author: Arnold: Mellott,

text:
    Archie R. Conner, Administrator of the Estate of Lucy Radulovich, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88064.
    Promulgated May 17, 1938.

      J. W. Townsend, Esq., for the petitioner.

      E. O. Adams, Esq., for the respondent.
   OPINION.

Arnold:

The constitutionality of section 44 (d) of the Revenue Act of 1934, or of similar sections in prior revenue acts, has been considered and decided adversely to petitioner’s contentions in Rose v. McEachern, 86 Fed. (2d) 231; reversed on another point, McEachern v. Rose, 302 U. S. 56; Lawler v. Commissioner (C. C. A., 9th Cir.), 78 Fed. (2d) 567, affirming 29 B. T. A. 227; Crane v. Helvering (C. C. A., 2d Cir.), 76 Fed. (2d) 99, affirming 30 B. T. A. 29; Nuckolls v. United States (C. C. A., 10th Cir.), 76 Fed. (2d) 357; and Provident Trust Co. of Philadelphia v. Commissioner (C. C. A., 3d Cir.), 76 Fed. (2d) 810, affirming 29 B. T. A. 374. See also Moore v. United States (Ct. Cls.), 10 Fed. Supp. 143; certiorari denied, 296 U. S. 583; and F. E. Waddell et al., Executors, 37 B. T. A. 565. In view of these authorities we deem it unnecessary to discuss the constitutionality of said section.

The remaining issue is a question of law involving the application of the last sentence in section 44 (d). The respondent, applying the first portion of 44 (d), increased decedent’s income by $13,915.26 because of the gain realized upon the transmission of installment obligations at decedent’s death. The petitioner does not contest the amount of gain, but claims that it is entitled to the benefits conferred by the last sentence of said section. If the provisions of the last sentence govern, there will be no gain returnable from the transmission of the obligations at death, but if such provisions do not govern, respondent’s action must be approved. Since the issue involves a question of statutory construction, a short history of the enactment of the provisions and the reasons therefor will be helpful.

Prior to the enactment of section 212 (d) of the Revenue Act of 1926 there was no statutory authorization for reporting profits on the installment basis. Willcutts v. Gradwohl, 58 Fed. (2d) 587; certiorari denied, 287 U. S. 637. The enactment of that provision was a definite recognition by Congress of the hardships suffered by taxpayers selling property upon the installment basis. Section 212 (d) gave relief by permitting the taxpayers to postpone the taxing of profits until the installment payments were received. Many taxpayers, after electing to report gain under section 212 (d), successfully escaped any further tax by disposing of their installment obligations in nontaxable transactions. Harold G. Ferguson, 34 B. T. A. 522, 525. To plug this loophole Congress added subdivision (d) to section 44 of the Revenue Act of 1928, which attached a condition to the option granted taxpayers to the effect that if the taxpayer disposed of or transmitted his installment obligations, the balance of the profit was realized. Nuckolls v. United States, supra.

The application of 44 (d) of the 1928 Act imposed a hardship upon the estates of decedents who died possessing a substantial amount of installment obligations. Congress attempted to alleviate this hardship bj adding the last sentence in section 44 (d) of the 1982 and 1934 Acts, the provisions of which permit the decedent’s estate to postpone returning the gain under certain conditions. The procedure provided for was designed to relieve the hardship and at the same time protect the revenue, Report of the Finance Committee of the Senate, Revenue Bill of 1932.

The respondent’s interpretation of section 44 (d) of the 1934 Act is revealed by article 44-5 of Regulations 86, the pertinent portion of which is set out in the margin.

A careful analysis of the facts indicates that the requirements of the statute and the regulations for postponing the recognition of gam have been substantially complied with. The typed bond is precisely worded with respondent’s printed form 1132; the bond was filed with decedent’s return; the amount of the bond is more than double the deficiency now asserted; the bond was executed by the residuary legatees and a surety company; the bond is conditioned upon the return as income by the legatees of the unreported gain in each payment; and the surety company is apparently an acceptable surety on Federal bonds. Respondent’s approval of the bond is the only thing lacking and that is a requirement of the regulations, not of the statute.

The issuance of the deficiency notice was clearly a rejection of the bond, and raises the interesting question of whether failure to approve the bond constituted an abuse of discretion. The petitioner contends that respondent has no discretion under 44 (d) but must accept the bond because of the absolute Tight granted taxpayers by the statute, citing F. Harold Johnston, Executor, 33 B. T. A. 551. In that case the executor filed decedent’s return without reporting any gain from the acceleration of installment profits. Thereafter form 1132 became available and the executor offered to file a bond as permitted by section 44 (d) of the 1932 Act. In the interim the legatees had returned the profits for the year in which the installment payments were received. The respondent refused to accept the bond because it had not been filed with the decedent’s return. We held that the respondent’s refusal was arbitrary and that the bond should have been accepted.

By comparison the facts in this proceeding are stronger in that a bond was actually filed, but was not approved, not because of a defect in the bond or'the parties executing it, but because of the taxable status of the residuary legatees. The real reason for not approving the bond is that as the legatees are tax exempt corporations the profit of the uncollected obligations may escape tax. [Respondent argues that as a charitable organization is not required to file an income tax return, or pay a tax, it is not a “person”, as used in the last sentence of section 44 (d), that could file a bond “conditioned upon the return as income.” That would read into the last sentence of section 44 (d) something that is not there and limit the word “person” to “taxable person.” Such an interpretation is not in harmony with the statutory definition of the word “person” found in section 801 (a) (1), which provides that “When used in this Act — (1) The term ‘person’ means an individual, a trust or estate, a partnership, or a corporation.” In our opinion the term “person”, as used in the last sentence of section 44 (d), includes any corporation, and respondent can not base his nonapproval of the bond upon the taxable status of these legatees.

The issue, therefore, narrows down to whether respondent can look beyond the provisions of 44 (d) to the parties binding themselves to return the gain and ascertain whether such parties will pay a tax thereon. The last sentence in section 44 (d) indicates the Congressional intent to prohibit the acceleration of gain where installment obligations are transmitted at death. Not only is a privilege granted, but the grant is secured by a mandatory prohibition against the application of 44 (d) if a bond is filed conditioned upon the “return as income” (not the payment of tax) of that proportion of the payment which decedent would have returned as income had she lived and received payment. Such a bond, so conditioned, was filed. The respondent had no right to refuse a proper bond, and his refusal to approve it was arbitrary. Such an abuse of discretion can not be justified by anticipating a possible defense of the residuary legatees.

Whether the legatees can escape a tax on the income returned is not a matter which we have to determine. We have to construe the statute as written, and if the construction gives rise to administrative difficulties, respondent’s recourse is with Congress. But where the statutory requirements have been fully met, and the privilege granted has been earned, the respondent can not arbitrarily deny the privilege because future contingencies may deprive him of the tax.

The deficiency should be recomputed in accordance herewith.

Eeviewed by the Board.

Decision will be entered wider Rule 50,

Mellott,

dissenting: The holding that the respondent acted arbitrarily in refusing to approve the proffered bond seems to me to be erroneous. The bond was not filed with the Commissioner but was merely tendered for approval and filing. The taxpayer’s remedy, if injured or aggrieved by his refusal to approve it, was recourse to a court of general jurisdiction. A court, by writ of mandamus, might have compelled him to act; but even a court would not attempt to control his judgment or discretion unless he acted arbitrarily, and a conclusion that he has so acted would be reached only when clearly justified by the evidence.

Even assuming that this Board has jurisdiction to determine whether the Commissioner did, or did not, act arbitrarily, which is doubtful, the evidence is wholly insufficient to justify the conclusion reached by the majority. He sought and secured the written advice of the General Counsel of the Treasury Department, which was introduced in evidence before us. The General Counsel recommended disapproval of the bond because it would be of no value to the Government since the mere return of income by a charitable organization would not result in the collection of the tax due, but would have the effect of granting an exemption from tax and thus defeat the very purpose of section 44 (d).

As pointed out by the Court of Claims in Moore v. United States, 10 Fed. Supp. 143; certiorari denied, 296 U. S. 583, “The statute places property received as a profit by the decedent during his lifetime and transmitted by his death in the same class as the distribution, sale, or other disposition of such property during the taxpayer’s lifetime.” The obvious purpose of Congress in adding the amendment in 1932 which permits the estate of a decedent, his next of kin, or legatees to file a bond, is to protect the revenue and is not to grant an exemption,

The executors filed two income tax returns approximately a year after the death of the decedent, one for the period prior to her death and one for the period subsequent to her death. In neither did they report any portion of the profit in question. An amended return for the period subsequent to the death of the decedent was filed on February 19, 1936, in which it is stated that it is the contention of the executor that all income, since it inures to the benefit of beneficiaries which are corporations exempt from tax, is exempt from taxation even befofie distribution to the beneficiaries. Perhaps the question whether the income may thus be exempted from tax is not properly before us and need not be determined; but in view of the questions which may arise, the possible ambiguity of section 44 (d), the duty of the Commissioner to protect the revenue, and the fact that advice of counsel was secured and followed, I think it should not be held that he acted arbitrarily in withholding his approval of the proffered bond.

Harron agrees with this dissent.

