciary return. The respondent should have allowed the inheritance tax of $89,880.99 as a deduction in the fiduciary return.

The remaining issue, relating; to the deduction of the sums paid by the E. W. Scripps Trust Fund to liquidate estate tax of the estate of E. W. Scripps, is governed by the Revenue Acts of 1928 and 1932, the payments, to the extent important here, having been made in the years 1928 to 1932, inclusive. Section 23 (c) of the applicable statutes provides that deduction for estate taxes “shall be allowed only to the estate.” The question turns upon whether the E. W. Scripps Trust Fund is “the estate” within the meaning of section 23 (c).

The petitioner argues that since the value of the corpus of the E. W. Scripps Trust Fund formed a part of the gross estate of E. W. Scripps by reason of the power reserved by the grantor to revoke or alter the trust, it is within the term “estate” as used in section 23 (c), and that to refuse to give it the benefit of the deductions would result in discrimination.

Deductions from gross income are a matter of legislative grace and can be allowed only when granted by clear language, the rule that ambiguities must be resolved in favor of taxpayers having no application to1 deduction provisions of taxing acts. New Colonial Ice Co. v. Helvering, 292 U. S. 435; Helvering v. Inter-Mountain Insurance Co., 294 U. S. 686.

The Avord “estate” is not defined in the gOArerning statutes. The term “shall be alloAA'ed only to the estate” was inserted in the 1928 Act “to avoid confusion which had theretofore existed as to whether the estate or beneficiaries were entitled to the deduction, based upon the conclusion whether the estate tax was levied on the right to transmit or the right to receive the decedent’s property.” Junius Beebe, Trustee, supra; Elmon C. Gillette, 29 B. T. A. 561; affd., 76 Fed. (2d) 6.

The estate tax here Avas imposed upon the transfer of the net estate of E. W. Scripps and Avas payable by the executor of his estate. Secs. 301 (a) and 305 (a), Revenue Act of 1926. In regulations promulgated under the 1921, 1924, and 1926 Acts, the Commissioner holds that this obligation of the executor applies even though the gross estate for estate tax purposes consists, in part, of property which will not be administered by the executor. Art. 81, Regulations 63 and 68, and art. 79, Regulations 70. The estate tax Avas a lien upon the gross estate, less charges against the estate and administration expenses allowed by the court having jurisdiction of the estate. Sec. 315 (a). A trust to which property was transferred to take effect in possession or enjoyment at or after the decedent’s death is not liable for the tax unless it is not paid when due. Sec. 315 (b). In United States v. Woodward, 256 U. S. 632, the question Avas AA'hether estate tax paid by executors in 1919 was deductible in computing taxable income in 1918. In speaking of whether Federal estate taxes were Avitliin the meaning of the Avord taxes used in section 214 of the 1918 Act, allowing deductions for taxes paid or accrued AAdthin the year, the Court said: “It is made a charge on the estate and is to be paid out of it by the administrator or executor substantially as other taxes and charges are paid. * * * It does not segregate any part of the estate from the rest and keep it from passing to the administrator or executor for purposes of administration, as counsel contend, but is made a general charge on the gross estate and is to be paid in money out of any available funds', or, if there be none, by converting other property into money for that purpose.”

The corpus of the E. W. Scripps Trust Fund is an estate, generally referred to as a trust estate. At all times important, the trustee and executor were each administering his respective estate, and each was required to file a fiduciary return of income, subject to the conditions set forth in section 143 of the Revenue Act of 1928 and section 142 of the Revenue Act of 1932. The same acts impose a tax on incomes of estates and trusts. Sec. 161. Thus throughout the taxable years the E. W. Scripps Trust Fund and the estate of E. W. Scripps were in existence as separate and distinct taxable entities.

If the petitioner’s view is the correct one, then any one of a number of revocable trusts created by a decedent and existing for income tax purposes while the estate of the grantor is being administered by an executor, could obtain the benefit of the statute by paying Federal tax of the decedent’s estate. It would require clear legislative authority to produce such a result. We find none in the statutes.

The case of Junius Beebe, Trustee, supra, is not controlling. There the state inheritance tax was imposed upon a testamentary trustee on the distribution of property held in the trust estate after the discharge of the executor.

