author: Seawell :

text:
    Simms Petroleum Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Simms Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Trinity Drilling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61496-61498.
    Promulgated August 15, 1933.

      J. Sterling Halstead, Esq., and K. D. Morgan, Esq., for the petitioners.

      Eldon McFarland, Esq., Bruce A. Low, Esq., Arthur Clark, Esq., and R. H. Transue, Esq., for the respondent.
   OPINION.

Issue No. 1.

Seawell :

The first issue involved is entirely one of fact, namely, the amount of losses to which the Simms Oil Co. is entitled on account of the abandonment or other disposition of certain oil leases in 1922,1923, 1924, and 1925. The parties have stipulated that the Commissioner did not allow any cost basis on account of the acquisition of the leases in question on June 20, 1919, and accordingly included in taxable income tbe entire proceeds, if any, arising from their disposition. We have found as a fact that the cost of the leases to the Simms Oil Co. was $972,012.94 and the parties have stipulated the percentage of such cost which is applicable to the leases abandoned in the several years referred to above. The losses allowable (to the extent material in these proceedings) will accordingly be determined on the basis of the cost as determined herein and the percentages of such cost as stipulated by the parties as applying to the several years referred to.

Issue No. 0.

On this issue the error assigned in the petition is, first, that the Commissioner erred in failing to recognize a" loss of $673,852.02 sustained by the Simms Petroleum Co. in 1923 through the disposal on December 31, 1923, of the stock owned by it in the Eowe Oil Corporation to the Simms Oil Co. The computation of the loss was set out in the petition as follows:

Cost of tke Rowe Oil Corporation stock
Cask- $598,137. 49
17,000 skares of Simms Petroleum Co. at an alleged value of $53 per skare_ 901, 000. 00
Total-$1, 499,137.49
Capital contrikution of Simms Petroleum Co. to Rowe Oil Corporation resulting from forgiveness of indektedness- 356, 767. 77
$1, 855, 905. 26
Less: Consideration named in tke contract of Simms Petroleum Co. witk Simms Oil Co. for tke sale of tke Rowe Oil Corporation stock_ 1,182, 053. 24
Alleged loss sustained- $673, 852. 02

It is further contended that the Simms Oil Co. sustained a loss on the same day of $1,227,542.45 as a result of the liquidation and dissolution of the Eowe Oil Corporation, computed as follows:

Cost of Rowe Oil Corporation stock_$1,182, 053.24
Indektedness of Rowe Oil Corporation to Simms Petroleum Co. assumed by Simms Oil Co_ 145,158. 59
$1,327,211. 83
Less: Net fair market value (exclusive of above indebtedness) of assets of Rowe Oil Corporation distributed in complete liquidation of Rowe Oil Corporation on December 31, 1923_ 99, 669. 38
Alleged loss sustained_$1,,227, 542: 45

In considering this issue it should be observed' at the outset that the year in which the alleged losses occurred is not before the Board, hut what the petitioners, desire is to use such losses in increasing ox creating net losses in 1928 which may be carried forward and allowed as deductions in computing net income for 1925. Further, it should be kept in mind that at the time the transactions in question took place the Simms Petroleum Co. owned all the capital stock of the Simms Oil Co. and the Rowe .Oil Corporation, and the three corporations filed a consolidated return for 1923. While a loss was claimed in the petition for the Simms Petroleum Co., as set out above, no mention is made of such loss in their brief, but the entire argument advanced is on account of the loss to the Simms Oil Co. In any event, we think it clear that whatever net loss may have been sustained by the Simms Petroleum Co., either as a result of the transactions here referred to or otherwise, may not be availed of by it in 1925 under the provisions of section 206 of the Revenue Act of 1926, since the Simms Petroleum Co. had no income in that year against which such net loss might be applied. In other words, a net loss sustained by a member of an affiliated group may not be availed of in a subsequent year for an amount greater than its own income in such subsequent year. Woolford Realty Co. v. Rose, 286 U.S. 319; Swift & Co. v. United States, 38 Fed. (2d) 365; New Castle Leather Co., 26 B.T.A. 282; affd., 65 Fed. (2d) 294; Delaware & Hudson Co., 26 B.T.A. 520; affd., 65 Fed. (2d) 292; and Sailors Brothers Co., 26 B.T.A. 700.

Nor can we agree with the petitioners that the loss which occurred on account of the liquidation of the Rowe Oil Corporation is one which was sustained by the Simms Oil Co. In short, what occurred was that the Simms Petroleum Co. acquired the entire capital stock of the Rowe Oil Corporation in 1919 and 1920 and held such stock until December 31, 1923, when it determined to liquidate the Rowe Oil Corporation. At the same time the Simms Petroleum Co. owned the entire capital stock of the Simms Oil Co. On December 31, 1923, the net value of the assets of the Rowe Oil Corporation was $99,6"69.38, exclusive of an indebtedness to ■ the Simms Petroleum Co. of $145,767.77, which, if taken into consideration, would show liabilities in excess of assets of approximately $46,000. Regardless of the lack of value attaching to the assets of the Rowe Oil Corporation, the Simms Petroleum Co. entered into a contract with its other wholly owned subsidiary, the Simms Oil Co., whereby the latter would pay to the parent $1,182,053.24 for the assets of the Rowe Oil Corporation in addition to assuming the liability of the Rowe Oil Corporation to the Simms Petroleum Co. On the same day the Rowe Oil Corporation liquidated to the Simms Oil Co. and thereupon dissolved. Of course, if we would view the situation as the petitioners would have us view it, namely, in its separate aspect as an acquisition of the stock of the Rowe Oil Corporation by the Simms Oil Co. and the liquidation of the former corporation to the latter, a loss on the part of the Simms Oil Co. would be said to have occurred in the amount of the difference between the cost of the stock to the Simms Oil Co. and the net value of assets received {Riggs Nat. Bank, 17 B.T.A. 615; affd., 57 Fed. (2d) 980), but we are convinced that what occurred can not be looked at in that manner. Prior, to December 31, 1923, there was no apparent corporate connection between the Rowe Oil Corporation and the Simms Oil Co. other than might be said to exist because of a common parentage in the form of the Simms Petroleum Co., but such a relationship does not alter the fact that each of the corporations is separate and distinct and each corporation in an affiliated group must be looked at as a separate taxpayer. Cf. Woolford Realty Co. v. Rose, supra, and Swift & Co. v. United States, supra. In short, what may be carried forward in the form of a net loss by each member of an affiliated group (after appropriate use of such net loss in determining the consolidated net income for the year in which the loss occurred) is its own net loss and not the loss either of the group or of some other member.

