text:
    John B. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44582.
    Promulgated August 29, 1933.

      G. J. McGwire, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Marquette :

The respondent has determined a deficiency in income tax for the year 1926 of $13,063.98. The only error asserted is that the respondent has determined that a liquidating dividend was received by the petitioner in 1926 in payment for 1,083 shares of stock when in fact the dividend was applicable to 1,666 shares, being all the stock owned by the petitioner. The facts were stipulated. From the stipulation the following material facts appear:

The petitioner on November 13, 1925, purchased 1,666 shares of common stock of the par value of $100 per share in Smart Farm Co., a Michigan corporation, for which he paid $133,231.34. The sole business of this corporation was the selling of real estate subdivision lots on the installment plan. On December 23, 1925, the petitioner received in partial liquidation of his capital stock in Smart Farm Co. the amount of $8,838.94, which reduced the cost of his stock to $124,392.40. At a special meeting of the stockholders of Smart Farm Co., held January 2, 1926, certain resolutions were adopted, the material portions of which are as follows:

The purpose of the meeting being to consider and act upon a proposal to amend tbe Articles of Association of the company, to authorize this company to act as agent, to hold, collect, enforce and perforin land contracts and to act as Trustee of real estate; to decrease the Capital stock of the company; and to authorize the Directors to distribute cash and assets of the company; the following resolutions were, after due consideration, made, seconded, and unanimously adopted by all the stockholders present, there being more than two thirds of the stockholders of record:
Whheeas, it is determined to be in the best interests of the Company to partially liquidate the same and the capital stock of the Company by distributing to the stockholders of the Company pro rata according to their respective shares of such capital stock, cash and other assets of the Company which may not be required for the liquidation of corporate debts and obligations accrued and unaecrued.
And Whekhas it is determined that cash and assets in the amount of One Hundred Seventy-five Thousand Dollars ($175,000.00) is sufficient to pay such corporate debts and obligations accrued and unaecrued;
Now Therbfoke Be It Resolved that the capital stock of the Company be decreased from Five Hundred Thousand C$500,000.00) Dollars to One Hundred Seventy-five Thousand ($175,000.00) Dollars, and that the articles of association relating to capital stock be and the same are amended so as to read as follows, viz.,
The capital stock of the corporation hereby organized is the sum of $175,000.00.
The number of shares into which the capital stock is divided is seventeen hundred fifty (1750), of the par value of One Hundred ($100.00) Dollars each.
We do further certify that the total amount of stock, after such decrease, subscribed is One Hundred Seventy-five Thousand ($175,000.00) Dollars.
The total amount of stock after such decrease actually paid in is the sum of One Hundred Seventy-five Thousand Dollars ($175,000.00).
And Be It Further Resolved that Article II of the Articles of Association be amended to read as follows:
The purpose or purposes of this Corporation are as follows: Purchasing, holding and dealing in real estate, acting as agent to hold, collect, enforce and perform land contracts, and acting as trustee to hold legal title to real estate for the use and benefit of other persons.
* Jjs * s)«
Be It Further Resolved that the directors be and they hereby are authorized to distribute cash and assets of the Company to the stockholders of the Company in proportion to their respective stockholdings therein in such amount and in such manner as they may determine and in partial liquidation of the capital stock of the Company.

On the same date a special meeting of the board of directors was held, which adopted resolutions which, after reciting the proceedings of the stockholders’ meeting, resolved, among other things, as follows:

Now Therefore BE It Resolved that the President and Secretary be and they hereby are directed to prepare, execute and file with the proper public officials a certificate of amendment of articles of association and of decrease of capital stock in accordance with the said resolution of stockholders and
Be It Further Resolved that stock certificates be prepared in the same identical form as those heretofore authorized by this Board excepting only that the amount of outstanding capital stock shall be indicated thereon to be One Hundred Seventy-five Thousand Dollars, and that stock certificates in such form be and they hereby are adopted for use by this company and
BE It Further Resolved that stock certificates in such form as above described be prepared and issued to the stockholders .of the company in proportion to their present holdings upon surrender by the stockholders of their present certificates, and that such present outstanding certificates when so surrendered shall be cancelled, and that stockholders be notified to surrender their certificates forthwith for the purpose of effecting such exchange;
That a dividend in the amount of Eighty ($80.00) Dollars per share be and the same hereby is declared in partial liquidation of the capital stock of the company payable January 2nd, 1926, to the stockholders of record that same day, payable in cash and in land contracts receivable taken at the book value thereof * * *
# * *****

In accordance with the aforesaid resolutions, there were distributed to the petitioner on January 5, 1926, the following:

Cash_ $346.16
Land contracts_ 132, 987.18
133,333. 34

During the year 1926 the petitioner received principal payments on the land contracts, received in liquidation as recited in the foregoing paragraph, in the amount of $42,746.17. Thereafter and also during the year 1926 petitioner sold such land contracts for $90,241.01 in cash.

In accordance with the aforesaid resolutions the petitioner surrendered his certificate for 1,666 shares on February 4, 1926. On March 23, 1926, he received in return a certificate for 583 shares. The State of Michigan authorized the decrease in capital stock of Smart Farm Co. on February 8, 1926.

Authorized and outstanding capital stock of Smart Farm Co. on January 2, 1926, was 5,000 shares common, par value $100 per share, of which petitioner owned one third. After the corporate action hereinabove set forth, the outstanding capital stock was 1,750 shares common, par value $100 per share, of which petitioner owned one third. The percentage of ownership of petitioner in Smart Farm Co., therefore, was the same both before and after the reduction in capital stock.

The following is the balance sheet of Smart Farm Co. as of December 31, 1925:

Assets :
Cash_ $9, 357.32
Unsold lots_ 8,277.67
Land contracts receivable_ 575, 059. 98
Mortgages receivable- 13, 329. 28
Bonds_ 9, 700. 00
Operating deficit- 301,267.44
Total_916, 991. 69
Liabilities:
Mortgages payable- $5, 595. 00
Reserve for improvements___ 31, 531.41
Commissions payable_ 43, 329. 90
Unrealized profits on installment sales_ 336, 535. 38
Common stock_ 500,000.00
916, 991. 69

The respondent computed the petitioner’s gain arising from the liquidating dividend of $400,000 by attributing the total amount received by the petitioner ($133,333.34) to the 1,083 shares surrendered by him and deducting from this amount the remaining cost of these shares. The petitioner contends that the amount of $400,000 should be apportioned to all the outstanding shares, 5,000, with the result that the gain on each share is less than that determined by the respondent.

Both parties agree that the distribution of $400,000 was a distribution in partial liquidation. The sole issue is whether this distribution was in complete cancellation or redemption of the 3,250 shares which were retired or was one of a series of distributions in complete cancellation or redemption of all (5,000 shares) of the stock of the Smart Farm Co. The solution of this question depends on the application of the following provisions of section 201 of the Bevenue Act of 1926:

(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *
$ $ $ $ 4 $ *
(h) As used in this section the term “ amounts distributed in partial liquidation'’ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

The petitioner insists that by the resolutions of January 2, 1926, the stockholders accomplished two distinct and separate things: They took action for the reduction of the capital stock of the corporation, and they directed the directors to make a distribution of the assets to the stockholders of the company in proportion to their respective stockholdings. He further points out that the directors declared a dividend not on the shares to be retired, but on each of the 5,000 shares outstanding. He relies on Remington Rand, Inc. v. Commissioner, 33 Fed. (2d) 77, and other cases which hold that what was done must control rather than what might have been done. He further calls attention to that part of the resolution which states that the amount of $175,000 was sufficient to pay the corporation’s debts accrued and unaccrued, thus implying that the unretired 1,750 shares of stock were practically worthless.

While we must look to things done and not to things which might have been done, we should also look to the general plan adopted by the shareholders and ascertain what was actually done in pursuance of that plan. We must not separate the fagot and break the sticks separately. Edwards v. Chile Copper Co., 270 U.S. 452. We should not be controlled by the words of the resolutions if their real purpose and effect are otherwise apparent. Phelps v. Commissioner, 54 Fed. (2d) 289; Gossett v. Commissioner, 59 Fed. (2d) 365; 60 Fed. (2d) 484.