       Sec. 44 (d). Gain ob Loss Upon Disposition op Installment Obligations. — If an Installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at ether than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the Income which would be returnable were the obligation satisfied in full. This subsection shall not apply to the transmission at death of installment obligations if there is filed with the Commissioner, at such time as he may by regulation prescribe, a bond in such amount and with such sureties as he may deem necessary, conditioned upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment.

       Your committee lias added to section 44 (d) a provision that the subsection shall not apply to the transmission at death of installment obligations if a bond is filed in the proper amount conditioned upon the return as income by any person receiving any payment on account of such obligations of the same proportion of such payment as would have been returnable by the decedent had he lived and received the same. It has come to the attention of your committee that considerable hardship sometimes occurs in the application of existing law to cases of decedents who die possessed of substantial amounts of installment obligations. In such cases the entire amount of the profit represented by the obligations must be reported as income in the return of the decedent for the year of his death. Your committee believes that if, for example, the estate of the decedent or his next of bin or legatees file a bond to return as income the proper proportion of the payments received by them on account of the installment obligations received from the decedent, the revenue will be properly protected. This section is accordingly amended to provide for such procedure.

       * * * In the case of decedents who die possessed of installment obligations, no gain on account of the transmission at death of such obligations is required to be reported as income in the return of the decedent for the year of his death, if the executor or administrator of the estate of the decedent or any of the next of kin or legatees file with the Commissioner a bond on Form 1132 in an amount not less than the amount by which the tax of the decedent for the year of his death would have been increased had no such bond been filed. The bond shall be conditioned upon the return as income, by any person receiving any payment in satisfaction of such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment. The bond shall be executed by a surety company holding a certificate of authority from the Secretary of the Treasury as an acceptable surety on Federal bonds, shall be subject to the approval of the Commissioner, and must be filed at the time of filing the return of the decedent for the year of his death. * * *


source: Caselaw Access Project

author: Mellott:

license: Public Domain

text:
    Betty Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Betty Rogers, O. N. Beasley, Oscar Lawler, James K. Blake, Executors of the Estate of Will Rogers, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84895, 84896.
    Promulgated May 18, 1938.

      Olaude I. Parker, Esq., John B. MiTbiken, Esq., Bctiyley Kohbmeier, Esq., and L. A. Luce, Esq., for the petitioners.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Mellott:

These consolidated proceedings involve deficiencies in income taxes for the year 1933 in the amount of $17,055.90 in Docket lío. 84895 and $16,894.61 in Docket No. 84896. The respondent decreased a marital community loss, one-half of which was deducted by each member of the community as an ordinary loss, from $57,643.46 to. $54,055.25, and treated it as a capital loss sustained equally by each member of the community. The only question involved is whether such loss is a capital loss or an ordinary loss.

The proceedings were submitted upon two stipulations of facts which, except for the purely formal parts, are substantially the same. These stipulations are included herein by reference, a combined summary being sufficient for the purpose of the report.

The petitioner, Betty Rogers, a resident of California, is the widow of Will Rogers, who died testate, a resident of California, on August 15, 1935. She, and the others shown in the caption in Docket No. 84896, were appointed executors of the estate of the decedent by the Superior Court of the State of California in and for the County of Los Angeles, on September 17,1935.

During September 1927 the decedent and his wife purchased for profit certain business real estate situated in the county of Los Angeles, California, at a price of $105,000, payable as follows: $15,000 cash at the time of purchase, the assumption of a note in the amount of $52,000, which was secured by a mortgage on such property and became due and payable in 1930, and the giving of their promissory note for the balance of $38,000, secured by a trust deed on the property.

The decedent and his wife paid the $15,000 cash and prior to 1933 paid in full the $52,000 note.

The note for $38,000 and the beneficial interest under the deed of trust which secured it were transferred and assigned to the California Trust Co., a corporation. The note became due and payable on August 19, 1932.

On August 25, 1932, payment of the note and accrued interest thereon was demanded of decedent and his wife and notice was given that, unless the principal and interest were paid, the holder of such note would proceed to enforce its rights under the provisions of the deed of trust given to secure payment of it.

Thereafter it was agreed by and between decedent and his wife and the holder of the $38,000 note and trust deed that the property be conveyed by the former to the latter and that the note be canceled and surrendered. Thereafter the property was reconveyed by the Title Guarantee & Trust Co. to the decedent and his wife and on April 21, 1933, they transferred and conveyed it to the California; Trust Co., and the $38,000 note was surrendered to decedent and his wife and canceled.

In addition to the $67,000 paid by the decedent and his wife upon the purchase price of the property they also paid, prior to April 21, 1933, escrow expenses in the amount of $212.02, or a total of $67,-212.02. For the years 1927 to 1932, inclusive, they were allowed depreciation on the improvements on the property in the total amount of $13,156.77. Their total unrecovered cash investment in such property at the time of its conveyance to the California Trust Co. was $54,055.25. The decedent and his wife each sustained a loss in 1933 from the transaction in the amount of $27,027.62.

The decedent and his wife filed separate returns for 1933. They computed a loss on the transaction in the amount of $57,643.46 and each deducted one-half of that stun, or $28,821.73, as an ordinary loss, under the provisions of section 23 (e) of the Revenue Act of 1932. The respondent reduced the amount of the loss to $54,055.25, and, in recomputing the tax liability of each of them, treated the loss as a capital loss within the meaning of section 101 of the Revenue Act of 1932. The deficiencies result from respondent’s determination that the loss was a capital loss.

The pertinent provisions of the Revenue Act of 1932 are shown in the margin.

Petitioners argue that Rogers and his wife did not “have whole title to the property * * * but * * * merely an equity and a right to receive whole and complete title on completion of payment of the purchase price.” That may be true; however, the property was deeded to them subject to the indebtedness which they assumed and paid, and it is stipulated that they claimed and were allowed depreciation on the improvements on it in the total amount of $13,-156.77. The property was acquired in a transaction entered into for profit. It will be noted that “ ‘capital assets’ means property held by the taxpayer for more than two years.” Under the facts as stipulated, we think that the conclusion is inescapable that the real estate was “held” for more than two years within the purview of the statute.

Petitioners insist, however, that even though the property was a capital asset, the loss sustained upon its disposition was not a capital loss, as defined by the statute, because it was neither sold nor exchanged. Having decided that the property was a capital asset, the only remaining question is whether it was sold or exchanged.

On brief petitioners argue that when the entire transaction was completed they were left with nothing which they did not have prior to entering into the contract or purchase and that they had suffered an actual loss in the amount of $54,055.25 ($67,212.02 less $13,156.77); that in construing or interpreting a statute the ordinary meaning of the words used therein should be taken, citing Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; and that the transaction in question did not involve a “sale or exchange” within the ordinary meaning of these words because they connote an acquisition of property by the bargaining parties through the exercise of a free will to buy and sell rather than the compromise of an outstanding indebtedness, the enforced collection of which had been threatened by means of legal proceedings.

We agree with petitioners that in construing or interpreting a statute the ordinary meaning of the words used should be taken. “A sale, in the ordinary sense of the word is a transfer of property for a fixed price in money or its equivalent.” Iowa v. McFarland, 110 U. S. 471, 478. “An exchange of property is a mutual transfer of one or more pieces of property for property other than money.” 23 C. J. 184. “ ‘The distinction between a sale and exchange of property is rather one of shadow than of substance. In both cases the title to property is absolutely transferred; and the same rules of law are applicable to the transaction, whether the consideration of the contract is money or by way of barter.’ ” Hale v. Helvering, 85 Fed. (2d) 819.

Prior to the transaction here involved petitioners had paid for the real estate $67,212.02 in cash, and had given their note for $38,000 to the vendor. This note had been transferred and assigned by the vendor to the California Trust Co. It is apparent, therefore, that the real property cost petitioners $105,212.02 and this amount (less depredation allowed, $13,156.77) was their basis for gain or loss upon its sale or other disposition. We are not impressed with petitioners’ argument that when they transferred the property to their creditor they merely paid their debt of $38,000, and that therefore there was no sale or exchange. We agree that they paid a debt; but the payment of a debt does not entitle a taxpayer to a loss deduction. Petitioners’ claim for a deduction is based on the fact that they made a disposition of property and thereby sustained a loss. It can not be said that they received no consideration because then their loss would have been $92,055.25 ($105,212.02 less $13,156.77) and not $54,055.25. By reason of the transfer of the property to their creditor petitioners were released from their promise to pay $38,000, and their creditor relinquished its right to collect this amount. In our opinion the transaction should be treated either as a sale of petitioners’ right, title, and interest in the property for the price of their obligation or as an exchange of real estate for the obligation, both properties having an equal value. We prefer to regard the transaction as a sale. This view is supported by a decision of the Supreme Judicial Court of Massachusetts in Gallus v. Elmer, 193 Mass. 106; 78 N. E. 772. In that case Gallus, who conducted a butcher and grocery business, sold certain fixtures, tools, utensils, and goods used in carrying on that business to one Kopec for $500, of which $100 was paid in cash, and the balance was to be paid on June 9, 1905. On June 9 Gallus demanded payment of the amount due, which was not paid. Kopec stated.he was willing that Gallus should take all of the property in payment of the debt due, and an instrument was prepared reciting that Kopec, in consideration of $400 paid by Gallus, sold, transferred, and delivered all of the property back to Gallus. The question arose whether the transfer of the property to Gallus in payment of the debt due constituted a sale under the “Bulk Sales” act. In holding that it did the court said:

* * * While it is true that in its strictest sense a sale is a transfer of personal property in consideration of money paid or to be paid, still in the interpretation of statutes it is often held to include barter and any transfer of personal property for a valuable consideration. “In a general and popular sense, the sale of an article signifies the transfer of property from one person to another, for a consideration of value, without reference to the particular mode in which the consideration is paid.” Bigelow, C. J., in Howard v. Harris, 8 Allen 297, 299. * * *

In support of their contention that the transaction was neither a sale nor an exchange petitioners rely upon Hale v. Helvering, supra; Commonwealth, Inc., 36 B. T. A. 850; and Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95.