When considered in the foregoing manner we fail to see how it can be said that the Simms Oil Co. sustained a net loss through the liquidation of the Rowe Oil Corporation in 1923 which may be -carried forward and allowed as a deduction in computing its net income for 1925. Certainly a situation here exists for an application of the well recognized principle in tax cases that substance should prevail over form, since in the merest form only can it be said that the Simms Oil Co. sustained a loss through the transaction in question. Obviously, the Simms Oil Co. was acting merely as the nominee of the Simms Petroleum Co. in effecting the liquidation and dissolution of the Rowe Oil Corporation, and the transfer of the Rowe Oil Corporation stock from the Simms Petroleum Co. to the Simms Oil Co. was in no sense an arm’s length transaction. To recognize such a loss as the loss of the Simms Oil Co. would be tantamount to the recognition of a loss created without regard to the realities of the situation. How the consideration named in the contract between the Simms Petroleum Co. and the Simms Oil Co. was arrived at does not appear, but apparently it might well have been any other amount, large or small, which the exigencies of the occasion or the desires of the parties might have dictated. But even if we should overlook the evident fact of nominee relationship existing on the part of the Simms Oil Co., would it not be a most unusual situation for a deductible loss to arise on account of the acquisition of a.negative quantity? We think so. On the whole, we are of the opinion that whatever deductible loss arose on account of tbe transactions in question was that of the Simms Petroleum Co. and, as we pointed out under a dis-_ cussion of another phase of this issue, since that corporation had no net income in 1925, any net loss which arose in 1923 may not be availed of either by itself or the other members of the group in 1925.

Issue No. 3.

The errors assigned on this issue are that the Commissioner erroneously included, certain amounts in the income of the Simms Oil Co. which were paid to the former stockholders of the Clayton Co. as set out in our findings. A brief recital of the facts, which are somewhat complicated by the various corporations and contracts involved, should make the issue clear. In 1922 the Clayton Co. secured certain rights from the Gasoline Co. to crack gasoline under patents owned by the latter corporation. Shortly thereafter the Clayton Co. assigned some of the rights so received to the Atlantic Co. under a contract which provided that the Clayton Co. would receive some of the royalties to be paid by the Atlantic Co. to the Gasoline Co. On May 14, 1922, and before any amount had become payable under the foregoing arrangements, the Simms Petroleum Co. entered into an agreement with Murphy & Co., owners or in control of some two thirds of the stock of the Clayton Co., for the acquisition of stock of the Clayton Co. In addition to the amount stated in the agreement to be paid for the stock, it was provided that all sums to be paid the Clayton Co. under its royalty arrangements with the Gasoline Co. and the Atlantic Co. would become the property of the stockholders of the Clayton Co. who were stockholders of record of such company immediately prior to the transfer of the stock to the Simms Petroleum Co. By July 2, 1925, the Simms Petroleum Co. had acquired 91.1 percent of the Clayton Co. stock under the agreement with Murphy & Co. and at that time the Simms Petroleum Co. owned the entire capital stock of the Simms Oil Co. On July 2, 1925, the Clayton Co. authorized the sale and transfer of its assets to the Simms Oil Co. as of June 30, 1925, and such authorization was carried out. In such sale the Simms Oil Co. took over the assets and assumed the liabilities of the Clayton Co. and also obligated itself to pay $861,872.71 to the Simms Petroleum Co. In addition the Simms Oil Co. accepted or acquiesced in the arrangement by which any payments to. be made on account of the assignment of rights to the Atlantic Co. would be paid to the former stockholders of the Clayton Co. Between May 14 and December 28, 1925, all the outstanding stock of the Clayton Co. was acquired by the Simms Petroleum Co. pursuant to its contract with Murphy & Co., and on December 28, 1925, the Clayton Co. was formally dissolved. As payments became due and payable under the assignment of rights by the Clayton Co. to the Atlantic Co. they were made to the parties who it was agreed should receive them, namely, they were eventually lodged in the hands of the former stockholders of the Clayton Co.

Our question is whether the Commissioner erred in including the foregoing payments in the taxable income of the Simms Oil Co., the successor in interest of the Clayton Co. If the payments had been made to the Clayton Co. in the ordinary course of events the amounts so paid would have constituted income; in other words, the Clayton Co. had an income-producing asset in the form of a contract, the income from which would have been taxable to it. Further, no question is raised that the income would not have likewise been taxable to the Simms Oil Co., the successor in interest of the Clayton Co., had it not been for the contract which was entered into for the benefit of the old stockholders of the Clayton Co. Our question is whether as a result of the agreement between Murphy & Co. (representing the old stockholders) and the Simms Petroleum Co. there was such a change in the status of the income to be received that it would be taxable to the old stockholders without first having become the income of the Simms Oil Co.

The major contention advanced by the petitioners is that the contracts of the Clayton Co. with the Gasoline Co. and the Atlantic Co. were a contingent claim which was distributed as a dividend in kind to the stockholders of the Clayton Co. and the proceeds thereof were not, in any event, income of the Simms Oil Co. Admittedly, there is much that may be said in support of such a proposition, but we think such a conclusion overlooks certain basic corporate principles and certain important facts which are present in the case at bar. In the first place, the contracts of May 14 and June 10, 1925, did not have the Clayton Co. as a party; they were between Murphy & Co., which either owned a majority of the stock of the Clayton Co. or represented a majority of its stockholders, and the Simms Petroleum Co., which was buying the Clayton stock. That a corporation is separate and distinct from its stockholders and that a corporation owns the corporate assets rather than its stockholders are too well established to require citation of authority in support thereof. Accordingly, we fail to see why the position of the Clayton Co. as a separate taxable corporate entity was in any manner changed as a result of contracts to which it was not a party; the royalty contract remained as its asset and any income to be derived therefrom would have been taxable to it.