The stockholders had in mind three things: The amendment to the articles of incorporation (showing an intention to continue to do business); reduction of the capital stock, and the distribution of a part of the assets of the company to the shareholders. This was one plan and all of it was accomplished. Seduction of the capital stock was tq be effected, and was effected, not by reducing the par value of each share, but by complete retirement and cancellation of 3,250 shares. This is what was actually done.

The fact that the reduction of capital stock could not be effected until the amended articles were secured does not militate against this view any more than if the resolutions had directly provided that the distribution was in cancellation of the 3,250 shares which were canceled. Under the resolutions each stockholder was obligated upon receipt of his part of the distribution to surrender 3,250/5,000 of his shares and the only consideration that we can perceive the shareholder received for this surrender was his part of the distribution. To call the surrender of the stock a separate, voluntary transaction is to shut one’s eyes to the real obligations and the actual facts. Whatever the form, the substance was as we have stated.

Subdivision (h) recognizes two forms of partial liquidation; First, where a distribution is made in complete cancellation of a part of the stock of a corporation, and the other is one of a series of distributions in complete cancellation of all or a part of its stock. Here the series stopped with the distribution of the $400,000. The articles were amended, the business went on, and 3,250 shares of stock were retired.

We agree with the respondent that the $400,000 was distributed in complete cancellation of the stock retired. The petitioner asserts that this conclusion will result in injustice, since the $175,000 of capital stock remaining represents only that amount of assets which in turn is liable for debts of an equal amount. It offers nothing in proof of this statement except the recital in the resolutions, but the business was to go on and we cannot believe that it was to engage in business with no free assets. Besides, the balance sheet of the company as of December. 31, 1925, does not bear out the recital. It shows gross assets of $615,724.25 and liabilities, other than to stockholders, of $80,456.31, with a net worth of $535,267.94. Deducting from this the distribution of $400,000, we have left in the corporation assets of a book value of $135,267.94; or, to put it otherwise, the remaining stock, composed of 1,750 shares, had a book value of over $77 per share.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    W. E. Easterwood, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. E. Easterwood, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 40181, 40182, 63416, 63417.
    Promulgated August 29, 1933.

      L. A. Luce, Esq., for the petitioners.

      J. M. Lem&nkugel, Esq., and R. B. Gannon, Esq., for the respondent.
   OPINION.

Lansdon:

Since it is admitted that each of the petitioners filed income tax returns during the whole period under review on the calendar year basis, the only question here is whether their books were kept on the same basis and truly reflected income. W. E. Easterwood filed his first return in 1924 on the calendar year basis and, in the circumstances set out in our findings, he then established his right to file all subsequent returns on the same basis except upon the Commissioner’s permission to change or upon the determination by that officer that such returns were not based upon his regular accounting system, or if so based, that such system failed to reflect true income.

The evidence adduced by petitioners convinces us that their books were kept on the calendar year basis. Easterwood testified that he had so ordered. Expert accountants who are familiar with the books testified that they were so kept. Inventories and closing entries as of December 31 of each year were duly made. A substantial part of the income reported was of a nature that indicates its accrual as of December 31 of each year. It is our opinion, therefore, that petitioners’ books were kept on a calendar year basis and that the several income tax returns were properly made and filed on the same basis. The Commissioner erroneously determined the deficiencies in controversy. Duriron Co., 18 B.T.A. 554; Cf. Brooklyn City R.R. Co., 27 B.T.A. 77; Great West Printing Co., 22 B.T.A. 346; affd., 60 Fed. (2d) 749.

Decision will be entered wider Bule 50.


author: Black:

text:
    T. Rosslyn Beatty, Petitioner, v. Commissioner of Internal Revenue, Respondent. John T. Beatty, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mildred Veronese Beatty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45563-45565, 46866-46868.
    Promulgated August 29, 1933.

      A. L. Van Winkle, Esq., for the petitioners.

      Arthur Go/rnduff, Esq., for the respondent.
   OPINION.

Black:

The question we have to decide in these proceedings is whether losses resulting from the sale of capital assets of a trust may be deducted from the income of the beneficiaries of the trust, who are also the remaindermen. The facts have already been fully stated and need not be repeated here.

There can be no question that the trust established by Boss J. Beatty held the legal title to the securities which were sold during each of the taxable years. In selling them, the trust did not have to consult the beneficiaries, who are the petitioners in this proceeding. It seems to us that the losses on the sale of the securities, so far as the right to take such losses as deductions in figuring income taxes is concerned, are the losses of the trust and not of the beneficiaries.

It has been stipulated that the trust was in existence during each of the taxable years and unquestionably it was a separate taxable entity. Section 219 of the Revenue Act of 1926, which is the revenue act applicable to each of the years involved in this proceeding, makes trusts of the kind we have in this proceeding separate taxable entities. Section 219 (b) expressly provides: “Except as otherwise provided in subdivision (g) and (h), the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary.” We pause to remark that subdivisions (g) and (h) referred to have no application to the facts of the instant case.

It has been stipulated that in each of the years involved in this proceeding the trust had income of $85,000. Undoubtedly this income would be taxable to the trust except for the fact that it was an allowable deduction to the trust by reason of the provisions of section 219 (b) (2), which reads in part: “ There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not.” The trust would also be entitled to take as a deduction from its gross income for each of the taxable years any losses resulting from the sale of capital assets. This by reason of section 214 (a) (4), (5), Revenue Act of 1926.

While the trust, which was the legal owner of these capital assets during each of the taxable years in question, could take as a deduction from its gross income losses resulting from the sale of these assets, we know of no provision of law which would permit petitioners, who are the beneficiaries of the trust, to take such losses as deductions from their gross income, even though they were also remaindermen under the terms of the trust indenture. The trust set up by the indenture was a separate taxable entity from petitioners and one taxpayer cannot deduct from his gross income another’s losses.

Petitioners urge as their principal authority in support of their contention our decision in James W. Arrott, Jr., 23 B.T.A. 478. An examination of that case will show that our decision was grounded upon our holding therein that James W. Arrott, Sr., decedent, did not under the laws of Pennsylvania create a legal trust in respect of the shares in his residuary estate devised to his sons, but that the executors and trustees were merely agents of such devisees. Under such circumstances we held that the sons were the legal owners and holders of their part of the real estate in their own right and were entitled to deduct in their individual returns their proportionate shares of allowances for depreciation and loss on sale of capital assets. We have no such situation as that in the instant case.

The trust involved in these proceedings was more than the mere agent of the beneficiaries. It was the holder of the legal title of the trust corpus, and the trustee was not to turn over this trust corpus to the beneficiaries until they each reached the age of forty years.

It is true that in James Arrott, Jr., supra, there are some expressions in the concluding paragraph of the opinion which support the contentions now made by petitioners. These expressions, however, are obiter dieta and not necessary to the conclusions therein reached and seem to be in conflict with other decisions of the Board. Cf. Cora S. Stern, 14 B.T.A. 444; Marion Shainwald Sevier, 14 B.T.A. 709; Samuel Riker, Jr., 15 B.T.A. 1160; Baltzell v. Mitchell, 3 Fed. (2d) 428; certiorari denied, 268 U.S. 690.

The Supreme Court of the United States recently decided an issue somewhat similar to the one which we now have before us in Anderson v. Wilson, 289 U.S. 20. In that case the Court stated the issue thus: “ The question to be decided is whether the difference between the value of real estate at the death of a testator and the proceeds realized thereafter upon a sale by the trustees may be deducted as a loss by the taxpayer, the beneficial owner of the proceeds, upon his return to the collector for the income of the year.” The Supreme Court answered the question in the negative and held that the beneficiaries of the trust could not take any part of the loss resulting from the sale of capital assets by the trust as deductions on their individual income tax returns. However, it is only fair to state that the Supreme Court, in reaching this conclusion, did so upon the basis that under the laws of the State of New York the fee title to the real estate in question passed to the executors and the beneficiaries owned, not a beneficial interest in the real estate, but a beneficial interest in the proceeds resulting from the sale of the real estate when it was sold.