In Hale v. Helvering, supra, the taxpayers in 1925 sold an orange grove for the sum of $60,000. Title was transferred to the purchaser upon the payment of $20,000 in cash and the execution and delivery of $40,000 in notes secured by first mortgage. The taxpayers each reported their pro rata share of the profit upon this transaction in 1925, and paid the tax thereon. Upon maturity of the notes in 1927, the mater, although financially able to pay, refused to do so. A suit was instituted during the year 1929 to collect in the amount of $22,418.24, but prior to judgment, and during that year, a settlement was agreed to which resulted in a loss to the taxpayers of $7,497.22. In holding that the loss was an ordinary loss the Court of Appeals for the District of Columbia said:

Accepting the definitions relied upon by the petitioner as constituting the ordinary meaning of the words in question, such definitions do not include the disposition of the notes under the facts here. There was no acquisition of property by the debtor, no transfer of property to him. Neither business men nor lawyers call the compromise of a note a sale to the maker. In point of law and in legal parlance property in the notes as capital assets was extinguished, not sold. In business parlance the transaction was a settlement and the notes were turned over to the maker, not sold to him. In John H. Watson, Jr., v. Commissioner of Internal Revenue, 27 B. T. A. 463, overruling Henry P. Werner v. Commissioner of Internal Revenue, 15 B. T. A. 482, it was held that the payment at maturity, of the face amount of bonds purchased at a premium, was not a sale or exchange resulting in a capital loss. If the full satisfaction of an obligation does not constitute a sale or exchange, neither does partial satisfaction. * * *

The court held, as this Board had held, “that the compromise with the maker, who was able to pay them, of promissory notes, for less than their face value, does not constitute a sale or exchange of capital assets.”

While we agree with the court that under the facts of the Hules case the compromise of a note was not a “sale” or an “exchange”, because the property in the notes was extinguished, and not sold, we do not believe that this case is controlling of the instant proceedings. Petitioners disposed of real property. They are claiming the right to a loss deduction for the reason that the amount realized was less than the cost of the property to them. hTo compromise of a note is involved. Petitioners gave up all of their right, title, and interest in the real property for the equivalent of $38,000, and thereby reduced the amount of the loss resulting from their investment in the property by that amount. If petitioners had transferred the property for $38,000 in cash and then had used the cash to satisfy their indebtedness, it is clear that they would have made a sale of their property. We do not believe that the situation is changed where the property is transferred directly to the creditor in satisfaction of the indebtedness. Cf. United States v. Hendler, 302 U. S. 680; E. F. Simms, 28 B. T. A. 988, 1030. We do not construe the decision in the Hale case as meaning that the surrender of notes or cancellation of an indebtedness is not sufficient or proper consideration to support a sale. Many courts have held that the extinguishment of a preexisting debt may constitute a valuable consideration for a sale of property. Ferguson v. Larson (Cal.), 33 Pac. (2d) 1061; Bank of Centralia v. Chicago, Burlington & Quincy Railroad Co., 246 Ill. App. 211; David Bradley & Co. v. Kingman Implement Co., 79 Neb. 144; 112 N. W. 346; Rachman v. Clapp, 50 Neb. 648; 70 N. W. 259; Billings v. Warren, 21 Tex. Civ. App. 77; 50 S. W. 625.

In Commonwealth, Inc., supra, also cited and relied upon by petitioners, the owner of realty, subject to a mortgage, deeded the property to the mortgagee without consideration and thereby sustained a loss. We held that the loss so sustained was an ordinary loss, and not a capital loss, and, among other things, said:

* * * The purported release of liability under the mortgage was of no benefit to the petitioner, for it had no liability under the mortgage. Neither the petitioner nor its grantor assumed the mortgage liability, but took title, subject to it. Hence, there was no personal liability on the part of the petitioner. Hulin v. Veatch, 148 Or. 119; 35 Pac. (2d) 253; Metropolitan Bank v. St. Louis Dispatch Co., 149 U. S. 436; Fulton Gold Corporation, 31 B. T. A. 519. Inasmuch as there was in fact no consideration to the petitioner, the transfer of title was not a sale or exchange. The execution of the deed marked the close of a transaction whereby petitioner abandoned its title. Cf. A. J. Schwarzler Co., 3 B. T. A. 535, Greenleaf Textile Corporation,. 26 B. T. A. 737, holding that a taxpayer does not sustain a deductible loss of the value of real estate while retaining tide to it.

The instant proceedings are clearly distinguishable from Commonwealth, Inc., supra. In that case the taxpayer received nothing in consideration of the transfer of the property to the mortgagee. Here, however, the taxpayers received a consideration of $10 and “in addition * * * full satisfaction of all obligations secured by the deed of trust [the $38,000 note].” The deed recites that “the consideration received by the grantors is equal to the fair value of grantors interest in said land.”

The remaining case relied upon by the petitioners is Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra. There the taxpayer leased a warehouse for 20 years at a rental of $7,000 a month. By September 1928 the taxpayer owed its lessor $107,880.79 and was in an insolvent condition. It entered into an agreement with its lessor under the terms of which it conveyed to the latter certain property in which it had an equity of $17,507.20, and the lessor canceled the balance of the debt, charging it off as worthless. The Circuit Court of Appeals for the Fifth Circuit, in holding that the transaction did not constitute income to the taxpayer, said:

* * * The transaction was not in form or substance a sale for $107,880.77 of property which had an appraised value of $17,507.20. In effect the transaction was similar to what occurs in an insolvency or bankruptcy proceeding when, upon a debtor surrendering, for the benefit of his creditors, property insufficient in value to pay his debts, he is discharged from liability for his debts. This does not result in the debtor acquiring something of exchangeable value in addition to what he had before. There is a reduction or extinguishment of liabilities without any increase of assets. There is an absence of such a gain or profit as is required to come within the accepted definition of income. * * * It hardly would be contended that a discharged insolvent of bankrupt receives taxable income in the amount by which his provable debts exceed the value of his surrendered assets. * * * Taxable income is not acquired by a transaction which does not result in the taxpayer getting or having anything he did not have before. Gain or profit is essential to the existence of taxable income. A transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or efeate taxable income. * * *

In our opinion there is nothing in the decision of the court which is contrary to the conclusion we have reached in the instant proceedings. We are convinced that petitioners made a sale of a capital asset to their creditor. We therefore hold that the respondent’s determination that the loss sustained was a capital loss is correct.

Reviewed by the Board.

Judgment will be entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * * * * *
      (e) Losses by Individuals. — Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business. * * *
      SEC. 101. CAPITAL NET GAINS AND LOSSES.
      *******
      (b) Tax in Case of Capital Net Loss. — In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes im-pesed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12% per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.
      (c) Definitions. — For the purposes of this title— *******
      (2) “Capital loss” means deductible loss resulting from the sale or exchange of capital assets.
      * * *****
      (6) “Capital net loss” means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.
      * * *****
      (8) “Capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *


author: Black :

text:
    Cornelia V. Cecil, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79052.
    Promulgated May 19, 1938.

      Jwnius G. Adams, Esg., for the petitioner.

      John W. Smith, Esg., for the respondent.
   OPINION.

Black :

We shall first consider the deductibility during the calendar year 1931 of the North Carolina real estate taxes in the amount of $20,267.08 which petitioner paid on May 30, 1931. Section 23 (c) of the Eevenue Act of 1928 provides that in computing net income there shall be allowed as a deduction, “Taxes paid or accrued within the taxable year * * Section 43 of the same act provides:

The deductions and credits provided for in tbis title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.

Petitioner concedes that the taxes in question accrued during the year 1930, but contends that, since it had been her uniform practice for many years prior to 1931 to keep her personal books and records and to report her personal income and deductions on a cash basis and her return for 1931 was made on that basis, she was within her statutory right to deduct in 1931 that portion, namely, $20,267.08, of the $57,257.52 taxes assessed in 1930 against the Biltmore Estate property which was actually paid during 1931.

In referring to her “personal books and records” and her “personal income and deductions”, it is assumed that reference is being made to all her hooks, records, income, and deductions other than the books, records, income and deductions relating to the Biltmore Dairy Farms, the Biltmore Estate, and the Biltmore House and Gardens. In any event, we find the two classifications convenient, and will hereinafter refer to the one as personal and the other as Biltmore. An examination of petitioner’s income tax return for the calendar year 1931 (referred to in the stipulation as Exhibit A) shows that petitioner reported substantial amounts of personal income and deductions aside from the Biltmore income and deductions.