So far we do not think the petitioners seriously question that a distribution in kind had not taken place, but they say that the action of the Clayton Co. in' connection with the transfer of its assets to the Simms Oil Co. and its liquidation and dissolution amounted to a ratification of tbe stockholders’ contracts with the Simms Petroleum Co. and .thus completed the action necessary for an effective distribution in kind of the royalty contract to the old Clayton stockholders. We are constrained to disagree. It is true that the trilateral agreement of the Simms Petroleum Co., the Simms Oil Co., and the Clayton Co. specifically recognizes the contract as to the payments to the old stockholders and the same is true of the resolution adopted by the board of directors of the Clayton Co. for the transfer of its assets to the Simms Oil Co., but the fact remains that the asset itself was transferred to, and became the property of, the Simms Oil Co. At that time no income had accrued or become payable under the royalty contract in question. Even, therefore, if we agree that the contract between Murphy & Co. and the Simms Petroleum Co. had been acquiesced in and accepted by the Clayton Co. and the Simms Oil Co., we have nothing more than an assignment of income to arise in the future, which has long been recognized as taxable to the assignor when it arises. Bing v. Bowers, 22 Fed. (2d) 450, and Hazel T. Power, 23 B.T.A. 428; aff'd., 61 Fed. (2d) 625; certiorari denied, 288 u.S. 612. Certainly, if a dividend in kind had been intended, we see no reason why it could not have been accomplished through the assignment of the asset itself instead of retaining what seems like a most cumbersome way of having the income pass through the several hands before reaching the old Clayton stockholders. Under the petitioners’ theory, the Simms Oil Co. became a mere stakeholder with no interest whatsoever in the contract or its proceeds other than to turn the proceeds over to the old stockholders. The extent to which that proposition is true we shall not attempt to determine, though the more reasonable view would seem to be that for some reason the Simms interests desired to retain a measure of control over the royalty contract. Whether the retention of the contract meant some possible benefit to the Simms interest does not appear, though it is difficult to conceive that any other reason would have prompted the action taken. Further, the parties to the contracts seemed to have recognized at least the possibility that the income under the royalty contract would be taxable to the Simms Oil Co., since it was provided that the amount to be distributed to the old stockholders was the amount paid by the Atlantic Co. “ less Federal income taxes, payable in respect thereto.” The course pursued was in accordance with that understanding, namely, the Simms Oil Co. retained an amount estimated as sufficient to cover the Federal taxes and the balance was distributed. In any event, it is clear that the royalty contract passed to the Simms Oil Co. and we can see no basis under our scheme of taxation by which the income derived therefrom would not be taxable to it even though it distributed such income in accordance with a preexisting contract to persons who were not its stockholders at the date of distribution.

The further contention is made that even if it should be held that the amounts in question are taxable to the Simms Oil Co., in any event two amounts which were shown in our findings as having been credited on the books of the Gasoline Co. to the Clayton Co. on December 21 and December 31, 1925, but were not paid by the Gasoline Co. until January 2,1926, were erroneously included by the Commissioner in taxable income for 1926, when they should have been included in taxable income for 1925. The Commissioner maintains that the position as set out in the deficiency notice is correct, though he pleads affirmatively that in the event the two amounts should be taxed in 1925 instead of 1926, the deficiency for 1925 should be increased accordingly. The answer to the question rests upon a determination whether the amounts were constructively received in 1925 when the credits to the Clayton Co. were placed upon the books of the Gasoline Co. The Commissioner’s various regulations which have been promulgated under the several revenue acts (including art. 51 of Regulations 69), as well as numerous court and Board decisions, have applied the principle that the doctrine of constructive receipt is inapplicable unless the amount in question is unqualifiedly subject to the demand of the party who would receive the same. Certainly, we can not say, because the amounts were credited to the Clayton Co. by the Gasoline Co., that they therefore became unquali-fiedly subject to the demands of the Clayton Co. prior to their payment. The most that can be said is that the crediting was evidence that the Gasoline Co. was living up to its contract and the same might be said of the payments by the Atlantic Co. to the Gasoline Co., but we are unwilling to say from such evidence that the amounts thereby became unqualifiedly subject to the demand of the party to whom credited.

Issue No. J.

The error assigned under this issue relates to the same transaction as the previous issue and has for its ultimate question the basis for depreciation by the Simms Oil Co. of the assets received by it through the liquidation of the Clayton Co. on July 2, 1925. More specifically, the question is whether the cost to the Clayton Co. or the cost to the Simms Oil Co. as represented by the fair market value of the depreciable assets at the date of liquidation of the Clayton Co. is to be used as the basis for depreciation by the Simms Oil Co.

The position of the Commissioner is that there was here a reorganization (a merger) within the meaning of that part of section 203 (h) (1) of the Revenue Act of 1926 which defines a reorganization as “ a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation)” and that accordingly the case is governed by section 204 (a) (7) and (c), which provides for the use of cost to the trans-feror corporation as the basis for depreciation to the corporation to which depreciable assets are transferred. The particular type of reorganization which he contends occurred was a merger, and in support of this position he relies on a statement in Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188; affd., 287 U.S. 462, where it is stated that “ In a merger one corporation absorbs the other and remains in existence while the other is dissolved.”

It is of course true that when two corporations merge one corporation absorbs the other and remains in existence while the other is dissolved, and in this case the assets of one corporation were taken over by another, its liabilities were assumed and thereafter it was dissolved, while the transferee corporation remained in existence, but we do not understand that such a transaction constitutes the character of absorption and continuation necessary for a merger within the meaning of the statute. For example, if after the Simms Petroleum Co. had acquired 91.1 percent of the Clayton Co., the Simms Petroleum Co. had liquidated the Clayton Co., taking over its assets and assuming its liabilities, we do not understand that a merger would have arisen any more than there occurred in the case of Riggs National Bank, supra, where one corporation which owned all the stock of a second corporation caused the second corporation to be dissolved and took over its assets. In that case the reasoning here advanced by the Commissioner would result in a merger being held to have occurred, but the Board held that the liquidation of the subsidiary gave rise to a deductible loss on the part of the parent. Cf. Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568 (reversing Aluminum Goods Mfg. Co., 22 B.T.A. 1)affd., 287 U.S. 544. In the case at bar the Simms Petroleum Co. was not even affiliated with the Clayton Co. since it owned less than 95 percent of its stock, and with all the more reasoning it would be said that a basis for gain or loss would arise on account of such liquidation. There was also no continuation of stock interest between the Clayton Co. and the Simms Petroleum Co., that is, none of the old stockholders of the Clayton Co. were or became stockholders of the Simms Petroleum Co.

The liquidation here, however, was not of the Clayton Co. to the Simms Petroleum Co., but instead it was one step removed therefrom, namely, to the Simms Oil Co., whose entire capital stock was owned by the Simms Petroleum Co., and from the common ownership it is urged that there was a merger in which more than an 80 percent interest remained in the same hands, namely, the Simms Petroleum Co. We disagree and can see no more reason for saying that a merger occurred than in the suppositious case which we set out above. The most that can be said is that the resolution of the Simms Petroleum Co., dated July .1, 1925, and providing for the transfer of assets in question, stated that it seemed advisable to have the Simms Oil Co., its operating subsidiary which was engaged in a line of business similar to that of the Clayton Co., take over the assets of the Clayton Co. and carry on refining and distributing operations such as that corporation previously carried on.- But we do not understand that such action contemplated any merger of the corporate life of the Clayton Co., a Delaware corporation, with that of the Simms Oil Co., a Texas corporation, other than might appear in any case of an outright acquisition of the assets of one corporation by another. The ownership of the assets of the Clayton Co. passed completely to the Simms Oil Co. and the Clayton Co. was thereafter dissolved. There is not even the common contention as to whether what occurred constituted an intercompany transaction, since the Clayton Co. and the Simms Oil Co. were not affiliated when the transfer of assets occurred. Between July 2 and December 28, 1925, the Simms Petroleum Co. or the Simms Oil Co. acquired the minority interest under the same contract by which the other stock had been acquired, but such acquisition would not alter the affiliated status which existed on July 2, 1925. On the whole, we are of the opinion that what here occurred amounted to a liquidation of the Clayton Co. to the Simms Oil Co. and that the basis for depreciation for the Simms Oil Co. on account of the depreciable assets received is the fair market value of such assets at the time received. It accordingly follows that the additional depreciation stipulated by the parties on such basis should be allowed. See Warner Co., 26 B.T.A. 1225; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599.