The property in the hands of the executor had a value for estate tax purposes in excess of the estate tax. The fact that the decedent disposed of his property in such a way as to make it difficult or impossible for the executor of his estate to pay estate taxes does not give the petitioner any greater rights under the statutes. Gillette v. Commissioner, supra.

The respondent did not err in refusing to allow the E. W. Scripps Trust Fund to deduct the payments in question in the computation of its net income for the taxable years.

Reviewed by the Board.

Decision will be entered in Doclcet No. 77116 v/nder Bule 50. Decisions will be entered for the respondent in Docket Nos. 77117, 77602, and 77603.

Murdock dissents.

Matthews,

dissenting: I think the Federal estate taxes paid by the trust estate in the years 1928-1932 are deductible by the trust in its income tax returns for those years because (1) this trust estate was the estate of decedent for estate tax purposes [the inclusion of which in gross estate is solely responsible for any estate tax being due], (2) the trust estate paid the estate taxes; and (3) section 23 (c) of the Revenue Acts of 1928 and 1932 allows estate taxes to be deducted by the estate.

Section 23 provides that:

In computing net income there shall he allowed as deductions:
* * * * * * *
(e) Taxes generally. — Taxes paid or accrued within the ifixable year * * * * * * * * * *
For the purpose of this subsection, estate, inheritance, legacy, and succession taxes * * * shall be allowed as a deduction only to the estate.

The terms “ estate taxes ” and “ estate ” in section 23 (c) have the same meaning as they have in the estate tax provisions of the statute. Under the estate tax provisions a tax is imposed upon the transfer of the net estate of every decedent dying after the enactment of the act and it is to be measured by the value of the net estate and paid out of the estate which measures the tax. The estate whose transfer is taxed may consist of several parts, administered by several different persons, and each of those persons may be required to return the property being administered by him. Section 302 (b) of the Revenue Act of 1926 provides that if the executor is unable to make a complete return of any part of the gross estate of decedent he shall include in his return the description of such part and the name of each person holding a legal or beneficial interest therein and upon notice from the collector such person shall make a return as to such part of the gross estate. One part is as much the estate of decedent for estate tax purposes as any other part, all being thrown together in determining the net estate which measures the tax, and each part of the estate is required to beau its just and equitable portion of the tax imposed because of the transfer of such part. Sec. 314 (b), Revenue Act of 1926.

The effect of the majority opinion is to read into section 23 (c) a qualification which is not in the statute, namely, that estate taxes shall be allowed as a deduction only to the “estate being administered by an executor.” If Congress had intended to limit the deductions for estate taxes only to that part of the estate being administered by the executor, I think it would have said so. It is clear that the decedent’s estate and not the beneficiaries of that estate shall have the deduction but there is nothing in the language used to indicate that only that part of the estate being administered by an executor is entitled to a deduction of the estate taxes in the income tax return. The estate of a decedent for estate tax purposes may and often does embrace several trust estates, which are separate entities for income tax purposes. Of course, if the trustee of a revocable tr'ust such as we have here does not pay any of the estate tax the trust is not entitled to a deduction in its income tax return for such tax. Neither would the estate being administered by an executor be entitled to a deduction for estate taxes which it did not ¡jay and which were due to the inclusion in the estate of a trust which was testamentary in nature.

Section 314 (b) of the estate tax provisions states that it is the purpose and intent of the estate tax title that so far as is practicable and unless otherwise directed by the will of decedent the tax shall be paid out of the estate before its distribution.

The will of E. W. Scripps as to the distribution of his property and the pa^yment of estate taxes must be ascertained from reading his will and the trust instrument together. It is the trust instrument which provides to whom the estate is to be distributed upon termination of the trust and in the trust instrument decedent provided for payment of the estate taxes out of the income or xJi'iiicipal of the trust estate.

As the estate tax imposed was due wholly to the inclusion of the trust estate in decedent’s estate, and as the decedent directed that the estate taxes should be paid out of the income or principal of the trust and such taxes were paid by the trust, both the will of the decedent and the intent and purpose of the statute were carried out.

If E. W. Scripps had left no property at death except his interest in this trust estate, the trustee as the person in actual possession of such property of the decedent would have been required to perform all the duties imposed by the statute on an executor or administrator of a decedent. These duties would include filing the estate tax return and paying the tax out of the trust funds in his hands. In such case I do not believe that the right of the trust estate to a deduction under section 23 (c) in its income tax return of the estate taxes paid by it would be questioned. The fact that decedent also left property to be administered by his executor, the value of which was far less than the personal debts of decedent, should not operate to deny a deduction to the trust estate of the estate tax paid by it, which was wholly duo to the inclusion of the trust estate in decedent’s gross estate.