It is petitioner’s position that the real estate taxes in question formed no part of the operating expenses of Biltmore, but belonged to the personal classification instead. From this position she argues that it was perfectly proper for her to keep her personal books and records on the cash basis and her Biltmore books and records on the accrual basis, and cites as authority therefor Joseph Stern, 14 B. T. A. 838.

The respondent contends that the Stern case is inapplicable and distinguishable on the facts; that petitioner’s transactions which we have classified above as personal did not amount to a separate trade or business; that the Stem case applies only where there are separate businesses; that where both the accrual and the cash bases are used, as they are used in the instant case, the predominating basis should be adopted; that in the instant proceeding the accrual basis predominates and should have been applied to her personal transactions as well as her Biltmore transactions; and that the instant proceeding is ruled by John I. Chipley, 25 B. T. A. 1103.

In the Stern case, Joseph and Samuel Stern were partners operating under the name of Stern Brothers. The partnership operated two separate and distinct businesses, wholly different in character— one a mercantile business and the other a coal land business. The accounts of the two businesses were kept separate and distinct. The accounts of the mercantile business were kept on the accrual basis; those of the coal land business on the cash basis". This method of keeping the accounts had been regularly and consistently followed for many years. Under these circumstances we held that, since the two businesses were separate and distinct and in each case the system used reflected accurately the income received, the use of a different system of accounting for each was proper.

In the Chipley case, John I. Chipley was president of a corporation engaged in business as an automobile dealer at Wilmington, North Carolina. He was also engaged in business in his individual ■capacity as a dealer for the same make of automobile at Greenwood, South Carolina. The books in connection with his individual business were kept on the accrual basis. He had some income, not connected with his individual business and negligible in amount, which he did not accrue on his books, but he recorded it as and when received. He was also given credit on the corporation’s books for an annual salary of $12,000 as president. During the taxable year he withdrew only $1,819.92 from his salary account. Under the facts in that case we held that the accrual method overwhelmingly predominated in the keeping of Chipley’s books and, therefore, he should have reported in his gross income the full amount of the $12,000 salary which was credited to his account on the books of the corporation, and not merely the $1,819.92 which he withdrew in cash from his salary account with the corporation.

The instant proceeding is distinguishable, we think, from the Chipley case. There, the items not connected with the individual’s separate business were negligible and regarded by us as insignificant. Here, petitioner’s personal income reported on her return, aside from her Biltmore income, amounted to $168,264.15, exclusive of $173,-609.67 reported as tax exempt interest. These items were numerous and not insignificant. They were separate and distinct from the Biltmore items. The books in connection with the personal items were kept and the income was returned on a cash basis. The books in connection with the Biltmore items were kept and the income was returned on the accrual basis. This had been petitioner’s uniform practice for many years. We think the principles applied in the Stem case apply here. We do not think it makes any difference in this case whether petitioner’s personal transactions amounted to a separate business. We hold, therefore, that it was proper for petitioner to report her personal items on the cash basis and her Biltmore items on the accrual basis, but this holding does not decide the issue in petitioner’s favor.

We do not agree with petitioner’s position that the real estate taxes in question formed no part of the operating expenses of Biltmore but belonged to the personal classification instead. It was stipulated that these taxes were for the property tax year 1930-1931, and that they were assessed against the Biltmore Estate property. It is, therefore, our opinion that they should be taken into account on the same basis that all the other items of Biltmore are accounted for, namely, on an accrual basis.

Undoubtedly if these taxes had been an expense of the dairy business, they should have been treated on an accrual basis, for the books of that business were admittedly on the accrual basis, but it has been stipulated that “no part of said taxes were paid by or charged to the business owned and conducted by the petitioner under the name of Biltmore Dairy Farm.” However it has also been stipulated that “The books of the Biltmore Dairy Farms, Biltmore Estate and Biltmore House and Gardens were kept, and the income and deductions were returned, on an accrual basis, and all the balance of petitioner’s books and accounts were kept, and the income returned, on a cash basis.” Therefore it appears plain that all income and deductions, except taxes, connected with the Biltmore Estate were treated by petitioner on an accrual basis. Petitioner concedes that the $57,257.32 taxes assessed in 1930 against the Biltmore Estate property accrued as a liability against petitioner in 1930. Therefore in view of the stipulation that the books of the Biltmore Dairy Farms, Biltmore Estate, and Biltmore House and Gardens were kept and the income and deductions returned on an accrual basis, we think the taxes in question must be treated on the same basis. We, therefore, sustain the Commissioner in his disallowance of $20,267.08 taxes which were paid by petitioner on the Biltmore Estate property in *1931 but had accrued in 1930. If the taxes had been on other property which petitioner owned not connected with the Biltmore Estate, the answer might be different. In fact the statement attached to the deficiency notice shows that, of the $79,024.56 taxes claimed as a’ deduction by petitioner on her return, $58,757.48 has been allowed as a deduction and only the $20,267.08 which the Commissioner determined accrued against the Biltmore Estate property in 1930 has been disallowed.

The second issue is whether petitioner is entitled to deduct from her gross income for the year 1931 certain additional expenditures, aggregating $36,309.18, which were incurred and paid during that year as being incident to and necessary in the operation of the Bilt-more Estate and the Biltmore House and Gardens. If allowable, authority for the allowance must be found in section 23 of the Revenue Act of 1928, the pertinent part of which is as follows:

SEC. 23. DEDUCTIONS PROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.

Petitioner did not claim the additional expenditures aggregating $36,309.18 as a deduction in her 1931 income tax return. The issue was properly raised by an amendment to the petition filed in the present proceeding. The additional expenditures of $36,309.18 are itemized in the stipulation of facts herein previously set forth, and are in addition to the $44,460.07 representing salaries, wages, and sundry items of expense incurred and paid in connection with the exhibition of the Biltmore House and Gardens. The latter amount of $44,460.07 was deducted by petitioner in her return for the year 1931 and was allowed by the respondent. Petitioner in her return reported as a part of her gross income the amount of $41,286.73 as representing $38,653.50 from admissions to the landscaped portion of the Biltmore Estate and the Biltmore House and Gardens and $2,633.23' from sales of views of Biltmore Estate and Biltmore House and Gardens.

The respondent in his brief has divided the Biltmore Estate into three separate departments, namely, (1) Biltmore Dairy Farms, (2) Biltmore House and Gardens, and (3) landscape department. He concedes, and it is so stipulated, that the Biltmore Dairy Farms is a separate trade or business. The income and deductions of the Biltmore Dairy Farms are not in controversy in this proceeding.

The deductibility of the expenditures aggregating $44,460.07 is likewise not in issue between the parties, although, as will appear later, it is hard to reconcile the respondent’s allowance of this item and his refusal to allow the item of $36,309.18. The respondent epitomizes his entire argument by the single statement that the ownership and maintenance of the Biltmore Estate “as a whole” is not a trade or business within the meaning of section 23 (a) of the Revenue Act of 1928. In his brief, “Respondent denies that petitioner is entitled to the deduction of $36,309.18 for the reason that the ownership and operation of the Biltmore Estate, exclusive of the Dairy Farms, is not a trade or business within the meaning of Section 23 (a), sufra, and the allocated sum of $36,309.18, or any part thereof, does not qualify as ‘ordinary and necessary’ expenses paid or incurred during the taxable year 1931 in carrying on any trade or business for profit within the purview of said section.” If the only department of the Biltmore Estate to be recognized as a trade or business is the Biltmore Dairy Farms, then it is difficult to find the authority for allowing the $44,460.07 which respondent has allowed as an ordinary and necessary expense paid or incurred during the taxable year. It was stipulated that the $44,460.07 was “incurred and paid in connection with the exhibition of the Biltmore House and Gardens.” It was also stipulated that the $36,309.18 was incurred and paid and was incident to and necessary in the operation of the “Biltmore Estate and Biltmore House and Gardens.” The only difference between the two items is that the $44,460.07 was applicable only to department (2), whereas the $36,309.18 was applicable to departments (2) and (3). The admission fees paid by the public, which constituted over 93 percent of the gross receipts, were for admissions to both departments (2) and (3). The respondent in his brief explains the allowance of the $44,460.07 item as follows:

There is no question but that the receipts amounting to $41,286.73, received from the public for the privilege of visiting the Biltmore Mansion and Gardens are taxable as gross income, as defined by Sec. 22 (a), Rev. Act of 1928, 45 Stat. 791, and respondent has reciprocated petitioner’s generosity in permitting petitioner to deduct from gross income for 1931 the sum of $44,460.07, made up by specific items of expenses absolutely necessary and incident to opening the mansion and grounds to visitors.

We doubt if there is any material distinction between the expenditures aggregating $44,460.07 and the expenditures in question aggregating $36,309.18. It does not follow, however, that because the respondent has allowed the former we must allow the latter. What he has done in a matter which is not before us does not control our decision in a matter which is before us.