Issue No. 5.

While our evidence on this issue is not of the most satisfactory character in all of its details, we do not understand that there is any disagreement between the parties other than as to the amount of $82,827.60 on which the Commissioner has not allowed depreciation as shown in the stipulation set out in our findings on this issue. The Commissioner, while not agreeing to the correctness of our decisions, conceded in his brief that issues of this character have been decided on several occasions by the Board against his position and that accordingly, if the Board adheres to its prior rulings, the Simms Oil Co. is entitled to depreciation on the item in question. A. T. Jergins Trust, 22 B.T.A. 551; Petroleum Exploration, 23 B.T.A. 890 (reversed by the circuit court of appeals, Commissioner v. Petroleum Exploration, 61 Fed. (2d) 273, and certiorari granted, November 14, 1932); Albert W. Ziegler, 23 B.T.A. 1091; and Twin Bell Oil Syndicate, 26 B.T.A. 165. Since our decisions in the above cited cases, however, the Supreme Court of the United States definitely and authoritatively settled the issue now being discussed in favor of the contention of the Commissioner by affirming the decision of the United States Circuit Court of Appeals of the Fourth Circuit in Petroleum Exploration v. Commissioner, 288 U.S. 467, referred to above. See also Commissioner v. Jergins Trust, 288 U.S. 508, and United States v. Dakota-Montana Oil Co., 288 U.S. 459, in which latter case the Court said:

It is true that the Board of Tax Appeals in construing the 1924 and 1926 Acts has held that capitalized drilling costs are subject to a depreciation rather than a depletion allowance. Jergins Trust Co. v. Commissioner, 22 B.T.A. 551; Ziegler v. Commissioner, 23 B.T.A. 1091; P. M. K. Petroleum Co. v. Commissioner, 24 B.T.A. 360. But these cases were all decided after the enactment of the 1926 Act and did not consider the administrative and legislative history, which we think decisive.

The decisions of the Supreme Court above cited are controlling and are determinative of this fifth issue in favor of the contention of the Commissioner that the amounts expended during 1926 for drilling productive oil wells are recoverable through depletion rather than by depreciation allowances.

Issue No. 6.

The final issue, as to whether a net loss sustained by the Simms Petroleum Co. for the year 1923 may be carried forward and allowed as a deduction in computing consolidated net income of the several petitioners for 1925, when the Simms Petroleum Co. sustained a loss for 1925, is fully covered, and decided adversely to the carrying forward of such a net loss, in our discussion of issue No. 2. It accordingly follows that the Commissioner is sustained on this issue.

Reviewed by the Board.

Judgment will be entered under Bule 50.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Clark Thread Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. & P. Coats (R.I.), Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38903, 38904, 47974.
    Promulgated August 18, 1933.

      Albert L. Hopkins, Esq., Frederic J. Faulks, Esq., and Jay C. Halls, Esq., for the petitioners.

      Allin H. Pierce, Esq., for the respondent.
   OPINION.

Issue (I) — Amortisation of Contract of 1897.

Trammell :

The petitioners contend that the Clark Thread Co. is entitled to a deduction from gross income for each of the taxable years 1923 and 1921 on account of amortization of the contract entered into by and between George A. Clark & Brother (Inc.) and the Clark Thread Co. (and certain of the latter’s stockholders) in 1891 in the circumstances detailed under this issue in our findings of fact.

The petitioners claim that the contract constituted a valuable capital asset in the hands of George A. Clark & Brother (Inc.) from the date of its execution in 1891, subject to exhaustion in the process of earning income, and that the Clark Thread Co. acquired the contract in 1911. Petitioners concede that, coincident with its acquisition by the Clark Thread Co. and the dissolution of the other principal party thereto in 1917, the contract was terminated and ceased to exist, but contend that the Clark Thread Co. thereby acquired a valuable property right in the nature of an exhaustible capital asset, namely, the right to receive thereafter the entire amount of its net earnings for the remaining period of the original life of the contract.

The petitioners argue that the Clark Thread Co. is entitled to deductions in the taxable years on account of amortization or exhaustion of the capital asset so acquired in 1917, and propose as the proper basis for the computation of such deductions, first, the fair market value of the contract at March 1, 1913, alleged to have been $23,000,000, spread over 28% years, the remaining period of life of the contract on that date, which would give an annual amount in excess of $800,000. This basis is contended for on the theory that because George A. Clark & Brother (Inc.) owned 100 percent of the stock of the Clark Thread Co. in 1917 and the two corporations thus were affiliated at that time, the Clark Thread Co. is entitled to the same basis as George A. Clark & Brother (Inc.) would be entitled to if the contract had remained in its possession.

In the alternative, the petitioners argue that if the March 1,1913, value is not the proper basis for computing these deductions, then the Clark Thread Co. is entitled to deductions on the basis of the fair market value in 1917, said to have been $21,000,000, spread over the period of 24 years from July 1, 1917, to July 1,1941,' the date on which the contract would have expired by its own terms. Another alternative basis suggested by the petitioners is the cost to the Clark Thread Co. of acquiring the contract in 1917, alleged to have been $8,953,589.39.

Respondent’s contentions, in substance, are that the contract was an intercompany transaction between two subsidiary members of an affiliated group of corporations; that it represented nothing more than the method by which, or channel through which, the parent corporation in Scotland elected to take the profits of its American subsidiaries, the Clark Thread Co. and George A. Clark & Brother (Inc.); and that in any event the contract did not constitute a depreciable capital asset which was being used in the business of the Clark Thread Co. in either of the tax years, since the capital value of the contract, if it ever had any such value, was destroyed or disappeared on December 3, 1897, on which date George A. Clark & Brother (Inc.) became the record owner of all the shares of capital stock of the Clark Thread Co.