Under such circumstances the Court held that when the real estate was sold at a loss it was the loss of the estate and not of the beneficiaries of the estate, who were interested only in the proceeds, and the beneficiaries could not take any of the losses as deductions on their returns. The Court took pains to say, however: “ Whether the result would be the same if the beneficiaries had been the owner of future estates in remainder, we are not required to determine. Cf. Francis v. Commissioner, 15 B.T.A. 1332, 1340.”

So it must be admitted that the Supreme Court did not decide the precise question now under review. However the Court did go on and say, after announcing its above stated ruling: “ In so ruling we do not forget that the trust is an abstraction, and that the economic pinch is felt by men of flesh and blood. Even so, the law has seen fit to deal with this abstraction for income tax purposes as a separate existence, making its own retwrn under the hand of the fiduciary and claiming and receiving its own appropriate deductions.” (Italics supplied.)

We conclude, as we have stated elsewhere, by saying that we know of no statute which would grant to the beneficiaries of a trust the right .to take proportionate losses which have resulted from the sale of capital assets, the legal title to which at the time of sale was vested in a trust, itself a separate taxable entity. Under the authorities above cited,

Decision will be


author: Goodrich :

text:
    Alcoma Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60700.
    Promulgated August 29, 1933.

      H. N. Taylor, Esq., and William Dickinson Dart, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   opinion.

Goodrich :

Respondent has determined a deficiency in income tax for 1929 of $66,954.06, which arises from his disallowance of the deduction of a loss of $608,673.33 claimed by petitioner upon the sale in that year of its stock in the Bayshore Co., a corporation owning large tracts of real estate in Florida which it had attempted to develop and sell. The facts are not in dispute; it is agreed that the cost basis of the Bayshore stock, consisting of 20,535 shares of common and 9,232 shares of preferred, acquired by petitioner in a reorganization in 1925, was $609,173.33 and the selling price $500, and it is conceded that the sale was made for the purpose of registering a loss upon a depreciated investment which might be used to offset income in reduction of taxes. Petitioner disposed of the stock through open and regular business channels. The sale was made in December 1929, at one of the weekly public auctions conducted by the brokerage concern of Adrian H. Muller & Co. in New York City, preceding which the stock had been advertised for sale, along with other securities, in a list published in at least two newspapers. It was also included in the printed catalogue of securities to be sold, distributed to persons attending the auction. At the auction the stock was bid in for the account of August Heckscher by his secretary, who had been sent to attend the auction under instructions to bid for the stock not in excess of $1,000. Heckscher was one of petitioner’s directors and owned about 49 percent of its outstanding stock. Following the sale, the certificates representing the Bayshore stock were delivered to the brokers and by them to the corporation, which reissued the stock to Heckscher, by whom it was still owned and held at the time of this trial. The money in payment of the purchase price of the stock was likewise passed through the brokers. At the time of the sale the Bayshore stock was not entirely worthless, but the value of the company’s assets had depreciated so tremendously following the collapse of the Florida real estate boom and its prospects for future profitable operations had so changed that the stock had little more than a speculative value.

The controlling issue here is as to the bona tides of the sale of the stock by petitioner to Heckscher through the medium of the brokerage firm at its public auction. Respondent concedes that ostensibly the sale was a-bona fide transaction, having been conducted openly and aboveboard, through regular business channels, but rests his determination on the fact that the purchaser was petitioner’s director and principal individual stockholder. We fully recognize that transactions between a corporation and its directors or stockholders, or between parties otherwise closely related, by community of interest, offer an opportunity for collusive action, often resulting in tax evasion, and therefore that the circumstances surrounding such transactions must be closely scrutinized. Harold B. Clark, 2 B.T.A. 555; M. I. Stewart & Co., 2 B.T.A. 737; Harold F. Seymour, 27 B.T.A. 403; Oscar F. C. Kunau et al., Trustees, 27 B.T.A. 509. We conclude, after a careful examination of this record, that the sale here involved was bona fide in fact as well as in form. The testimony is clear, uncontradicted and convincing that petitioner intended to and did part with its property, finally and completely; that there were no restrictions upon the order of sale; that there was no arrangement as to a repurchase, reacquisition, or a holding of title for the benefit of petitioner, nor any attempt on its part to retain a vestige of control over or ownership in the stock. Heckscher’s instructions to his secretary were positive — he was to bid up to $1,000 for the stock, and no more. Had there been an offer in excess of that amount, that bidder would have acquired the stock. The stock was transferred after the sale to the purchaser and has since remained in his possession. Upon the record before us, the transaction was valid and complete and we see nothing to indicate a lack of bona tides in the sale.

Since respondent concedes it, we need not discuss the proposition that the vendor’s motive, namely the realization of a loss which would serve to reduce its tax liability, does not affect the validity of the sale, or that the existence of that motive does not make a sustained loss any the less recognizable. Nace Realty Co., 28 B.T.A. 467; Pennsylvania Co. for Insurances, etc., 2 B.T.A. 48, and cases there cited.

Judgment will be entered for the petitioner.


author: Arundell :

text:
    John C. Shaffer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50086, 59511.
    Promulgated August 31, 1933.

      Vincent J. Heffernan, Esq., for the petitioner.

      D. P. Kimball, Esq., and E. O. Adams, Esq., for the respondent.
   OPINION.

I.

Arundell :

The petitioner contends that he sustained a deductible loss of $344,882.62 in 1924 upon the disposition of his interest in the Louisville Herald Co. to Brown; that, as a result of that loss, he sustained a statutory net loss for 1924, within the meaning of section 206 (e) of the Bevenue Act of 1926, which is deductible in computing net income for 1925; that he sustained a further loss in 1925, in connection with the disposition, by reason of his payment of $2,850 to Badger and Gorham in settlement of the suit against the Louisville Herald Co., which loss is properly deductible in computing net income for that year; that in the settlement effected with Brown in 1926 by which he accepted $100,000 cash in lieu of $200,000 par value of preferred stock of the reorganized company, he sustained a further loss of $100,000 in that year; that he sustained an additional loss in 1926, in connection with the disposition, by reason of his payment in that year of additional sums aggregating $6,948.88; and that, as the result of said losses in 1926 and other losses of that year hereinafter to be considered, he sustained a statutory net loss for that year, within the meaning of section 206 (a) of the Bevenue Act of 1926, which is deductible in computing net income for 1927 and, to the extent of the excess of the net loss over the net income of 1927, in computing net income for 1928.

The respondent contends that the transaction by which petitioner disposed of his interest in the Louisville Herald Co. to Brown was not completed and closed in 1924 or 1925 and, consequently, any losses in connection therewith were not sustained in those years; that, even if such losses were sustained in 1924 and 1925, they resulted from an exchange, in pursuance of a plan of reorganization, of securities in a corporation a party to the reorganization for securities in another corporation a party to the reorganization and money, and, therefore, by section 203 (f) of the Revenue Acts of 1924 and 1926, such losses could not be recognized for income tax purposes; and that the losses sustained by petitioner in 1924 and 1926, if any, in connection with this disposition, were in part capital losses, within the meaning of sections 206 (a) (2) of the 1924 and 1926 Acts, which, by those statutory provisions, are to be deducted, in computing statutory net losses, only to the extent of the capital gains, and, by reason of such limitations, no statutory net losses were sustained in either of the aforementioned years.

The stipulation does not disclose the basis upon which the petitioner kept his accounts and computed taxable net income.

We will consider first the respondent’s contention that the transaction between the petitioner and Brown involved an exchange in pursuance of a plan of reorganization, the result of which, by section 203 (f) of the applicable statutes, is not to be recognized for the purposes of the tax. Section 203 provides, inter alia, that “ (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.” There follows in separate subdivisions of that section an enumeration of the exceptions referred to. The provisions of section 203 indicate that “ it is the exceptional case alone in which gain or loss is not to be recognized,” Arctic Ice Machine Co., 23 B.T.A. 1223; and that “it is necessary that the given transaction come clearly within the exceptions set out in the statute,” Warner Co., 26 B.T.A. 1225.

Subdivision (f) of section 203, upon which the respondent relies, reads: “ If an exchange would be within the provisions of paragraph (1), (2), (3), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.” And paragraph (2) of subdivision (b) reads: “ No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.”