Is petitioner entitled to deduct the amount of $36,309.18 in question under section 23 (a), supra? The answer depends upon whether the opening of the landscape portion of the Biltmore Estate and the Bilt-more House and Gardens to the public as a museum at fixed admission charges amounted to the “carrying on of any trade or business” as that term is used in the statute. Whether one is engaged in the carrying on of a trade or business has been adjudicated in many cases. A few of the leading cases are Plant v. Walsh, 280 Fed. 722; Wilson v. Eisner, 282 Fed. 38; Thacher v. Lowe, 288 Fed. 994; Flint v. Stone Tracy Co., 220 U. S. 107, 171; Deering v. Blair, 23 Fed. (2d) 975; Commissioner v. Widener, 33 Fed. (2d) 833; Hutchings v. Burnet, 58 Fed. (2d) 514; Doggett v. Burnet, 65 Fed. (2d) 191; Commissioner v. Field, 67 Fed. (2d) 876; Chaloner v. Helvering, 69 Fed. (2d) 571; Whitney v. Commissioner, 73 Fed. (2d) 589; Croker v. Helvering, 91 Fed. (2d) 299. In all the cited cases, with the possible exception of some obiter dictum in Plant v. Walsh, supra, one of the material tests to be applied is whether one intends to make a profit. “Unless you can find that element it is not within the statute * * Thacher v. Lowe, supra. A person’s transactions will not be excluded from the classification of business merely because they result in loss instead of profit if the honest intention to make a profit is present. Deering v. Blair; Commissioner v. Widener; Commissioner v. Field; Whitney v. Commissioner; all supra. The rule was stated in Doggett v. Burnet, supra, as follows:

The proper test is not the reasonableness of the taxpayer’s belief that a profit will be realized, but whether it is entered into and carried on in good faith and for the purpose of making a profit, or in the belief that a profit can be realized thereon, and that it is not conducted merely for pleasure, exhibition, or social diversion.

The stipulation, and that is all the evidence that we have, is silent as to any intention on petitioner’s part to make a profit out of the exhibition. In Exhibit C, which is attached to the stipulation and is a printed description, together with a few pictures of the Biltmore House and Gardens and Biltmore Estate, it is stated that “An admission charge is made, estimated as sufficient to defray the expenses of opening the house and grounds to the public.” From this statement it would seem that all petitioner intended to do was to try to break even. It does not show an intention to operate for a livelihood or profit.

A considerable portion of the stipulation and of the respondent’s brief was devoted to the question of whether petitioner had abandoned the estate as a residence. We do not think this is of prime importance. Even if petitioner had continued to reside on the estate, she could still have operated a part of it as a business, and did unquestionably do so as to the Biltmore Dairy Farms.

On the primary question our holding must be that in opening this imposing estate and grounds to the public as a museum and park at a nominal admission fee, estimated as sufficient only to defray the expenses, there was no unqualified intention on petitioner’s part to operate for profit. We therefore find that the Biltmore Estate, aside from the Biltmore Dairy Farms, was not a trade or business as that term is used in section 23 (a) of the Revenue Act of 1928. It follows that petitioner is not entitled to deduct the additional deduction claimed in her amendment to the petition.

Reviewed by the Board.

Decision will be entered for the respondent.

Arundell, Smith, and Van Fossan dissent.


author: Smith :

text:
    Ernest A. Cronin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88279.
    Promulgated. May 19, 1938.

      Roy K. Dietrich, Esq., for the petitioner.

      James 0. Maddox, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in gift tax for 1935 in the amount of $237.88.

Petitioner alleges that the respondent erred in the determination of the deficiency as follows:

(a) The Commissioner of Internal Revenue was in error in determining that the value of a transfer by gift of property, to-wit, $25,000.00, Provident Mutual Life Insurance Company Single Premium Life Insurance Policy No. 715768, irrevocably assigned to donor’s daughter on December 30, 1935, was its cost at time of such assignment, to-wit, $17,923.25, and not as petitioner claims and as is provided by the very terms of the contract of insurance itself, namely, the cash surrender value at the time of any assignment or transfer, plus the prepaid insurance, if any, to the date of the gift, to-wit, $16,237.50.
(b) The Commissioner of Internal Revenue was in error in determining that the value of a transfer by gift of property, to-wit $25,000.00, Provident Mutual Life Insurance Company Single Premium Life Insurance Policy No. 715770, irrevocably assigned to donor’s daughter on December 30, 1935, was its cost at time of such assignment, to-wit, $17,923.25, and not as petitioner claims and as is provided by the very terms of the contract of insurance itself, namely, the cash surrender value at the time of any assignment or transfer, plus the prepaid insurance, if any, to the date of the gift, to-wit $16,237.50.

The deficiency notice upon the basis of which this proceeding was brought reads in part as follows:

Reference is made to your protest of July 23, 1936, filed with the Internal Revenue Agent in Charge, St. Louis, Missouri, which was made the subject of a conference in that office relative to the deficiency of $237.88 in your Federal gift tax liability for the calendar year 1935.
Tour protest is directed against the increase in value of the two insurance policies returned in items 1 and 2 of Schedule A. Tou contend that the Bureau’s action in determining the value of these policies in accordance with the provisions of Regulations 79 (1936 Edition) relating to gift tax under the Revenue Act of 1932, as amended and supplemented by the Revenue Acts of 1934 and 1935 was erroneous for the reason that the values returned were based upon information supplied by the insurance companies, computed in accordance with the provisions of Regulations 79, promulgated October, 1930, which applied in the case of the assignments in question.
An examination of the evidence on file discloses that the two policies under consideration are single premium policies. You are advised that Regulations 79 (1936 Edition) applies to all gifts made in 1935. You are further advised that in the ease of a gift of a single premium policy, the value of such gift is the equivalent of what such policy would cost as of the date of assignment for the amount of insurance as paid up, including paid-up additional insurance, if any, due to the accumulation of dividends. It should be noted in this connection that this method of valuing a single premium policy has been used since the Gift Tax Act of 1932 has been in effect and, therefore, was incorporated as a part of the revised regulations.
Accordingly, the adjustments set forth in Bureau letter of June 25, 1936, resulting in a proposed deficiency of $237.88, are hereby affirmed.

The essential facts have been stipulated.

The petitioner is a resident of Kansas City, Missouri.

On October 2, 1933, the petitioner, then 61 years of age, took out life insurance policies Nos. 715768 and 715770 on his own life with the Provident Mutual Life Insurance Co. of Philadelphia, Pennsylvania. Both were single premium life policies and the cost to the petitioner of each policy was $17,259.50. In each policy the beneficiary named was petitioner’s daughter, Katharine Cronin, if living; otherwise the proceeds were to be paid to his executors, administrators, or assigns. The petitioner reserved the right to revoke and to change the beneficiary.

Under “General Provisions” each policy provided as follows:

Dividends. — The proportion of divisible surplus accruing upon this Policy (hereinafter called Dividends) shall be ascertained by the Company yearly.. At the end of each policy year the Dividends apportioned to this Policy shall be, as the application for this Policy may direct, either (a) payable in cash, or (b) used to purchase participating Paid-Up Additions to this Policy, or (c) left to accumulate to the credit of this policy with interest at such rate as the Company may each year declare but never less than the yearly rate of three and one-half per cent, payable with the proceeds of this Policy or withdrawable in cash at any time on demand. If no direction for the disposition of Dividends shall be made, they will be held to accumulate under clause (e) or applied as may be otherwise required under the laws of the State in which this Policy is delivered. The disposition of current and subsequent Dividends may be changed by a written direction filed with the Company at its Home Office not later than thirty-one days after the end of any policy year. The Insured, without the joinder or consent of any revocably designated Beneficiary or any irrevocably designated Beneficiary not an absolute owner of this Policy, may make such written direction and may receive, upon execution of the proper receipts, all Dividends payable under clause (a) or withdrawable under clause (c). When the sum of the cash value of this Policy and any accumulated Dividends withdrawable under clause (c) shall equal the face amount of this Policy, the Company, upon written request at that time of all parties in interest, will pay the face amount of this Policy less all indebtedness on this Policy.
* * * * # * *
Non-Forfeiture md Down Provisions:
(a) Gash Value. — Upon surrender of this Policy on any anniversary of its date by all parties in interest, the Company will pay the cash value of this Policy less all indebtedness on this Policy.
The cash value of this Policy is the then reserve hereon (omitting fractions of a dollar per one thousand of insurance) increased by the cash value of any outstanding Paid-Up Additions and diminished by a surrender charge from the first to the ninth policy years inclusive not exceeding the following percentages of the face amount of this Policy: for the first and second policy years l%o per cent; for the third policy year l%o per cent; for the fourth policy year l%o per cent; for the fifth policy year 1 per cent; for the sixth policy year %o per cent; for the seventh policy year %o per cent; for the eighth policy year 4Ao per cent; for the ninth policy year 2Ao per cent. The cash value of any Paid-Up Additions shall be the then reserve thereon, provided, however, that the cash value of any Paid-Up Additions shall not be less than the Dividends used in purchase thereof.

Each policy provided farther that its cash or loan value after it had been in force for two years was $647 per $1,000.