Before discussing the proper basis for the computation of the amortization deductions claimed by the petitioners, we will consider first the question which is of primary importance here, namely, whether or not the Clark Thread Co. acquired a capital asset in 1917 which is subject to amortization deductions. If that company and George A. Clark & Brother (Inc.) were in fact affiliated on May 19, 1897, when the contract in controversy was executed by them, then the contract must be regarded for tax purposes as an intercompany transaction, which did not result in the acquisition of a depreciable asset by the latter corporation. If the contract was not a depreciable capital asset in the hands of George A. Clark & Brother (Inc.) at March 1, 1913, or July 1, 1917, then the Clark Thread Co. is not entitled to amortization deductions on the basis of the fair market value of the contract at either of those dates, or on any other basis.

If the two corporations mentioned were subsidiary members of an affiliated group when the contract was executed, the net worth of that group was neither increased nor diminished by their agreement. The contract, then, would represent merely an intercompany transaction by which the net earnings of the one were shifted to the other. Nothing of value was added thereby to the assets of the affiliated group. Cf. Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544, and for a discussion of the nature of intercompany transactions see opinion of the circuit court in Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568, affirmed by the decision of the Supreme Court above cited. If the corporations were not affiliated when the contract was signed, but were independent corporations dealing at arm’s length, a different conclusion might be reached.

The record contains much significant information respecting the relationship of the contracting corporations, both prior and subsequent to May 1897. The Clark Thread Co. was incorporated in 1865, and for many years prior to 1897 its products were sold by George A. Clark & Brother, a partnership. The partnership was incorporated under the same name on May 18, 1897, and on the next day, May 19, 1897, the contract which is the subject matter of the claimed deductions was executed by the two corporations.

All the capital stock of the new corporation, George A. Clark & Brother (Inc.), was acquired by Clark & Co., Ltd., of Paisley, Scotland. The principal stockholders of the Clark Thread Co. at that time, and the number of shares held by each, were as follows: Stewart Clark of Paisley, Scotland, 1,300 shares; James Clark, 1,280 shares; William Clark, 1,208 shares; John Clark, 1,040 shares; James and John Clark, trustees, 800 shares; J. William Clark, individually and as trustee, 300 shares; William Campbell Clark, 50 shares; Robert Brown Symington, 50 shares, and Robert Cumming, 100 shares; total, 6,128 shares out of a total of 7,500 shares, or more than 80 percent of the then issued and outstanding capital stock. The individuals named were also shareholders or officers of Clark & Co., Ltd., of Paisley, Scotland, which became the sole stockholder of George A. Clark & Brother (Inc.), the other party to the contract in question.

It is to be noted that the partnership of George A. Clark & Brother, which was the sole selling agent of the Clark Thread Co., prior to May 18, 1897, was composed of the following members, all of whom were stockholders of the Clark Thread Co.: Stewart Clark, of Paisley, Scotland; William Clark, of London, England, and Robert Brown Symington and Robert Cumming, of Newark, New Jersey.

It is also shown by the record that Stewart Clark, of Paisley, Scotland, who was the largest individual stockholder of the Clark Thread Co., was an executive or managing director of Clark & Co., Ltd. (the sole stockholder of George A. Clark & Brother (Inc.)), and a member of the former partnership of George A. Clark & Brother. William Campbell Clark was the president of George A. Clark & Brother (Inc.) and a stockholder and vice president of the Clark Thread Co. Robert Brown Symington was a stockholder and secretary of the Clark Thread Co.; he was also secretary of George A. Clark & Brother (Inc.) and was a member of the former partnership of George A. Clark & Brother.

From the foregoing facts it appears that in May 1897, and for many years prior thereto, at least 80 percent, and perhaps a much larger percentage, of the capital stock of the Clark Thread Co. was owned and held by the stockholders of Clark & Co., Ltd., of Scotland, which subsequently became the sole stockholder of George A. Clark & Brother (Inc.). In the light of those facts, we can not assume that the Clark Thread Co. and George A. Clark & Brother (Inc.) were independent corporations acting at arm’s length when the contract of May 19, 1897, was executed. We can not escape the conclusion that they were subsidiary corporations of a closely related group.

Upon completion of the reorganization of 1897, of which the contract in question was an integral part, the status of the corporations was not materially changed. They remained subsidiaries of the same affiliated group. The record ownership of the stock of the Clark Thread Co. was merely changed from the former individual stockholders, who were shareholders of Clark & Co., Ltd., of Scotland, to George A. Clark & Brother (Inc.), all of whose stock was owned by the same Scottish corporation.

Whatever may have been the relationship of the contracting corporations on May 19, 1897, it is conceded that they became- affiliated on December 8, 1897, when George A. Clark & Brother (Inc.) acquired 100 percent of the capital stock of the Clark Thread Co., and that such status continued from that date to the year 1917. In any event, then, if these corporations were not affiliated on May 19, 1897, it is apparent that this contract between two subsidiaries of an affiliated group on and after December 3, 1897, conferred no benefits upon either member any more than either would have had without such contract. Without the contract, one corporation might have permitted any proportion of its profits it saw fit to be transferred to the other without any effect upon the enterprise. It was like taking money from one pocket and putting it in another. Because the two corporations by contract did, and continued to do, what might as well have been done without it, that is, shift profits from one to the other, does not give rise to an exhaustible asset. These two corporations by virtue of the contract brought into the business enterprise, consisting of the affiliated group, nothing in the way of capital asset values which the group would not have possessed if the contract had not been in existence. Therefore, if the contract ever had any value as a capital asset in the hands of George A. Clark & Brother (Inc.) prior to December 3,1897, we think there is no doubt that such value disappeared on that date.

George A. Clark & Brother (Inc.) thereafter possessed no rights under the contract which it could not have exercised by reason of its ownership of all of the capital stock of the Clark Thread Co. Indeed, its ownership of that stock gave it powers and rights greatly in excess of those conferred by the contract. Any time after December 3, 1897, George A. Clark & Brother (Inci) could have caused the Clark Thread Co. to cancel the contract, or to execute a new contract on such terms and conditions as it pleased. It could have appointed itself the sole selling agent of the Clark Thread Co. and could have taken not only 90 percent of the earnings of its subsidiary, but could have taken all of its earnings either under the provisions of the contract, or as dividends, or a portion of the earnings by both methods. It could have canceled the contract in question without consulting the Clark Thread Co., and there would have been none who could make legal objection.

The fact that after December 3, 1897, George A. Clark & Brother (Inc.) elected to continue the contract in effect and to take approximately 90 percent of the net earnings of the Clark Thread Co. under the provisions of the contract, and the balance of its earnings as dividends, is unimportant so far as attaching value to the contract as a capital asset.