We need not go into the question as to whether there was a reorganization of the Louisville Herald Co. within the meaning of subdivision (h) (1) of section 203, which, of course, is a major premise of respondent’s contention. We may, for the sake of argument, assume that to be the case; although it is evident that when the sale agreement was entered into the assumed reorganization could have been but a mere conception in the mind of Brown. But in order that the transaction may be brought within the exception of subdivision (f), the exchange must be “in pursuance of the plan of reorganization.” In other words, the exchange contemplated by subdivisions (b) (2) and (f) is one in which there is, as an integral and essential part of the plan or scheme of reorganization, a substitution for the taxpayer’s interest in the merged or consolidated company of a substantially similar interest in the surviving or new company, or, at least, a continuation of his interest based upon the new capitalization of the existing company; and we apprehend that generally it is to be effected bjr direct exchange between the corporate parties to the reorganization and their security holders. This requirement of subdivision (f) is not met by the facts of this case.

When the petitioner sold his security holdings to Brown for cash and new securities of that company or its successor if such successor were organized, no plan of reorganization had been adopted. Whatever securities he eventually would receive from Brown would come to him not by virtue of any interest which he held in the Louisville Herald Co. that would entitle him to participate in any reorganization, but as part of the purchase price of that interest. In any plan of reorganization of the Louisville Herald Co. it would be Brown and not the petitioner who would be entitled to exchange that interest for a similar interest in the reorganized company; and it was only by virtue of Brown’s right in that respect that he could expect to deliver the new securities in part payment of the purchase price. The respondent’s contention that the transaction is within the provisions of subdivision (f) of section 203 is without merit.

The next question to be considered is whether the petitioner sustained losses in 1924 and 1925 in connection with the aforementioned transaction which may be deducted in computing taxable net income of those years. The amount of the petitioner’s total loss from the transaction is not in dispute; it is merely a question as to when the loss was sustained.

By section 214 (a) of the Bevenue Acts of 1924 and 1926 there are to be allowed as deductions in computing net income: “(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business; ” and “(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business * * *.”

In general, the statute is concerned only with realized losses, Weiss v. Weiner, 279 U.S. 333; though “exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized,” Lucas v. American Code Co., 280 U.S. 445. They must be fixed by identifiable events, United States v. White Dental Mfg. Co., 274 U.S. 398; and, as a rule, evidenced by closed and completed transactions, art. 141, Keg. 65 and 69; and Ewing Thomas Converter Co. v. McCaughn, 43 Fed. (2d) 503; certiorari denied, 282 U.S. 897.

By the close of 1924, petitioner, pursuant to his agreement with Brown, had delivered all but 154 shares of the outstanding capital stock of the Louisville Herald Co. and all of the outstanding bonds of that company, and he had paid $230,150.01 of a total of $239,948.89 indebtedness of that company that he was called upon to pay under the agreement. Delivery of the 154 shares and payment of an additional indebtedness, including the claim of Badger and Gorham, of $9,798.88, of which $2,850 was paid in 1925 and $6,948.88 in 1926, represented the extent of his remaining obligations under the agreement. As to Brown, he had made the cash payments to petitioner, totaling $400,000, as provided in the agreement, and it remained for him to deliver the $200,000 par value of preferred stock of the successor company which had been organized. To the close of the year, the petitioner had incurred costs, in the acquisition of his investments in the Louisville Herald Co. and in carrying out his agreement with Brown, totaling $929,882.62, which together with the selling expenses he incurred, represented a total outlay of $944,882.62. For the investment represented by that cash outlay he was to receive a maximum consideration of $400,000 cash and $200,000 par value of preferred stock, the fair market value of which, as of the date of delivery, in view of the provisions of the sale agreement governing the issuance of that stock, could not, in our opinion, exceed its par value. Thus, identifiable events of 1924 and 1925 established, before the transaction was entirely closed, losses, “ certain in fact and ascertainable in amount,” of $344,882.62 and $2,850, respectively; and these losses could not be reduced one iota by any future events contemplated by the agreement. As it turned out, the petitioner sustained a further substantial loss in 1926, when the parties effected a final settlement under their agreement. We bold that the petitioner is entitled to deduct the losses of $844,882.62 and $2,850 in computing taxable net income of 1924 and 1925, respectively.

The next question is whether the losses sustained by petitioner in 1924 and 1926 in the aforementioned transaction may be deducted from income in computing the statutory net losses of those years.

Section, 206 (a) of the 1924 and 1926 Acts defines the term “ net loss ” as “ the excess of the deductions allowed by section 214 * * * over the gross income, with the following exceptions and limitations: (1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business; (2) In the case of a taxpayer other than a corporation, deductions for capital losses otherwise allowed by law shall be allowed only to the extent of the capital gains * * Section 208 (a) of the same acts defines the term “ capital loss ” as “ (2) * * * deductible loss resulting from the sale or exchange of capital assets;” and the term “ capital assets ” is defined as “(8) * * * 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.”

At the time the petitioner entered into the agreement with Brown he owned 2,346 shares of the capital stock of the Louisville Herald Co. and $111,000 face amount of that company’s bonds. He had acquired these shares in 1910, and the bonds prior to 1920. He was not a dealer in securities; and he was not engaged in buying and selling newspaper publishing corporations as a business. The stipulation states that the petitioner “ was engaged in the trade or business of editing and publishing newspapers through the medium of several corporations which he owned and controlled.” There is no element of buying and selling in that business, and inventories are foreign to it. His security holdings in the Louisville Herald Co. were merely the medium through which he exercised control of the business, and not his “ stock in trade * * * or other property of a kind which would properly be included in the inventory * * *, or property held * * * primarily for sale in the course of his trade or business.” The aforementioned securities were capital assets within the meaning of section'208 (a) (8) of the applicable statutes, and the loss sustained from the disposition thereof is deductible, under section 206 (a) (2), only to the extent of the capital gains.

The petitioner argues, however, that the ultimate loss which he sustained upon the transaction was attributable wholly to expenditures and voluntary cancellation of indebtedness of the Louisville Herald Co. within two years of the sale, and, consequently, that the loss was not a capital loss. Assuming, as petitioner contends, that these expenditures and canceled indebtedness constitute, at least in part, additional cost of the 2,346 shares, the fact that they were incurred or canceled within two years of the sale is of no significance; the controlling factor, and the thing which stamps the loss, so far as attributable to additional costs of said shares, as a capital loss, is that the shares to which such expenditures relate were held by him for more than two years. In other words, the two-year period mentioned in section 208 (a) (8) begins to run from the date of petitioner’s acquisition of the property, and not from the date of payment therefor or the date when additional costs in respect thereof were incurred.

The petitioner, relying upon M. P. Sturdivant, 28 B.T.A. 1385, and John H. Watson, Jr., 27 B.T.A. 463, further contends that the payments be made in 1924, in pursuance of the sale agreement, in liquidation of the indebtedness of the Louisville Herald Co., namely, $61,850 to the J. C. Shaffer Grain Co., $105,434.47 to the Star Publishing Co., and $62,865.54 of miscellaneous accounts, a total of $230,150.01, and $6,948.88 of miscellaneous accounts in 1926, were not connected with any sale or exchange and, consequently, are not capital losses. Neither of the cases relied upon appears to have any bearing whatever upon the proposition so advanced. We are of the opinion that the loss suffered by petitioner in piecemeal in 1924, 1925, and 1926 was attributable to the sale of capital and noncapital assets. The petitioner agreed to sell to Brown all of the outstanding-capital stock and bonds of the Louisville Herald Co., for $600,000, but he also agreed to pay a portion of the indebtedness of .that company and to save it and Brown harmless against any claim or suit arising out of acts committed prior to January 17, 1924, and these latter undertakings eventually cost him in the neighborhood of $240,000. Had Brown assumed those undertakings himself, unquestionably the consideration mentioned in the sale agreement would have been correspondingly less and, in that event, there would have been no question whatever that the loss was sustained upon the sale of the shares and bonds of the Louisville Herald Co. We do not believe that the ultimate loss is any the less attributable to that source because of the form of the agreement and the manner in which the transaction was carried out. The sale of the securities and the petitioner’s payment of the indebtedness of and claim against that company were one and not separate transactions, and whatever loss was incurred was incident to the sale of the securities. Of those securities we have already held that the 2,346 shares and $111,000 face amount of bonds were capital assets; and as to the remaining approximately $70,000 face amount of bonds, they were noncapital assets, since they were acquired at or about the date of .the sale agreement.