On December 26,1935, the petitioner executed an instrument, called “Change of Beneficiary and Election of Method of Settlement,” which reads as follows:

I, Ernest A. Cronin, do hereby irrevocably change the Beneficiary or Beneficiaries under Policies Nos. 715768 and 715770 issued on my life by Provident Mutual Life Insurance Company of Philadelphia, to the persons, in the manner and upon the terms, conditions and contingencies hereinafter set forth, hereby relinquishing all rights, privileges and incidents of ownership in said Policies:
First : If the proceeds of said Policies or either thereof shall become payable by reason of my death, the Company shall retain and make settlement of the aggregate proceeds of said Policies so becoming payable as follows:
(a) If my daughter, Katharine Cronin (born April 24,1921), shall be living at my death, the Company shall retain said proceeds under Option 1 contained in said Policies and pay interest thereon monthly to my said daughter if living when said interest payments shall respectively become payable, without right of withdrawal, but with right in her at any interest payment period after she shall have attained age twenty-five to direct that interest payments to her shall cease and that the Company shall apply said proceeds so as to provide an income to said daughter during her remaining lifetime, with income payments certain for ten, fifteen or twenty years, as said daughter may at that time designate, the amount of each income payment to be 103% of the annuity which the sum so applied would purchase on the basis of the Company’s single premium rates then in effect for a life annuity of the kind elected, adjusted to provide for the immediate payment of the first income payment.
(b) If my said daughter shall be deceased at my death, or shall thereafter die while receiving interest or income payments certain, the Company shall at the death of the survivor of my said daughter and me pay said proceeds, together with any accrued interest thereon, or the commuted value of any then unpaid income payments certain, as the case may be, share and share alike, to the then living lawful children of my said daughter, and in default of a then living lawful child of my said daughter to her Executors or Administrators. The words “child” and “children” as used herein shall not include a grandchild or grandchildren or more remote descendants.
Second : Any moneys which may become payable to a minor hereunder shall be paid only to the legally appointed guardian of such minor.
Third: The Company, in determining the persons comprising any class mentioned in this instrument, or any facts relating to any persons or beneficiaries mentioned in this instrument, either as a class or otherwise, their names, addresses, ages and dates of death may rely solely upon an affidavit by any one of said persons or beneficiaries and is hereby relieved and discharged from all liability and responsibility in making payments in accordance therewith.
Fourth : To the extent permitted by law, it is hereby provided that no beneficiary entitled under the terms of this instrument to receive any part of the proceeds of said Policies or any interest, installment or other payment shall be permitted to commute, anticipate, encumber, alienate or assign the same or any part thereof except as may be otherwise expressly provided herein and that no interest, principal or other payments under this instrument shall be in any way subjected to such beneficiary’s debts, contracts or engagements nor to any judicial processes to levy upon, subject or attach the same for payment thereof.
Fifth: Any Method of Settlement heretofore elected under said Policies or either thereof is hereby revoked and superseded.
Sixth : This instrument is subject to all the terms and conditions contained in said Policies and the Optional Methods of Settlement therein not inconsistent with the terms and conditions hereof.
Executed this 26th day of December 1935.
Executed in the presence of—
F. P. Logan, Jr. Ernest A. Cronin [seal]

The Provident Mutual Life Insurance Co. of Philadelphia accepted this instrument under date of December 30, 1935, stating: “It Is Hereby Agüeed that Settlement under said Policies shall be made in accordance with the foregoing Change of Beneficiary and Election of Method of Settlement.”

The cash surrender value of each policy on December 30, 1935, was $16,237.50. This amount was returned by the petitioner as the value of the gift of each of the policies in the gift tax return which he filed for the calendar year 1935. In determining the deficiency herein the respondent increased the value of each policy as reported in the gift tax return to $17,923.25, which is the amount each would have cost the petitioner if taken out by him on December 30, 1935.

The only question submitted for our determination in this proceeding is the value for gift tax purposes of the two above described insurance policies on December 30, 1935, the date on which the company approved the action of the insured in irrevocably naming his daughter as beneficiary of both policies.

Pursuant to his regulations, article 2 (5) of Regulations 79, the respondent determined that the naming of the beneficiary of the policies without reservation of a power to revoke constituted a gift on which the petitioner is subject to the gift tax imposed by the Revenue Act of 1932, and that the value of the gift is the amount that similar policies would have cost the insured at that time.

The following provisions of the Revenue Act of 1932 are applicable:

SEO. 5 01. IMPOSITION OP TAX.
(a) For tbe calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift.
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *
(c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but -the relinquishment or termination of such power (other than by the donor’s death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of snch income by gift.
SEO. 506. GISTS MADE IN PROPERTY.
If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.

The pertinent provisions of Kegulations 79 are as follows:

Aet. 2. Transfers reached. — The statute imposes a tax whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible, or intangible. Thus, for example, a taxable transfer may be effected by the declaration of a trust, the forgiving of a debt, the assignment of a judgment, the assignment of the benefits of a contract of insurance, or the transfer of cash, certificates of deposit, or Federal, State, or municipal bonds. * * * Inasmuch as the tax also applies to gifts indirectly made, all transactions whereby property or property rights or interests are donatively passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax. In the following examples of transactions resulting in taxable gifts, it will be understood that the transactions occurred after the date of the enactment of the statute (June 6, 1932), and were not for an adequate and full consideration in money or money’s worth:
*******
(5) If the insured assigns a life insurance policy, or designates a beneficiary in such a policy, but does not retain what amounts to a power of revocation (as, for example, the right to surrender or cancel the policy, the right to obtain a loan against the policy or its surrender value, or a right to change the beneficiary or assignee, if by the exercise of such latter right the proceeds of the policy might be made payable to the insured, his estate, or otherwise for his benefit), such assignment or designation constitutes a gift, even though the right of the assignee or beneficiary to receive the proceeds is conditioned upon his surviving the insured. * * *
Abt. 19. Valuation of property. — (1) General. — The statute provides that if the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift. The value of property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * *
*******
(9) Life Insurance and Annuity Contracts. — The value of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. * * *
*******
Example: A donor owning a life insurance policy on which no further payments are to be made to the company, (e. g., a single premium policy or paid-up policy) makes a gift of the contract. The value of the gift is the amount which the company would charge for a single premium contract of the same specified amount on the life of a person of the age of the insured.

Tib question is raised in the pleadings as to petitioner’s liability for a gift tax on the transaction, and we shall therefore assume that such liability exists, as the respondent has determined, and limit our inquiry to the question of the value of the policies on the given date in accordance with the allegations of error contained in the petition, as set out above.

The statute prescribes no particular method for determining the value of insurance policy contracts as distinguished from other property. It provides simply that the value of the gift for estate tax purposes is the value of the property given at the date of the gift. The value of property at any given date is a question of fact to be determined from all the attendant circumstances. The respondent’s determination of the value of the policies here involved on December 30,1935, admittedly was made in accordance with article 19 of Regulations 79 above, and if the regulation is sound the respondent’s determination must stand.

The Commissioner’s regulations ordinarily are to be given great weight by the courts, particularly where they relate to administrative matters or where they undertake to construe or clarify an ambiguous statute. United States v. Hermanos y Compania, 209 U. S. 337; Maryland Casualty Co. v. United States, 251 U. S. 342; Koshland v. Helvering, 298 U. S. 441. On the other hand, the Supreme Court has said that a regulation which does not carry into effect the will of Congress as expressed by the statute but “operates to create a rule out of harmony with the statute, is a nullity.” Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129.

A regulation to be valid must not only be consistent with the statute, but must be reasonable. International Railway Co. v. Davidson, 257 U. S. 506.

In Helvering v. Taylor, 293 U. S. 507, the Supreme Court said:

* * * The fact that the Commissioner’s determination of a deficiency was arbitrarily made may reasonably be deemed sufficient to require the Board to set it aside. Cf. Appeal of Bruce & Human Drug Co., 1 B. T. A. 342; Appeal of Acorn Refining Co., 2 B. T. A. 253; Appeal of Index Notion Co., 3 B. T. A. 90.

Where the statute sets up the value of property at the date of the gift as the measure for the tax liability, we do not think that it is within the province of the Commissioner to prescribe by regulation a restricted method for determining the value of any particular class of property.

The respondent’s valuation of the insurance policies here under the method prescribed in the quoted regulation is at best arbitrary and inconclusive. The cost of a similar new policy may be more or less than the present value of an existing policy, depending on factors which the regulation disregards. Premium rates might increase or decrease from year to year without affecting the value of an existing policy. The age and physical condition of the insured are also factors that would enter into the cost of a new policy.

Since, as we believe, the respondent’s method of determining the value of the policies in question was erroneous, we can not accept the result which he has reached as prima facie correct if there is any substantial evidence upon which a different value may be determined. Cf. Reinecke v. Spalding, 280 U. S. 227; Alexander Sprunt & Son, Inc. v. Commissioner, 64 Fed. (2d) 424.

It has been stipulated that the cash surrender value of the policies in question on December 80, 1935, was $16,237.50 each. While their cash surrender value does not conclusively establish their market value, Lucas v. Alexander, 279 U. S. 573, it is nevertheless substantial evidence of market value and it is the only evidence of value which the record offers, except for the further stipulation as to what would have been the cost of similar new policies.