But the petitioners insist that nevertheless George A. Clark & Brother (Inc.) did continue the contract in force and effect from 1897 to 1917; that it was a valuable capital asset because it produced a net profit to said corporation of more than $2,000,000 annually; and that George A. Clark & Brother (Inc.) could have sold the contract for many millions of dollars. We are not impressed by this argument. It is plain that George A. Clark & Brother (Inc.) could not have sold this contract without parting with its right as sole stockholder to receive approximately 90 percent of the earnings of the Clark Thread Co., and if the contract had not been in existence the sole stockholder could have sold its right to such earnings for as large a consideration as it could have gotten for the contract.

If George A. Clark & Brother (Inc.) subsequent to 1897 had in fact sold the contract to a third party, and the purchaser were before us claiming deductions for amortization of the contract, a different situation would be presented. But here we are dealing with a claim which is allowable only on the theory that the contract in question constituted an exhaustible capital asset in the hands of a parent corporation, by means of which contract the parent corporation took from its wholly owned subsidiary approximately 90 percent of the subsidiary’s net annual earnings by causing the subsidiary to sell its output to the parent at cost plus approximately 10 percent of its earnings. In taking under the contract the greater portion of the subsidiary’s earnings George A. Clark & Brother (Inc.) reduced to that extent the amount of net earnings available for distribution to it as dividends. In these circumstances, the allowance of deductions for amortization of the contract would amount substantially to amortization of the right of the sole stockholder to receive the net income of its corporation:

The right of a stockholder to receive as dividends the net earnings of the corporation whose stock he owns is a valuable property right, but it represents to the stockholder income derived from the investment of capital in the corporation’s stock; it is not a capital asset which may be amortized.

In Walter E. Kramer, Executor, 21 B.T.A. 1043, Kramer and Schnadig, who were the sole stockholders of the Pullman Couch Co., caused that corporation to assign and transfer to them its right to receive certain patent royalties. The petitioners contended that they thereby acquired valuable contractual rights upon the basis of which they were entitled to deductions for exhaustion. In our opinion, we said:

However, tliey (Kramer and Schnadig) were already entitled to receive those royalties from the corporation as dividends on their stock. Instead of permitting the corporation to receive the royalties and then pay the same over to them in the form of dividends, they caused the corporation to assign the royalties to them directly. * * * Under these circumstances, the so-called “ contractual rights ” of the petitioners to receive the corporation’s royalties did not, in our opinion, give rise to a capital asset in respect of which amortization or exhaustion deductions are allowable. * * * The right to receive dividends does not constitute a capital asset which may be made tbe subject of amortization deductions.

On principle, the instant case, we think, is not distinguishable in any material respect from the one above cited. There, the two stockholders of the couch company by a written contract caused the corporation to assign and transfer to them its right to receive income which would otherwise have been available for distribution to them as dividends. Here, George A. Clark & Brother (Inc.), the sole stockholder of the Clark Thread Co., on and after December 3, 1897, by means of a written contract took from its subsidiary approximately 90 percent of its earnings which otherwise would have been received by the subsidiary and distributed to the sole stockholder as dividends. The fact that George A. Clark & Brother (Inc.) took the profits which otherwise would have been received by its subsidiary in excess of the stipulated annual amount, by causing the subsidiary to turn over its products at cost, plus said annual amount, we think is not controlling. The method selected by the parties in the instant case deprived the subsidiary of income which, except for the contract, would have been eventually distributed to its sole stockholder in dividends, quite as effectively as did the contract in the Kramer case. And as we held there, so must we hold here, that the right of á sole stockholder to receive the income of his corporation as dividends can not by contract be converted into a capital asset which may be made the subject of amortization deductions merely because the stockholder elects to take such income directly under the terms of a contract by which the corporation is required to sell its products to the stockholder at cost.

For the reasons stated, it is our opinion that George A. Clark & Brother (Inc.),.upon execution of the contract in question, did not acquire an exhaustible capital asset, and was not entitled to amortization deductions on the basis of the value at March 1,1913, nor July 1,1917. It follows that there is no basis for the allowance of amortization deductions to the Clark Thread Co., and it is unnecessary for us to discuss what would be the proper basis for computing such deductions if they were allowable.

The same conclusion may be reached on another ground. The precise question for decision here is whether or not the Clark Thread Co. during the taxable years 1923 and 1927 possessed an exhaustible capital asset upon which it is entitled to amortization deductions. The events which transpired in the prior years, particularly the years 1897 and 1917, are pertinent only in so far as they throw light upon this issue.

It is significant that the termination of the contract between the Clark Thread Co. and George A. Clark & Brother (Inc.) resulted from the dissolution of the latter corporation on July 1, 1917, and not from any action on the part of the Clark Thread Co., which did not acquire the assets and assume the liabilities of its former stockholder until November 17,1917. Obviously, we think, the contract by its very nature and terms was not transferable, and as far as shown, no other person, individual or corporate, succeeded to any of the rights of George A. Clark & Brother (Inc.) thereunder. Whatever benefits, if any, flowed to the Clark Thread Co. were merely incidental to the termination of the contract by reason of the dissolution of the other principal corporate party.

These circumstances, in our opinion, could not and did not give rise to the acquisition of an exhaustible capital asset by the Clark Thread Co. The net result to the surviving company was only to relieve it of a burdensome contract which was in the nature of a continuing liability. Under the terms of that contract the thread company was bound to turn over its entire manufactured output to its sole stockholder at cost, plus an amount which in fact equaled only about 10 percent of its potential annual earnings. Upon termination of the contract on July 1, 1917, the Clark Thread Co. was enabled thereafter to receive the full amount of its earnings, but the termination of a disadvantageous contract does not result in the acquisition of a capital asset. We conclude, therefore, that during the tax years the Clark Thread Co. did not possess a capital asset upon the basis of which it is entitled to the amortization deductions claimed.

For all the reasons hereinabove indicated, the action of the respondent on the first issue is approved.

Issue (8) — Amounts Paid for Discontinuance of Competitive Trade Brands.

In 1927 the Clark Thread Co. paid to the Blodgett & Orswell Co., a competitor, the sum of $500,000 and to its attorney the sum of $25,000, as consideration for the discontinuance of the sale of thread by the latter company under the name of “ John J. Clark.” The detailed circumstances of the transaction and the incidents leading up thereto are fully set out in our findings of fact. The petitioners claim they are entitled to deduct the aggregate amount of $525,000 from gross income for 1927 as a business expense, while the respondent contends that the amount represents a capital expenditure.