It was held in Junius Beebe, Trustee, 26 B. T. A. 190; affd., 67 Fed. (2d) 662, that a testamentary trust is within the meaning of the term “estate” in section 23 (c). By a parity of reason, a trust which is testamentary in nature, as in the instant case, is also within the meaning of the word “estate.” I think the decision of the Board and the court in the Beebe case govern in this case and that the trust estate should be allo-wed the deduction claimed.

ÁeuNdell and Mellott agree with this dissent.


author: Mukdock :

text:
    Seymour H. Knox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65203.
    Promulgated January 24, 1936.

      Ralph M. Andrews, Esq., for the petitioner.

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

Mukdock :

The Commissioner determined a deficiency of $70,384.19 in the petitioner’s income tax for the year 1929, but now concedes that the petitioner’s profit on the sale in 1929 of 120 rights to purchase National City Bank stock was $6,218.27, instead of $13,799.64, the amount used by the Commissioner in determining the deficiency, and that the petitioner sustained a loss of $1,678.74 on the sale in 1929 of 25 shares of American Steamship Co. stock. The only issue for decision by the Board is. whether or not the petitioner sustained a deductible loss of $331,976.80 in 1929 from the disposition of 11,550 shares of the capital stock of Marine Midland Corporation (hereafter referred to as Midland) to Marine Equities Corporation (hereafter referred to as Equities). Most of the facts have been stipulated and none are in dispute. The Commissioner disallowed the loss on the ground that the disposition of the shares -by the petitioner was not a sale but an exchange within the provisions of section 112 (b) (5) of the Revenue Act of 1928. He amended his answer to allege affirmatively that if the shares were sold by the petitioner, the loss was nondeductible because of the “wash sales” provisions of section 118 of the Revenue Act of 1928. The facts need not be stated in full.

The petitioner purchased 2,000 shares of Midland common stock on September 18 and 19, 1929, for $166,025. He also purchased 10,000 shares of the same kind of stock on October 16, 1929, for $600,000. He sold on October 24, 1929, on the market to outsiders for $26,910.70, 450 of the 2,000 shares acquired- in September.

Persons other than the petitioner incorporated Equities on November 12, 1929. This corporation had authority to acquire, hold, sell, and deal generally in and with all forms of securities. It was organized for the purpose of trading in and stabilizing the stock of Midland, which held a controlling stock interest in a number of banks. The petitioner subscribed for 11,550 shares of the stock of Equities at $35,275 per share on November 18, 1929, and on the same day gave his check for $407,426.25 to Equities in payment of his subscription. “Petitioner at that time was advised that Marine Equities Corporation intended thereafter to offer to acquire from him 11,550 shares of Marine Midland Corporation in consideration of the issuance to him of its check for $407,137.50.” The petitioner, in a separate transaction, delivered his 11,550 shares of Midland common stock to Equities on November 19, 1929, and received from Equities its check for $407,137.50, or $35.25 a share. This was the market price of the stock at that time as shown by transactions on the New York Curb Exchange and on the Buffalo Stock Exchange.

Equities at or about the same time purchased Midland stock from its other stockholders until it owned 36,800 shares. It had 36,800 of its shares outstanding at that time. Thereafter it bought and sold about 1,000 shares of Midland stock on the open market. It also sold some of its own shares to and bought Midland shares from two new stockholders in December 1929. As it received dividends on the Midland stock which it held, it declared corresponding dividends to its own stockholders.

Over 5,000,000 shares of Midland stock were outstanding on November 19, 1929. The petitioner did not reacquire any Midland stock within 30 days prior or subsequent to November 19, 1929, and had no contract or option to acquire such stock from Equities or any other source at November 19, 1929, or later.