However, even if the losses represented by the aforesaid payments in 1924,1925, and 1926 were not attributable to a sale or exchange of property, but constitute, as petitioner contends, ordinary losses, still they could not be deducted in computing the statutory net losses, unless attributable to the operation of a trade or business, or to a transaction entered into for profit. We hold, upon authority of Burnet v. Clark, 287 U.S. 410, that the losses were not sustained in the operation of a trade or business regularly carried on by the petitioner; and the circumstances under which the payments were made indicate clearly that they were not made for profit. Hence, it is only by reason of the fact that the payments were linked with and, therefore, constituted losses upon the sale of petitioner’s security holdings in the Louisville Herald Co. that they can be given any consideration at all under the net loss provisions of the applicable statutes.

The stipulation sets forth that in 1926 the petitioner realized capital net gains in respect of items not here in dispute, but it is silent as to any capital gains for 1924. We must assume, therefore, that there were no capital gains for 1924, and, accordingly, hold that in computing the statutory net loss of that year no part of the loss of $344,882.62 sustained by the petitioner upon the sale of his interest in the Louisville Herald Co. that may be attributable to the sale of capital assets may be deducted. As to that part of the loss attributable to the sale of noncapital assets, the amount thereof has not been stipulated, and if it is determinable at all under the stipulated facts, it must be on the theory that it bears the same ratio to the total loss ($344,882.62) as the cost of those assets ($59,769.81) bears to the total cost of the capital and noncapital assets ($944,882.62). The only other possible conclusion under the stipulated facts is that the noncapital assets, having been purchased by the petitioner within 10 days of the sale agreement, are represented in the selling price at an amount equal to cost of acquisition to the petitioner, and that the entire loss, therefore, is attributable to the capital assets. Any deduction for noncapital loss, computed as above indicated, would not produce a statutory net loss for 1924.

II.

The next question is whether, as the result of a further loss sustained in 1926 in connection with the disposition of his interest in the Louisville Herald Co. in the amount of $106,948.88 and a loss of $475,055.48 also sustained in that year in connection with the disposition of his interest in the Denver Publishing Co., the petitioner sustained a statutory net loss for 1926 which may be deducted in computing taxable net income for 1927 and 1928.

The transaction involving the petitioner’s interest in the Denver Publishing Co. apparently was completed and closed in 1926; and the pending question is whether the loss sustained by the petitioner in that transaction may be deducted from income in computing the statutory net loss of that year. In its important aspects, the transaction is substantially similar to the one in which petitioner disposed of his interest in the Louisville Herald Co.; and the same principles of law and same reasoning as were applied in the disposition of the earlier transaction apply with equal force to the one now under consideration. In this transaction the petitioner disposed of his interest in the Denver Publishing Co. at a loss of $475,055.48. The loss was not sustained in the operation of a trade or business, but was directly attributable to the disposition of his security holdings in the Denver Publishing Co. The greater part of the securities so disposed of had been held by the petitioner for more than two years, while the remainder had been held for a lesser period of time. These securities were not his “ stock in trade * * * or other property of a kind which would properly be included in the inventory * * *, or property held * * * primarily for sale in the course of his trade or business.” Consequently, as to the major part of the securities, they were capital assets; and the loss sustained in connection with their disposition is deductible, in computing the statutory net loss for 1926, only to the extent of the capital gains for that year. The parties have stipulated that the petitioner realized capital net gains in 1926 of $23,691.57. The allowance of a deduction in the latter amount, for capital loss, would not create a statutory net loss for 1926; and, since under section 206 (a) (1) deductions otherwise allowed by law not attributable to the operation of a trade or business may, in computing the statutory net loss, be allowed only to the extent of the amount of the gross income not derived from trade or business, it is apparent that any deduction for the portion of the loss attributable to noncapital assets could not create a statutory net loss for that year. A like conclusion must be made in respect of the further loss of $106,948.88 sustained in 1926 in connection with the petitioner’s disposition of his interest in the Louisville Herald Co.

Decision will be entered under Rule 60.


author: Lansdon :

text:
    Clinton Cotton Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54880.
    Promulgated August 31, 1933.

      Donald Borne, Esq., for tbe petitioner.

      James K. Polk, Jr., Esq., for tbe respondent.
   OPINION.

Lansdon :

The respondent has asserted deficiencies in income tax for tbe years 1927, 1928, and 1929 in the respective amounts of $8,583.40, $4,292.82, and $1,341.03. For its canses of action the petitioner alleges (1) that the Commissioner has not used the fair market values of assets that it owned at March 1, 1913, as the basis for computing depreciation thereon; (2) that the rate at which Commissioner computed depreciation on secondhand machinery acquired after March 1, 1913, is inadequate; (3) that it is entitled to deductions as ordinary and necessary expenses for certain disbursements in the taxable years which the Commissioner has capitalized; (4) that an inadequate rate of depletion has been allowed on the cost of plumbing installed in tenement houses which it owns; (5) that it is entitled to annual depreciation deductions from its income on account of the cost of pavements, curbing, and sidewalks which it constructed in its mill village; and (6) that it is entitled to deduct the value of certain abandoned property from its income in one of the taxable years.

The petitioner is a corporation engaged in textile manufacturing at Clinton, South Carolina. It was organized in 1899. Its first mill was completed in 1897, the second in 1907 and by 1913 the plant consisted of two mill buildings and machinery and other property as follows: 1,430 looms, 64,480 spindles, 136 carders, 16 pickers, 18 drawing frames, 12 slubbers, 60 fly frames or speeders, a power house, eight warehouses, and a mill village of 155 tenement houses. During the taxable years the plant was materially the same as in 1913. For purposes of computing depreciation the properties are grouped into three general classifications, viz., mill buildings, machinery, and mill village.

A schedule is in evidence showing dates of acquisition, correct balance of investment at the end of each year from 1897 to 1929, and the dates and amounts of additions and reductions as to all the depre-ciable assets owned by petitioner at March 1,1913, and in the taxable years, and is incorporated in this report by reference. This schedule shows that at March 1, 1913, the depreciated costs of petitioner’s machinery, mill buildings, and tenement houses were $823,848.97, $173,034.29, and $56,055.18, respectively. Upon such amounts as bases, with due consideration for additions, abandonments, and complete exhaustion of costs by prior allowable depreciation, the respondent has computed depreciation deductions for the taxable years in the respective amounts of $65,352.13, $74,817.66, and $80,350.60, which are in excess of the deductions claimed by the petitioner in its income tax returns for the same years in the respective amounts of $25,879.65, $33,015.87, and $30,296.56.

The mill buildings are of brick and when constructed had an expected useful life of 50 years; the average life of new machinery used by petitioner is 28% years from the date of installation; and the tenement houses, when new, had an expected useful life of 25 years. The Commissioner has computed allowable depreciation deductions on the costs of the several classes of assets at the rate of 2,3% and 4 percent, respectively, for the mill buildings, machinery, and mill village.

The petitioner expended $28,981.50 during 1927 and 1928 for plumbing in its mill village. In 1927 it repaired the roofs of the tenement houses in such village at a cost of $995 for shingles. In 1927 it acquired certain used machinery at a cost of $51,992.49 and in the same year abandoned water taps installed at a cost of $258.64. In 1927, 1928, and 1929 it expended the amounts of $21,717.05, $1,146.05, and $16,793.52 for paving streets and sidewalks and approaches to its mill village.

The petitioner accepts the rates of depreciation determined by the respondent in so far as they apply to the several categories of assets when acquired new. It contends, however, that the 1913 fair market values of the properties owned at that time are greatly in excess of the depreciated costs as reflected on its books of account as of that date. If such greater values are established by the evidence it is also necessary to show the remaining useful life of the assets as of March 1, 1913. In proof of the alleged market value at the basic date it adduced the testimony of its president and several qualified expert witnesses. Each was of the opinion that the fair market value of the properties was greater than the basis used by the respondent in computing the amounts of depreciation already allowed.