The evidence clearly establishes, we think, that the amount was paid by the Clark Thread Co. for the sole purpose of suppressing a competitive trade brand and thereby eliminating competition. It is also obvious that the Clark Thread Co., after mature consideration, believed that the benefits to be derived by it were worth at least the amount of money paid out. Those benefits were not of a temporary nature, to be enjoyed only during the year 1927, but over an indefinite period of many years, and the whole cost thereof should not, therefore, be charged against income for the year 1927. Such benefits are in the nature of an intangible capital asset, and the amount paid therefor is a capital expenditure, not a deductible expense.

Where the benefits accrue for a limited and definite term of years, the value of the asset is exhausted ratably by the passage of time and an aliquot part of the cost is allowed as a deduction on account of such exhaustion for each year of the period, but where, as here, the benefits derived are permanent or of indefinite duration, no deduction for exhaustion is allowable. Press Publishing Co., 17 B.T.A 452; affirmed as Newspaper Printing Co. v. Commissioner, 56 Fed. (2d) 125; News Leader Co., 18 B.T.A. 1212; Dime Bank of Lansford, Pa., 20 B.T.A. 250; Eitingon-Schild Co., 21 B.T.A. 1163, 1181; Eagle Pass & Piedras Negras Bridge Co., 23 B.T.A. 1338.

In Newspaper Printing Co. v. Commissioner, supra, the rule was stated by the court as follows:

* * * The simple question then arises whether the cost of eliminating competition can constitute a loss within the meaning of section 234 (a) (4) of the Revenue Act of 1921 (42 Stat. 255) ; or whether the value of the thing procured, that is, the elimination of competition, is a capital asset to be carried to capital account. That the cost of eliminating competition is a capital asset has been established by a long line of decisions of the Board of Tax Appeals. In this case it appears to be clear that the taxpayer was willing to pay the amount of its claimed loss for the benefits to be derived from the elimination of the two' competitors. The value of this intangible asset, which must be presumed to be measured by its cost, should have been credited to the capital account and carried as a capital asset. The fact that businessmen, perhaps of wide experience, were willing to pay out the money in return for the gain, clearly negatives any idea that they contemplated that the gain would be less than the expenditure.

On the second issue, respondent’s action is approved.

Issue (3) — Depreciation on Additions to Plant and Equipment.

During the fiscal year ended June 30, 1923, the Clark Thread Co. expended the total sum of $1,670,760.67 for additions to its manufacturing plant and equipment. These additions consisted of buildings, water and steam pipes, and various kinds of equipment and machinery, comprising some 15,000 items, the larger part of which was installed during the first half of the fiscal year. The petitioner claimed in its return a deduction for depreciation on these additions in the amount of $8,437.72, which was allowed by the respondent.

The petitioner now contends that the amount claimed and allowed was inadequate, and that it should be allowed a deduction in the amount of $43,234.30 computed on the basis of one half the depreciation sustained on tbe assets during an entire year. There is no controversy between the parties as to the total cost of the additions in question, the periods of useful life or proper rate of depreciation to be applied, nor the fact that the larger part of such additions was installed during the first half of the fiscal year.

The respondent concedes that in the case of depreciable assets comprising a large number of similar items, under the circumstances disclosed here, it is his customary procedure, as a matter of practical expediency, to determine depreciation on the basis now urged by the petitioner, but contends that there is no statutory authority for such method, and that where in the exercise of discretion he has declined to compute depreciation on that basis, his action should not be disturbed unless the taxpayer offers proof in respect of each item. This view, we think, overlooks the rule that discretion vested in any officer of the Government, either administrative or judicial, may not be exercised in an arbitrary and unreasonable manner to the injury of a taxpayer.

In the light of the facts presented here, it is our opinion that the petitioner is entitled to the depreciation claimed, and we so hold.

Issue (4) — Profit on Assets Sold in WB3.

During the fiscal year 1923, the petitioner J. & P. Coats (K..I.), Inc. sold certain assets consisting of real estate, with the houses and improvements thereon, and various kinds of machinery which had been discarded and scrapped. In its tax return for that year the petitioner reported a profit from the sale of all of these assets in the amount of $32,911.03, which respondent increased by the amount of $10,522.36 on the ground that the petitioner had not taken into consideration depreciation for the taxable year. The petitioner acquired all of the property involved on January 1, 1913.

At the hearing petitioner offered opinion testimony of two witnesses for the purpose of establishing the value of the land without improvements at March 1,1913, and the separate value of the houses and improvements. Cost was the same as value, and the value at January 1, 1918, was stated to be the same as at March 1, 1913. On the basis of this testimony the petitioner argues that the difference between the cost of the land, plus the cost of the improvements, less depreciation sustained, and the selling price represents the profits realized from the sale of the real estate, which amount is said to be $2,464.06. Petitioner asserts that the respondent computed the profit from the sale of the real estate in the amount of $18,356.43.

The balance of the profit determined by the respondent is allocated to the machinery which was scrapped and sold during the year, and the amount of profit so determined by the respondent is alleged by the petitioner to be $31,800.43 on machinery which was sold for $1,784.04. The petitioner contends that the respondent allowed a loss of $6,723.47 on certain items of machinery, and on all the items of machinery computed a net gain of $25,076.96, so that the amount of profit determined by the respondent on the machinery, other than the items on which he allowed the loss, was $31,800.43. The petitioner argues, therefore, that if no cost is allowed as the basis for determining gain or loss, the net gain could not exceed the net proceeds of sale, which amounted to only $1,784.04.

With this last proposition of the petitioner we are, of course, in agreement, but we can not concur in the petitioner’s conclusions of fact. Testimony was offered by the petitioner for the purpose of establishing the figures stated, but it is apparent that those amounts represent mere assumptions of the witness, which are not supported by the record; and in that situation, such testimony can not be accepted as proving facts.

It is not disclosed by the record that the respondent computed the profit from the sale of the real estate separately, or that he allowed a loss on the sale of a part of the machinery and determined a profit on the sale of the balance of the machinery. The deficiency letter clearly indicates that the respondent accepted as correct the amount of profit reported by the petitioner on the sale of its assets as a whole, with the single exception that he reduced cost by depreciation sustained in the taxable year in the amount of $10,522.36, which resulted in increasing by that amount the total net gain.

The petitioner does not attack the action of the respondent in determining that additional depreciation as stated was sustained in the tax year and not taken into consideration by the taxpayer in reporting the profit realized from the sale of the assets. The determination of the respondent on this issue is, therefore, approved for lack of evidence to show error.

Issue (5) — Contributions to Hospitals.

The petitioner J. & P. Coats (E.I.), Inc. during the fiscal year 1923 contributed the sum of $5,000 to a campaign fund of the Memorial Hospital of Pawtucket, and the sum of $1,000 to the building fund of the Notre Dame Hospital of Central Falls, Ehode Island. The petitioner’s manufacturing plant was located partly in Paw-tucket and partly in Central Falls.