The petitioner kept his accounts1 and filed his income tax returns on the cash receipts and disbursements basis. He filed his return for the calendar year 1929 with the collector of internal revenue at Buffalo, New York. He claimed on that return a loss of $84,726.80 on the sale of the 2,000 shares of Midland stock which he purchased in September 1929, 450 of which he sold on October 24, 1929, on the market and 1,550 of which he sold to Equities on November 19, 1929, and he also claimed a further loss of $247,250 on the sale of 10,000 shares of Midland acquired on October 16, 1929, Avhicli he sold to Equities on November 19, 1929. The Commissioner, in determining the deficiency, disallowed these losses in their entirety upon the ground that all of the shares had been transferred to Equities in an exchange coming within the provisions of section 112 (b) (5). of the Revenue Act of 1928, so that no loss was recognized.

The stockholders of Equities, on May 17, 1930, decided to dissolve and on the same day the assets of the corporation were distributed pro rata among its stockholders. The petitioner received 11,490 shares of Midland stock and $2,557 in cash. The president of Equities, in recommending dissolution, stated that the purpose for which the corporation had been organized, i. e., to trade in and stabilize the stock of Midland, had been fulfilled.

The petitioner entered the 11,490 shares of Midland stock on his books at its then market value, $40.50 per share, and reported a profit for 1930 from the dissolution of Equities of $60,475.75. The Coinmissioner made no adjustment of the profits so reported for 1930.

The evidence indicates that the transactions here in question were not entered into for the purpose of avoiding taxes. The parties had other purposes in mind and apparently gave no thought to any tax question. The petitioner has testified without equivocation or contradiction that he had no agreement or option, express or implied, to reacquire the Midland shares. Cf. Commissioner v. Dyer, 74 Fed. (2d) 685. The Commissioner at no time has contended or oven suggested that any of the transactions were fraudulent. Every step was real, genuine, and in no sense lacking in bona fieles. The petitioner actually sold his Midland shares and sustained a loss of $331,976.80 in 1929.

The respondent’s first principal contention is that the form of the transactions whereby the petitioner and others obtained shares of Equities and shortly thereafter transferred a corresponding number of shares of Midland stock to Equities should be ignored and the substance and effect of those transactions should be regarded as controlling. He argues that in substance and effect the petitioner a3id other stockholders of Midland exchanged their Midland stock share for share for the stock of Equities. Section 112 (b) (5) provides that “no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the coj'poration”, provided that “the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.” However, neither the facts nor the authorities support this argument of the Commissioner. What was done should bo the test. United States v. Phellis, 257 U. S. 156; Anna M. Harkness, 1 B. T. A. 127. The petitioner did not exchange his Midland stock for Equities stock. Cf. Katherine A. Spalding, 7 B. T. A. 588; Sarther Grocery Co., 22 B. T. A. 1273; affd., 63 Fed. (2d) 68. He purchased Equities stock for cash in one transaction and later in another transaction Equities purchased his Midland stock for cask. These two transactions may not be regarded as one for the purpose of imposing a tax. Daisy M. Ward, 29 B. T. A. 1251; affd., 79 Fed. (2d) 381; Georgia Savings Bank & Trust Co., Executor, 28 B. T. A. 1153, 1164. If the petitioner had realized gain from the disposition of his Midland shares, the Commissioner would no doubt contend that section 112 (b) had no application and that the gain should be recognized. The section has no application to a state of facts such as is here presented. The general rule of section 112 (a) applies. Marjory Taylor Hardwick, 33 B. T. A. 249.

The Commissioner next contends that even if there was a sale and a loss, section 118 applies and allows no deduction for the loss. Section 118 provides that no deduction shall be allowed for any loss claimed to have been sustained in the sale or other disposition of shares of stock where it appears that within 30 days before or after the date of such sale or other disposition the taxpayer has acquired or has entered into a contract or option to acquire “substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition.” The Commissioner’s theory is that the taxpayer acquired property substantially identical to his Midland shares when he acquired the Equities shares, i. e., he owned 11,550 shares of Midland prior to the transactions and thereafter he owned a Mir joint interest in 36,800 Midland shares. He cites neither cases nor rulings nor regulations in support of this argument. The separateness of a corporation and its stockholders can not be disregarded for this- purpose. Eisner v. Macomber, 252 U. S. 189, 213. Equities owned the Midland shares after November 19, 1929. The petitioner merely owned stock in Equities. The indirect interest which he thus had in the Midland shares belonging to Equities was not substantially identical to the Midland shares which he owned prior to the transaction. Klein v. Board of Supervisors, 282 U. S. 19, 24.

Decision will be entered under Exile 50.