Upon cross-examination each of the witnesses admitted that his opinion was based upon the reproductive cost of the entire plant, less depreciation sustained between the acquisition of the various assets and March 1, 1913, except that one witness seemed to base his conclusion on the estimated value of a cotton mill at that date computed at $28 per spindle. Even this witness admitted that his opinion was based on a reproductive cost of $35 per spindle, less depreciation, and the weight of his opinion was materially lessened in cross-examination by showing that cotton mills had been sold not far away from 1913 at much lower prices per spindle. The reproductive cost used as the basis for such opinion was determined by a retrospective appraisal made in 1921. It has been repeatedly held by the Board and by the courts that reproductive cost is of little evidentiary weight in the determination of fair market value. In Standard Oil Co. of New Jersey v. Southern Pacific Co., 268 U.S. 146, the Court considered the measure of damages for property destroyed by a wrongful act, held it to be the “ market value ” of the property and said that such value is “ the same that in all probability would result from fair negotiations between an owner willing to sell and the purchaser desiring to buy,” citing Brook-Scanlon Corp. v. United States, 256 U.S. 106. After stating that cost of reproduction at date of valuation is evidence to be considered, the Court continued:

It is to be borne in mind that value is the thing to be found, and that neither cost of reproduction new, nor that less depreciation, is the measure or sole guide. The ascertainment of value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. Minnesota Rate Oases, 230 U.S. 352, 434.
The respondent contends that reproduction cost new, less depreciation, is not competent evidence to establish fair market value. We do not agree that such value is not evidence to be considered in the ascertainment of values. Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276. In our opinion, however, it has very little weight. In National Packing Corp., 24 B.T.A. 952, we held as follows:
The first issue in this proceeding concerns the basis for computing depreciation for all the years here in question on the depreciable assets acquired by petitioner at the time of its organization. As of January 1, 1922, petitioner entered these assets on its boohs at values based on the appraisal made August 1, 1921. This appraisal, probably made for insurance purposes, purports to be based upon costs of reproduction, new, both for the buildings and for the machinery and equipment, and from these reproduction costs a “ depreciation value ” was computed. But, neither in the appraisal itself nor in the other evidence in the case, does it appear that the theoretical values set up in the appraisal are the fair market values of the various assets at that time, and therefore the appraisal is not determinative of those values. * * * The value of the assets when acquired by petitioner is a question of fact and cannot be determined by this theoretical computation, even though the computation starts with a reproductive value based upon cost of similar property. Market value is a definite thing and it may have no particular relation to replacement cost, and is in no wise determined try it. See Kinsman Transit Co., 1 B.T.A. 552; Valley Steamship Co., 1 B.T.A. 1107; Rockford Malleable Iron Works, 2 B.T.A. 817; Frost Manufacturing Co., 13 B.T.A. 802. On the whole record petitioner has failed to establish that the values at which the fixed assets were set up on its boohs were the fair market values thereof at the time it acquired them. The respondent’s determination is sustained as to this issue. [Italics supplied.]

In the light of the authorities above cited and after due consideration as to the weight of all evidence adduced by the petitioner, we are of the opinion that the presumption of correctness which attaches to the respondent’s determination has not been overcome. See Chicago Ry. Equipment Co., 4 B.T.A. 452; affd., 39 Fed. (2d) 378; and 282 U.S. 295; National Straw Works, 16 B.T.A. 463; affd., 47 Fed. (2d) 463. It is now well established that if the value of de-preciable property at March 1, 1913, exceeds cost, the remaining useful life thereof must be proved as a prerequisite to increasing the rate of depreciation. There is no evidence of record upon which we can base findings of the remaining useful life of petitioner at March 1, 1913. On this issue the determination of the respondent is affirmed. Estate of Leon C. Riggs, 2 B.T.A. 668; Kaufman Straus Co., 2 B.T.A. 718; Geo. S. Scoville, 2 B.T.A. 813.

Petitioner also contends for an adjustment of allowable depreciation on secondhand machinery acquired in 1927 at a cost of $51,992.49. The only proof of the remaining useful life of such assets when acquired is a statement by the secretary of the petitioner that a part thereof was constructed in 1918. There is no evidence of its condition when acquired in 1927. On this issue the respondent is affirmed.

The expenditures for plumbing in the tenement houses of the mill village in 1927 and 1928 were capital outlays which the petitioner is entitled to recover on the basis of the unexpired useful life of the structures in which such plumbing was installed. Shillito Realty Co., 8 B.T.A. 665; affd., 39 Fed. (2d) 830; see also Hess Brothers, 7 B.T.A. 729. The record contains sufficient facts for a recomputation under Rule 50 as to this claim. The cost of shingles used in repairing the roofs of the tenements in 1927 was ordinary expense and is a proper deduction from petitioner’s gross income for that year. The respondent admits error in disallowing a loss of $258.27 in 1927 and that amount, therefore, should be deducted from petitioner’s gross income in such year.

The petitioner’s last contention is that it should be allowed to amortize the cost of paving and sidewalks incurred in the improvement of its mill village in the several taxable years.. If these improvements were on the streets of Clinton dedicated to public use, the cost of paving is not amortizable; F. M. Hubbell Son & Co., 19 B.T.A. 612; affd., 51 Fed. (2d) 644; certiorari denied, 284 U.S. 664; if on its own property and used in its business, it is entitled to recover its investment therein by ratable annual deductions from income. There is no evidence of record upon which we can base a finding of fact as to either situation. The determination of the respondent is affirmed.

Decision will he entered wider Bule 50.


author: Goodeich :

text:
    J. L. McInerney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54676.
    Promulgated September 6, 1933.

      H. A. Mihüls, G.P.A., for the petitioner.

      Prew Savoy, Esq., and J. A. MorawsM, Esq., for the respondent.
   OPINION.

Goodeich :

It is stipulated upon the record that petitioner and his wife conveyed the properties, both real and personal, acquired by petitioner from Baldwin, through Wiltshire as trustee, to the National Spring & Wire Co. for a consideration of $572,700, this figure being arrived at by deducting $40,000, representing mortgages assumed by the purchaser, from $612,700, the gross selling price of the assets. Upon that basis, petitioner contends that the initial payment received in 1928, the year of the sale, was less than 40 per centum, and the transaction may be treated as an installment sale. We refuse to be bound by this stipulation, for it appears to be contrary to the facts of record. William Ernest Seatree, 25 B.T.A. 396. While it is true that the offer to sell, as recited in the minutes of a meeting of the stockholders of the National Co., mentions encumbrances totaling only $40,000, nevertheless, as set out in our findings of fact, the three liens totaling $100,000 were then outstanding. They were mentioned in the deed by which Wiltshire, trustee, conveyed to petitioner; they were mentioned in the deed by which petitioner and his wife conveyed to the National Co., and also in the deed by which the National Co. conveyed the properties to the National Marshall Spring Corporation. It may be there is an explanation for this discrepancy, but petitioner has offered none, either in his testimony or upon brief. Consequently, upon the record before us it appears clearly that when these properties were sold by petitioner they were subject to encumbrances, not only of $40,000, the amount which petitioner uses in his computations, but of $100,000, all of which were assumed by the purchaser. Inclusion of an additional lien assumed by the purchaser in the amount of $60,000 presents a basis quite different from that urged by petitioner to be used in determining whether the initial payment exceeded the 40 per centum limitation prescribed by section 44 of the [Revenue Act of 1928. The cost to the purchaser becomes $612,700, of which $100,000 consists of mortgages assumed, and the amount receivable by petitioner as vendor becomes $512,700. See article 352, Regulations 74; Burnet v. S. & L. Building Corp., 288 U.S. 406 (affirming 19 B.T.A. 788), and cases there cited; cf. Lucas v. Schneider, 47 Fed. (2d) 1006. Petitioner received in 1928 $225,000, which is in excess of 40 per centum; consequently, he is not entitled to the benefit of the installment sales provision of the statute.