In Lucas v. Alexander, supra, the Supreme Court found on the evidence of record in that case that two endowment life insurance policies had a value greater than their loan or cash surrender value. The policies there “participated in the surplus of the company and ‘dividends’ properly allocable to each were set aside or ascertainable on its books each year, but were payable only at the end of the tontine period of 20 years and only to holders of policies still in force at that time.” The Court said in its opinion:

It is familiar knowledge that the source of dividend accumulations upon insurance policies is interest upon investments of the company and savings effected from estimated future expenses and from death payments covered by premiums, with appropriate “loadings” to give a margin of safety, which the policyholders have paid. In accordance with the usual practice of life insurance companies, under the system of accounting employed by the insurer in the present case, the amount of reserve set aside by the company to meet its policy liability and dividend accumulations provisionally apportioned to each policy was ascertained or ascertainable on the books of the company at the end of each year. During the policy year which included March 1, 1913, the insurance reserve liability thus ascertained on each of the present policies was $40,600 and the dividend accumulation on each, which both courts below found had accrued on March 1, 1913, was $6,800, making a total of reserve and accumulations applicable to each policy of $47,400. These items with subsequent annual additions totaled, at the maturity of each policy, for the former $50,000 and for the latter $10,398.50, which, taken together, made up the total payment received by the taxpayer on each policy. They constitute a complete record and determination of the actual economic gain annually accruing upon the policies which was ultimately realized by the taxpayer, and they provide an adequate basis for ascertaining the proportion of the total value realized which had accrued on March 1, 1913. * * *

In the instant case the policies had no tontine feature. The earnings of the company were apportioned to the policies each year and were reflected in their cash surrender value. There are no other terms or conditions stated in the policies which appear to give them any greater or less actual value than their cash surrender value.

The value of property at a given date has been generally accepted to be the price at which the property would change hands between a willing buyer and a willing seller. See Walls v. Commissioner, 60 Fed. (2d) 347; Williams v. Commissioner, 45 Fed. (2d) 61; Helvering v. Wulbridge, 70 Fed. (2d) 683. The parties have stipulated that the cash surrender value of each of the policies in question was $16,237.50. This fact is the best evidence before us of the value of the policies at the date of the gift and is sufficient, we think, to overcome the presumption attaching to the respondent’s determination that the policies had a value in excess of that amount. There is nothing in the evidence to indicate that a greater price than their surrender value to the issuing company would have been paid for them by any one else.

We therefore determine on the evidence before us that the value of the policies at the date of the gift was $16,237.50 each, as reported by the petitioner in his gift tax return.

Reviewed by the Board.

Judgment will be entered under Bule BO.

Sternhagen, Black, Mellott, and Disney dissent.


author: MuRdock:

text:
    The Olean Times-Herald Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86897.
    Promulgated May 20, 1938.

      James P. Quigley, Esq., for the petitioner.

      V. F. Weehley, Esq., and P. A. Bayer, Esq., for the respondent.
   OPINION".

MuRdock:

The only issue is whether or not the Commissioner erred in disallowing a deduction of $15,573.41 as obsolescence on the Herald building for 1933. Section 23 (k) of the Revenue Act of 1932 permits the deduction of “a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” Those deductions are for the purpose of permitting a taxpayer to recover the cost of its property out of its earnings as the property is used up in- its trade or business. The total of the deductions plus the salvage value at the end of the useful life of the property should equal the cost of the property. The computation of a proper deduction for any year requires knowledge of certain factors, the first of which is the cost of the property. The Commissioner contends that the cost of the Herald building has not been shown. He concedes that the petitioner’s basis for gain or loss on the building and for depreciation is the same as the basis of its predecessor, the Herald, Inc., but he claims that the cost of the property to the Herald, Inc., has not been shown.

A deduction for the physical wearing out of a building is based upon the estimated physical life of the building. “A deduction for obsolescence can be allowed only where there is substantial reason to believe that the assets will become obsolete prior to the end of their ordinary useful life.” Frederick C. Renziehausen, 8 B. T. A. 87; affd., 31 Fed. (2d) 675; affd., 280 U. S. 387. “Obsolescence as used in tlie statute is tlie state or process of becoming obsolete, and tbe provision allowing a deduction tberefor is intended to care for losses of capital which take place over a longer period than the taxable year.” Tennessee Fibre Co., 15 B. T. A. 133; William Zakon, 7 B. T. A. 687. Thus, it is necessary for one claiming such a deduction to establish a period longer than the taxable year over which period the asset is becoming obsolete and at the end of which period it will be obsolete. There must be some identifiable event marking the beginning of the period and indicating that at the end of the period the property will have become obsolete.

The evidence in this case does not show that any event happened in 1933 which indicated that at some time after 1933 the building in question would become obsolete. No period of obsolescence is established. There is no evidence from which a rate could be determined and the cost of the building is in doubt. The part of the building used for printing newspapers had not been used since 1931. The officers of the petitioner in 1933 simply decided that they would have no further use for the Herald job printing plant, so they dismantled it. The value and usefulness of the building was really the same at all times after January 1, 1932. Although the building had been constructed especially for a printing plant, it could be put to other commercial uses. A purchaser was found in 1935 who converted it to other uses at a cost of about $2,500. It was not abandoned in 1933, but was put up for sale. The petitioner has failed to show that the Commissioner erred in disallowing the deduction. Cf. White Star Line, 20 B.T.A. 111; W. H. Haskell, 7 B. T. A. 697; Greenleaf Textile Corporation, 26 B. T. A. 737; affd., 65 Fed. (2d) 1017.

The petitioner in its brief attempts to claim a much larger deduction on the theory that the building became completely obsolete in 1933 and the difference between the basis and $15,000, the amount which was obtained later for the land and building should be deducted for that year. That issue is not pleaded and consequently is not properly before the Board. A deduction on account of loss is entirely different from a deduction on account of obsolescence. No loss deduction can be allowed unless the property is discarded, abandoned, or sold. Celluloid Co., 9 B. T. A. 989. The sale of the. property in question took place in 1935. If there was a loss prior to the sale, then it took place prior to 1933. Statements by counsel would indicate that when the sale took place in 1935 the petitioner benefited from the loss only to the extent of $2,000, since the loss was a capital loss and there were no capital gains which it could offset. That circumstance, although unfortunate, is no reason for allowing a deduction for obsolescence in a prior year.

Decision will be entered for the respondent.


text:
    Income Syndicate, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88321.
    Promulgated May 24, 1938.

      Elmer P. Bromley, Esq., and H. E. LindersmMh, Esq., for the petitioner.

      J. E. Marshall, Esq., and B. D. Daniels, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner made several adjustments to the net income shown by petitioner’s return for the fiscal year ended September 30,1934, and determined a deficiency in income tax amounting to $346.88. It is conceded by the petitioner that all, except one, of the adjustments were properly made. The sole issue submitted for our determination is whether or not the Commissioner erred in adding to petitioner’s income $2,522.46 as “Profits not reported” in connection with the condemnation of a portion of its property.

The facts were stipulated and, summarized, are as follows:

The petitioner is a California corporation, with its principal place of business at Los Angeles, California. On July 10, 1928, it was the owner of the following described real estate located in the City of Los Angeles, County of Los Angeles, State of California:

Lot)3 7, 8, 9,10, 33, 34, 35 and 36, in Block 4, Amended Map of the Subdivision of the Eastern portion of the Jeffries Tract, as per map recorded in Book 29, page 44, Miscellaneous Records of said County, which lots constitute one contiguous area.

The total purchase price of said property was $36,420.58. The property contained 24,515.30 square feet, the cost per square foot being $1.4856.

On or about July 10, 1928, the city of Los Angeles commenced condemnation proceedings by which it sought to, and did, condemn and acquire certain real property for the widening and laying out of Dayton Avenue and Figueroa Street in the city of Los Angeles, including 1,969.10 square feet of the above described property, the proportionate cost to petitioner of which was $2,925.29. Thereafter, pursuant to judgment in said condemnation proceedings, the city of Los Angeles paid, on June 28, 1934, to petitioner on account of the 1,969.10 square feet condemned the amount of $5,447.75.

The cost of such public improvement was paid by special assessment levied against the real property lying within the bounds of a special assessment district created for such purpose under and pursuant to the statutes of California. The portion of the above described property which was not condemned, and which petitioner thereafter continued to own and possess, was within the special assessment district. There was assessed upon such remaining property the sum of $4,670.58 as the proportionate cost of the improvement. The special assessment of $4,670.58 was not paid by the petitioner in 1934 nor was it used as an offset against the award of $5,447.75. However, pursuant to ordinance of the city of Los An-geles, and an act of the Legislature of California (Deering’s General Law, Art. 855), bonds were issued by the city of Los Angeles covering the amount of the assessment levied against petitioner’s property, which bonds constituted, and do now constitute, a first lien on such real property. The bonds are for a term of nine years from and after July 2,1934, and bear interest at 7 percent per annum, the principal being payable in nine equal annual installments.

The respondent determined that the gain realized by petitioner upon receipt of the award in 1934 was the difference between the amount of the award of $5,447.75 and the cost of the 1,969.10 square feet condemned of $2,925.29, or $2,522.46.