However, we do not rest our determination solely upon petitioner’s failure to overcome the evidence contradicting the stipulated figures, for we are convinced that certainly more than 40 per centum of the basis used by petitioner, and perhaps the entire consideration, was available to petitioner in 1928. The National Spring & Wire Co. was created for the sole purpose of passing title in the properties to the National Marshall Corporation and passing payment therefor to petitioner. It was the instrument of all parties to this sale, and was controlled by Kingston, who served as attorney for all the parties, including petitioner and his wife. As a conduit, it received from the National Marshall Corporation the purchase money clue petitioner. So far as the deeds indicate, the sale was a cash transaction, and there was no written contract covering the deal beyond the offer from petitioner and his wife as recited in the minutes. In contradiction to the terms of that offer it was testified that the terms of sale were “ one third down, and one third each year,” yet it is undisputed that, upon petitioner’s request, he received $225,000 immediately the conveyance was made, and that the balance due him, either in cash or in notes of the National Marshall Corporation in 1928, was paid over to and held by the National Co. We have little doubt but that he could have obtained that balance, had he so desired. We find an explanation for the failure to pay petitioner in full during 1928, in cash or its equivalent, in the following excerpt from the minutes of a meeting of the stockholders of the National Co. held on December 3, 1929:

The Treasurer of the corporation made an informal report of the affairs of the company * ⅜ #. He stated further that the company was in position to make a substantial reduction of its liabilities to Mr. and Mrs. Mclnerney, hut who had requested that payment. he withheld wntil after Jan. 1st, 1930. [Italics ours.]

We are convinced that the greater part, if not all, of the consideration was available to petitioner in 1928 and might have been received by him upon demand and that, under these circumstances, it must be regarded as constructively received by him. A. L. Voyer, 4 B.T.A. 1192; Maryland Casualty Co. v. United States, 251 U.S. 342; Frank E. Best, 26 B.T.A. 1070; F. H. Wilson, 12 B.T.A. 403.

Respecting the second issue, respondent contends that the conveyance of the real estate by petitioner to himself and his wife ere-ated, under the law of Michigan, an estate by the entirety, the profit from which is taxable to the husband, citing Sylvester A. Sommers, 18 B.T.A. 768. That decision is not here controlling, for we are concerned not with the income from the property, but with the proceeds of sale of the property, which, in this case at least, is quite a different thing. An assignment of the income would not relieve petitioner of the tax thereon, but it is his contention that he transferred to his wife, as a gift, a one half interest in the properties, both real and personal, and that consequently one half of the proceeds derived from the subsequent sale of the properties belonged to her. It is plain that the motive for the transfers was to divide the profit derived from the sale and thus reduce the tax liability otherwise falling upon petitioner as the sole vendor, and it must be conceded that, so far as form of the transfers is concerned, they were effected by valid means. Interest in the real estate was conveyed by proper deeds and, while' the bill of sale covering the interest in the personal property was held by Kingston, Mrs. Mclnerney was fully advised as to its effect. The record evidences a sufficient delivery and acceptance of a gift of the interest in the properties. But scrutinizing the circumstances surrounding the transaction, as we must do, and looking to the substance of the matter, we conclude that the intention to make a bona fide gift of that interest was lacking. At the time this purported gift was made, all arrangements for the sale of the properties, even to the organization of the “ dummy ” corporation, had been made; it remained only to pass title and receive the consideration. Although there is some general testimony that petitioner and his wife had previously worked together on business matters and that petitioner had on occasion given to her a part of the profits of his enterprise, there is no evidence here that Mrs. Mclnerney had previously been promised an interest in these properties. Nor is there any evidence that her interest in the properties and her share of the sales proceeds were received by her free from the domination of her husband and subject to her own control and desires. On the contrary, the sale was carried out as arranged, the wife joining in passing the title. We are not told whether her assent to this disposition of the properties was of her own volition. Nor are we told why she applied a part of her share of the sales proceeds to the payment of the debt owed by petitioner upon his purchase of the properties, nor what was done with any further amounts received by her, whether applied to uses of her own or turned over to her husband. To us the circumstances indicate not a bona fide gift of an interest in the properties which the. wife might control and manage as she desired, but a continuing intention to effect a sale and an acceptance of the interest by the wife with the understanding that she would pass it on to the purchaser upon the terms previously arranged by her husband. Consequently, the intention and the effect was not to give a present one-half interest in the properties, but an interest in the profit to arise from the sale. That does not relieve petitioner from his tax liability. Cf. Burnet v. Leininger, 285 U.S. 136; Rosenwald v. Commissioner, 33 Fed. (2d) 423 (affirming Julius Rosenwald, 12 B.T.A. 350); certiorari denied, 280 U.S. 599; Rensselaer & Saratoga R.R. Co. v. Irwin, 249 Fed. 726; certiorari denied, 246 U.S. 671; Petitfils v. Commissioner, 64 Fed. (2d) 309. The transfers were a subterfuge, effected upon the eve of the consummation of the sale in the hope that it would serve to avoid a part of the tax to be imposed upon the profit derived therefrom. We conclude that the real owner and vendor of the properties was petitioner, and that the entire profit is taxable to him. Nace Realty Co., 28 B.T.A. 467. Cf. Leonard Marshall Wright, 26 B.T.A. 21; William Ernest Seatree, supra.

Judgment will he entered under Bule 50.


author: MuRdock :

text:
    Rudolph Boehringer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49891.
    Promulgated September 6, 1933.

      Wilbur H. Friedman, Esq., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

MuRdock :

The Commissioner determined a deficiency of $2,248.01 in the petitioner’s income tax for 1928. In determining the deficiency the Commissioner included $20,000 in income as dividends received in the reorganization of the American Zeolite Corporation and explained this adjustment as follows:

In accordance with section 112 (c) (1) of the Revenue Act of 1928 and Article 575, Regulations 74, the income from reorganization is computed as follows:
Cash received_$20, 000.00
Stock received having value of_ 50,116. 62
Total_$70,116.62
Cost of original investment_ 20, 000.00
Taxable income_$50,116. 62
In accordance with example 2 of Article 574, Regulations 74, the profit is limited to the cash received and such profit should be taxed as dividend since the earned distributed surplus of the old company was more than sufficient to cover the cash distributions made in connection with this reorganization.

The petitioner assigns as error this action of the Commissioner.

The petitioner is an individual residing at Paterson, New Jersey. He was an officer, director and stockholder of the American Zeolite Corporation, a New York corporation engaged in the business of manufacturing under its patents a chemical for softening water. He held 2,000 shares, 40 percent of the stock of that corporation. There was only one other stockholder. The stock was all common .stock. These shares had cost him $20,000. He had owned them for more than two years.

A competitor had started some patent infringement litigation against customers of the American Zeolite Corporation of New York (hereafter referred to for convenience as New York) which had reached the Circuit Court of Appeals for the Second Circuit. The officers decided to organize a corporation in New Jersey to which the business would be transferred in order that suits against it for patent infringement would arise in the Third Circuit, where they thought they might have a better chance of success. The American Zeolite Corporation (hereafter referred to as New Jersey) was organized under the laws of New Jersey. On August 23, 1928, New York sold “ all of its assets except the sum of $50,000 allocated to capital, subject to all of its liabilities ” to New Jersey for all of the stock of the latter, being 1,000 shares of no par common. The net worth of the property transferred as shown by the corporate books was $125,-291.56. The 1,000 shares of New Jersey stock were distributed pro rata to the stockholders of New York, the petitioner receiving 400 shares. The directors of New York, at the same meeting at which they authorized the foregoing acts, also directed the proper officers to take the necessary steps to dissolve their corporation. It was dissolved on or about August 28, 1928.

New York had retained $50,000 in cash. Its earnings accumulated since February 28,1913, were in excess of $50,000 on August 23,1928. Thereafter it did no business. The stockholders, including the petitioner, retained their stock certificates until some time in October 1928. The directors of New York, acting as trustees in liquidation, met on October 1, 1928, and ordered the $50,000 to be distributed to the stockholders upon surrender of their stock certificates. The petitioner surrendered his certificates and received $20,000 as his share of the fund at some time in October 1928.

The Commissioner contends that there was a reorganization and a distribution in pursuance of the plan thereof which comes under the provisions of section 112 (c) (2) of the Revenue Act of 1928. We do not think that the provision referred to has any application to this case. Section 112 (c) (2) is limited to certain cases coming within the scope of (c) (1). Section 112 (c) (1) deals only with exchanges which would be within the provisions of subsection (b)(1), (2), (3), or (5) if it were not for the fact that the property received in exchange consists not only of property permitted to be received without the recognition of gain, but also of other property or money. The petitioner received no money from New Jersey. But, what is more important, this case would not be within the provisions of (b) (1), (2), (3) or (5). Subdivisions (1), (2) and (5) need no discussion. Subdivision (3) is as follows:

Stock fob stock ok reobganization.' — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

Since neither stock nor securities in New York were exchanged by this petitioner this provision is clearly inapplicable. Consequently (c) is likewise inapplicable. The Commissioner has evidently jumped to (c) without looking for any suitable provision of (b) on which he could rest. His argument therefore starts without statutory foundation and leads nowhere.

There was a reorganization, since there was a transfer by New York of a part of its assets to New Jersey and immediately thereafter New York or its stockholders were in control of New Jersey. Section 112 (i)(l)(B). The petitioner received his New Jersey stock tax-free. Section 112 (g) exactly covers this case. This is probably a further indication that (b) and (c) do not apply.

The respondent argues in his brief that even if section 112 (c) (2) does not apply the distribution was taxable as a dividend under section 115 (g). We think otherwise. The distribution in question was in complete liquidation of the New York corporation. Cf. section 115 (c). Section 115 (g) was intended to prevent tax avoidance. Pearl B. Brown, Executrix, 26 B.T.A. 901; Annie Watts Hill, 27 B.T.A. 73; affd., 66 Fed. (2d) 45. When section 115 is considered as a whole it seems clear that (g) was not intended to apply to a situation to which the more burdensome provisions of (c) apply. Cf. article 629, Regulations 74. If there is any doubt about the intention it is cleared away by reference to the legislative history of this provision. Section 115 (g) is an exact copy of section 201 (g) of the Revenue Act of 1926. There is a statement in the report of the Senate Finance Committee and in the report of the Conference Committee of the House that subdivision (g) of section 201 “ obviously does not apply in cases of complete liquidation of all of the stock of the corporation.” Sen. Rept. 52, 69th Cong., 1st sess., p. 15; House Rept. 356, 69th Cong., 1st sess., p. 30.

This brings us to another question — what part of the basis (cost) of the New York stock attaches to the old and what part to the new stock. Section 113 (a) (9). Following our decision in Bertha G. Bamberger, 27 B.T.A. 785, we hold that the basis should be apportioned between the old and new stock in accordance with article 600 (2) of Regulations 74, as amended.

Decision will be entered under Rule 50.


text:
    Estate of Louisa Morris Carroll, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67678.
    Promulgated September 7, 1933.

      Walter Carroll, Esq., and Andrew R. Martinez, Esq., for the petitioner.

      Thomas F. Callahan, Esq., for the respondent.
   OPINION.

Lansdon:

This proceeding is for the redeteranination of a deficiency in estate tax in the amount of $183.39 determined by respondent against the estate of Louisa Morris Carroll, who died on August 11, 1930, a resident of New Orleans, Louisiana. The only issue is whether the cash surrender value of certain life insurance policies should be included in the estate of the decedent.

The proceeding was submitted on the pleadings and some oral testimony was adduced to show that none of the beneficiaries derived any benefit from the life insurance policies in question. The facts are not in controversy.

Subsequent to his marriage and prior to the death of his wife, Joseph W. Carroll took out four insurance policies on his own life, payable to his estate. The cash surrender value of such policies at the date of decedent’s death was $61,129.64, no part of which was included in gross estate for estate tax purposes. Upon audit of the estate tax return the respondent held that such value was an asset of the marital community and that one half thereof in the amount of $30,564.82 should be included in the taxable estate of the decedent. None of the policies have been surrendered and none of the beneficiaries of the decedent’s estate have received any payments on account of the cash surrender value thereof at the date of decedent’s death.

The petitioner contends that as the insurance taken out by the surviving husband was not on the life of the decedent wife, and that as none of the amounts here involved have been received by the executor or any heir or beneficiary of the decedent, it is not taxable under the provisions of section 26, U.S. Code Annotated, and that even if the insurance were on the life of the decedent, it is no part of her estate for Federal estate tax purposes. The respondent’s determination is based’ on the theory that the cash surrender value of the four life insurance policies, all payable to the estate of the decedent’s husband, was a community asset at all times after the policies were taken out.

Under the laws of Louisiana it appears to be well settled that an insurance policy taken out by the husband and payable to his estate is community property. In Succession of Buddig, 108 La. 406; 32 So. 361, the court, in its syllabus, said: “A policy of life insurance issued to a married man during the existence of the community and made payable to his executor, administrators and assigns, falls into the community, and not his separate estate on the dissolution of the former by death.” In the body of the opinion the court said: “ He [the husband] has no right to transact so as to build up a separate estate to the disadvantage of the community. Everything left at dissolution is presumed common.” At section 485, McKay on Community Property, a very generally accepted authority, the writer says: “ So far as the author has been able to discover in the authorities, the only case where an insurance policy has been held to be common is where the husband, during marriage, procures insurance on his own life payable to himself, his executors, administrators or assigns.”

The confusion involved in the taxability of the proceeds of insurance policies probably results in part, at least, from the changed practice of insurance companies since much of the jurisprudence relating to life insurance was established. In its original form a life insurance policy produced no proceeds prior to the death of the insured. At the present time a large number of policies provide for the payment of the principal to the insured or his assigns at the expiration of a fixed period and even the majority of straight life policies provide for cash surrender value at the end of each year in which the contract is in evidence. As to all such policies death is not a prerequisite to a claim for the proceeds of life insurance. The payment of the premiums creates a cash asset that may be realized at the will of the insured, as was the case here where the payment of premiums by the husband resulted in the creation of an asset realizable in cash in the amount of $61,129.64. If this cash surrender value was property, as to which there can be no question, it fell into the community estate on the dissolution thereof by death and one half thereof should be included in the taxable estate of the decedent.

The petitioner argues that as the insured retained the right to change the beneficiaries of all the policies it is not certain that either the wife or her heirs could ever receive any part of the amount in question. Even if material, the petitioner has failed to prove that the insured could designate beneficiaries other than those named in the policies when taken. If he had such power it was not exercised and we are of the opinion that the death of his wife precluded him from making any change as to the cash surrender value of the policies that had accrued at the date of her death.

Petitioner also argues that the amount here in question is not taxable, since Congress has provided special rules for the taxation of the proceeds of life insurance policies. In our opinion the special provisions relied upon have no bearing on the only issue in this proceeding. If the husband had used the money with which he discharged the insurance premiums in the payment of installments on a parcel of real property, there can be no question that the equity so created would have been a community asset under the laws of Louisiana, and taxable as part of the community estate upon the death of either husband or wife. The respondent has determined that one half the cash surrender value of the life insurance policies in question was a community asset and that the decedent’s interest is taxable under the provisions of section 302(a) of the Revenue Act of 1926, as interpreted in article 10 of Regulations 70. Since the decedent died subsequent to February 26, 1926, the test of taxability set out in the second paragraph of article 10 of the regulations has no applicability to the issue here.

Decision will be entered for the resfondent.

       Sec. 302. The value oí the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      (a) To the extent of the interest therein of the decedent at the time of his death.

       Akt. 10. Character of interests included. — It is designed by the foregoing provision of the statute that there shall be included in the gross estate the value of all property of the decedent whether real or personal, tangible or intangible, the beneficial ownership of which was in the decedent at the time of his death.
      Where the decedent died prior to 10:25 a.m. Washington, D.C., time, February 26, 1926, the test which determines that the value of a given interest is to be included in the gross estate under the provisions of subdivisions (a) of the corresponding sections of the Revenue Acts prior to that of 192G, is whether the property, after death, shall be subject to : (1) Payment of the charges against the estates ; (2) payment of the expenses of administration; and (3) distribution as a part of the estate. This test is not applicable if the decedent died subsequent to the effective date of the Revenue Act of 1926.