The petitioner contends that the special assessment of $4,670.58 should be deducted from the amount of the award in computing taxable gain or loss. The respondent concedes that petitioner’s contention is supported by Wolf v. Commissioner, 77 Fed. (2d) 455; Christian Ganahl Co. v. Commissioner, 91 Fed. (2d) 343; certiorari denied, 302 U. S. 748; and Central & Pacific Improvement Corporation v. Commissioner, 92 Fed. (2d) 88. The rule of the above cases, which this Board followed in Calvin C. Green, 37 B. T. A. 25; Jamieson Associates, Inc., 37 B. T. A. 92; and Palladium Amusement Co., 37 B. T. A. 149, is that the condemnation of land for public purposes and the levying of special assessments covering the cost thereof are one transaction and the result should be treated as an entirety, i. e., the award should be reduced by the amount of the assessment. If the condemnation and assessment must be regarded as one transaction the fact that the payment of the assessment by the petitioner was postponed is immaterial. Although the petitioner received the full award, the assessment was paid to the city from the proceeds of the bonds issued against its property which was not condemned, the city thus, in effect paying only the difference between, the award and the assessment. The difference between the award and the assessment is less than the cost of the portion of the land condemned. The petitioner therefore realized no gain on the transaction.

We hold that the respondent erred in including the above amount in petitioner’s income.

Decision will be entered under Rule 50.


author: Aenold :

text:
    Olive Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83198.
    Promulgated May 26, 1938.

      Hugh W. McOulloeh, Esq., and Ned P. Veatch, Esq., for the petitioner.

      Olay C. Holmes, Esq., and Edwa/rd L. Weber, Esq., for the respondent.
   OPINION.

Aenold :

Section 25 (c) of the Revenue Act of 1932 provides that there shall be allowed for the purpose of the normal tax, but not for the surtax, a personal exemption credit of $2,500 in the case of “the head of a family.” Section 25 (b) of the Revenue Act of 1934 provides the same personal exemption for the head of a family, but allows the credit for the purposes of the normal tax and the surtax. There is no statutory definition in either of those acts of the “head of a family.”

Article 292 of Regulations 77 and article 25-4 of Regulations 86 interpret the statutory phrase “head of a family” to mean “one who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, * * * and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.” Article 292 and article 25-4 being identical, we have set forth in the margin the provisions of article 292. Prior decisions of this Board have considered the above definition and have held that it was a fair interpretation of the statute, and had the force and effect of law. Alfred E. Fuhlage, 32 B. T. A. 222; affd., per curiam, Helvering v. Fuhlage, 79 Fed. (2d) 998. See also Marry H. Walton, 37 B. T. A. 620, and cases cited.

Petitioner has attempted to bring herself within the above definition by showing that she actually supported and maintained a home for her mother before and after commitment, and that in addition she partially supported and maintained her mother during the taxable years. It is stipulated that Mary White was “maintained and treated” at the expense of the State while in the hospital, but petitioner has testified that additional maintenance was necessary on her part in order to supplement the maintenance provided by the state. She has estimated that this additional maintenance cost her on an average of $60 a month during the taxable years, and we have set forth in our findings the articles purchased and the expenses of the petitioner in providing and caring for her mother while the latter was in the hospital.

The evidence indicates that petitioner’s mother was maintained and partially supported both by the State of Illinois and by her daughter, the petitioner herein. Assuming that the per capita cost of maintenance during the taxable years was comparable with the per capita cost as indicated in the handbook of information of the Elgin State Hospital, it appears that petitioner expended more for the maintenance, support, and care of her mother than was expended by the state. If, therefore, this proceeding is to turn upon the relative amounts expended by the contributors to the maintenance of Mary White, the petitioner should be considered her mother’s chief support.

The regulations recognize that there need not be continuous, actual residence together if circumstances justify the separation and there is a necessity for continuously maintaining the dependent elsewhere. The record here fully establishes the necessity for the mother’s absence from her daughter’s home. Her mental condition required hospitalization and it was so ordered by the county court. The Illinois statutes clearly obligate a daughter to provide for her dependent mother; and, in cases of commitment of insane people to state hospitals, clearly obligate the relatives of the party committed to provide clothing, transportation, and other incidental expenses not constituting any part of the maintenance or treatment by the state. Secs. 1 and 2, ch. 107, and secs. 15 and 16, ch. 85, Cahill’s Illinois Revised Statutes (1929).

This record reveals that petitioner was actually supporting and maintaining her mother, was legally and morally obligated by blood relationship and statute to care and provide for her, and, in view of her mother’s mental condition, was necessarily exercising some degree of control over her, particularly on those occasions when she took her mother from the hospital. Petitioner fully expected her mother to return to her home as soon as she had sufficiently recovered, and her mother expected to do so. It was impossible to determine when that would be, owing to the nature of her mother’s condition, but it was thought her stay at the hospital would be temporary only. We are satisfied that petitioner has established her right to the personal exemption credit granted to the head of a family. The fact that petitioner’s sister was gainfully employed and made her home with the petitioner is no basis, in and of itself, for denying the exemption. Petitioner’s testimony and the testimony of her mother equally refute any inference that Mary White was securing any maintenance or support from any source except the State of Illinois and this petitioner. As between the State and petitioner we are of the opinion that Mary White was dependent upon and looked to petitioner for her chief maintenance, and that the hospital primarily provided medical treatment as distinguished from maintenance and support.

In view of our decision on the first issue, there will be no deficiency for any of the taxable years, and, therefore, no penalty can be imposed for failure to file timely returns. Since petitioner has paid the deficiencies asserted and interest thereon subsequent to filing her appeal, there has been an overpayment of tax in each year. The parties should submit computations showing the amount of overpayment for each of the taxable years, from which the Board can enter its final order. Sec. 322, Revenue Act 1934; sec. 322, Revenue Act of 1932, as amended by sec. 504, Revenue Act of 1934.

Reviewed by the Board.

Decision will be entered wider Bule SO.

       Art. 292. Personal exemption of head of family. — A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the Act must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously mates his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family.


author: HaeRon :

text:
    Butler-Fornari Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83328.
    Promulgated May 26, 1938.

      Mario Fornari for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION

HaeRon :

Petitioner claims that under decisions of the Board it is entitled to add to original cost of land the estimated cost of future development. The rule we have followed is stated in Cambria Development Co., 34 B. T. A. 1155, as follows:

* * * It is well established that as a matter of law the petitioner has the right to include in its cost such estimated future expenditures for the development of the property as required by its contracts of sale. Kentucky Land, Gas & Oil Co., 2 B. T. A. 838; Milton A. Mackay, 11 B. T. A. 569; Osgood Land & Livestock Co., 22 B. T. A. 387; Birdneck Realty Corporation, 25 B. T. A. 1084.

The difficulty that confronts us in this case is to determine whether the facts here are in accord with the facts which, in the cases cited, formed the predicate for the rule. The evidence in this case is meager. Petitioner’s officer who tried the case apparently was not aware of the necessity of proving the facts sufficiently to demonstrate that they square with the facts in the cited cases. In the above cases an important fact was that the taxpayers established that at least some of the improvements required by the sales contracts had been made. Further, in those cases, there was no reason to doubt that the sums claimed would be spent and thus become a part of the cost of the lots sold. Presumably in this proceeding the Commissioner has allowed the deduction of the original cost and in so doing has complied with the statute in treating as gross income only the excess of receipts over the basis. If that basis is to be increased in any way the petitioner has the burden of clearly proving his right to the claimed increase. We do not have here any statutory requirement that tax liability is to be determined solely upon the probabilities of 1929, nor any prohibition against looking to the future to determine the reasonableness of those probabilities. Cf. Ithaca Trust Co. v. United States, 279 U. S. 151. According to the evidence in this case, as late as December 1937 the petitioner had not made any of the improvements called for by the contracts. For more than eight years the petitioner has done nothing to give support to its claim that it has a basis greater than the original cost of its land. Moreover, there are indications in the documents on file that the petitioner has lost by foreclosure the unsold portions of the Fox Hills tract. There is considerable doubt as to whether petitioner will be called on to make future improvements under contracts for the sale of the 80 lots in the Fox Hills tract which were sold in 1929, in view of some delinquencies in the contracts themselves and because of the loss of the unsold remainder of the tract. The improvement of streets in a real estate subdivision is a matter relating to whole blocks in the tract, if not to the whole tract, and for all we know the locations of the 80 lots sold in 1929 are scattered over the tract. As to these 80 lots, with which we are concerned in this proceeding, it is not within reason to suppose that the petitioner will spend money for improvements unless forced to, and there is no indication that any attempt has been made to compel the construction of any improvements. Accordingly, the facts which gave rise to the rule in the Cambria and other cases above have not been shown to exist here, and there is no place for the application of that rule here. As the evidence fails to establish any basis for the lots higher than the basis allowed, the respondent’s determination must stand.

The petitioner has conceded that the other adjustments made by respondent are correct, namely, the addition of $243.60 to taxable income. There is, therefore, a deficiency due in the amount set forth by the respondent in his notice of deficiency.

Decision will be entered for the respondent.