The petitioner had an arrangement with the Memorial Hospital whereby amounts paid annually by it to the hospital entitled its employees to free hospital service up to the amount so contributed. Any additional services were paid for by the petitioner as rendered,

and statements were sent to the petitioner by the hospital from time to time showing the balance of the particular fund remaining unused. The petitioner did not maintain hospital facilities at its plant, which would have been necessary if such facilities had not been otherwise available, and the amounts contributed by the petitioner to hospitals were less than it would have cost it to provide such services. In the light of these facts, the so-called contributions were in no sense charitable or philanthropic, but were actuated by business reasons and resulted in direct business benefits. In our opinion, they constitute allowable deductions from gross income as business expenses. Franklin Mills, 7 B.T.A. 1290; Missouri Pacific R.R. Co., 22 B.T.A. 267, 302; Corning Glass Works, 37 Fed. (2d) 798.

In respect of the $1,000 paid by the petitioner to the Notre Dame Hospital building fund, the respondent points out that the hospital was not in operation during the tax year, and argues that this amount is therefore not deductible from gross income for the fiscal year 1923. That fact, we think, under the circumstances shown, is not controlling. The amount was in fact paid during the fiscal year 1923 and constituted a business expense deductible from income of that year. The same situation was considered by us in Sugarland Industries, 15 B.T.A. 1265, and the amount paid was allowed as a deduction from income of the year in which paid.

The petitioner asserts that it claimed deductions for the entire amount of the hospital contributions in question and that the respondent disallowed its claims in the amount of $3,500; whereas the respondent states that the petitioner claimed only the amount of $3,500, which was disallowed. However that may be, the petitioner is here claiming an additional deduction in the amount of $3,500, which, in our opinion, is allowable. The respondent’s action on this issue is reversed.

Issue (6) — Fee Paid on Aooovmt of Inorease of Capital Stock.

During the fiscal year 1923, the petitioner J. & P. Coats (R.I.), Inc. increased its capital stock and on that account paid to the general treasurer of the State of Rhode Island a “ fee ” in the amount of $4,000. The petitioner claimed a deduction in its return for 1923 of this amount as a tax paid to the State of Rhode Island, which was disallowed by the respondent.

In Holeproof Hosiery Co., 11 B.T.A. 547, we held that a “ fee ” paid to the State of Wisconsin on an increase of capital stock was deductible as a tax, and in the case of the Borg & Beck Co., 24 B.T.A. 995, we also held that “ fees ” paid to the State of Illinois on account of increases of capital stock were deductible as taxes. In those cases we pointed out in some detail the distinction between a fee and a tax, which we think it is unnecessary to repeat here.

In support of his action, the respondent relies upon our decision in United Gas Improvement Co., 25 B.T.A. 1382, in which we held that a so-called “ bonus ” exacted from corporations by the State of Pennsylvania for the privilege of increasing authorized capital stock was not a tax and did not constitute an allowable deduction in computing net income. That decision was based upon decisions of the courts of Pennsylvania and of the Federal courts sitting in that state, which specifically held that the Pennsylvania capital stock “ bonus ” was not a tax.

In connection with the present case, there has been called to our attention no decision of the courts of Rhode Island, or of the Federal courts, holding that the “ fee ” exacted from corporations by the State of Rhode Island on increase of capital stock is not a tax. On the contrary, as distinguished from the Pennsylvania “ bonus ”, the Rhode Island “ fee ” appears in all material respects to be similar to the “ fees ” exacted by the States of Wisconsin and Illinois, which we have held are deductible as taxes.

Following our decisions in Holeproof Hosiery Co., supra, and Borg & Beck, Co., supra, we hold that the “ fee ” of $4,000 paid by the petitioner to the treasurer of the State of Rhode Island was a tax, and as such is deductible from gross income for the fiscal year 1923, under the provisions of section 234 (a) (3) of the Revenue Act of 1921. Respondent’s action on this issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Trammell:

text:
    Georgia Savings Bank & Trust Company, Executor of the Estate of Joseph E. Boston, Sr., Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55581-55591.
    Promulgated August 18, 1933.

      John E. McClure, Esq., and Martin E. Kilpatrick, Esq., for the petitioners.

      W. Frank Gibbs, Esq., and N. D. Oann, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Corrle H. Brown; Corrie Hoyt Brown ; Georgia Savings Bank & Trust Co., Administrator of the Estate of Elijah Brown ; George M. Brown, Sr.; George M. Brown, Jr.; W. M. Camp ; Grisham Investment Co.; W. R. Hoyt; Mrs. George A. Matson, Executrix of the Estate of George A. Matson; and Brooks Mell.

   OPINION.

Trammell:

The issue here is whether the petitioners exchanged their stock in the Excelsior Laundry Co. for 5,000 shares of preferred and 12,500 shares of common stock in Atlanta Laundries, Inc., plus $200,000 cash, or whether they exchanged their stock in the old corporation for stock only in the new corporation. The transaction occurred in 1928, under the circumstances set out in our findings of fact.

The respondent has determined, and the petitioners concede, that the transaction constituted a reorganization within the meaning of that term as used in section 112 (i) (1) of the Revenue Act of 1928. If the petitioners exchanged their stock solely for stock, no gain or loss is recognizable to them under the provisions of section 112 (b) (3) of that act, but if they exchanged their stock for stock and cash, then under subsection (c) (1) of that section the gain, if any, must be recognized to the extent of the money received.

This question is largely one of fact, and from a careful consideration of all the evidence in the record before us, we have reached the conclusion, and so found, that the petitioners exchanged their stock for stock only; hence, the transaction is nontaxable.

The respondent objects that the written instruments in question ¡ were not signed by either the promoters or the Atlanta Laundries, ! Inc., and therefore did not constitute binding contracts; hence, that \the contract of November 15, 1927, as modified and fixed by the written notice of December 3, 1927, under section VI (d) of the contract, by which the stockholders of the Excelsior Laundry Co. elected to exchange their stock in that company for cash and stock in the new company, was the contract which was carried out. Such contention, we think, is not supported by the evidence.

Herbert J. Haas, who was the attorney for and represented the promoters and the Atlanta Laundries, Inc., both in the negotiations and in carrying out the contract in question, testified that section VI (d) of the contract was not carried out; that no cash was in fact paid by the Atlanta Laundries, Inc., to the stockholders of the Excelsior Laundry Co. for their stock; that all of the previous agreements were modified or changed, as the transactions were finally closed in accordance with the executed agreements of January 14, 1928.

This witness further testified that the transaction was closed in the manner provided by the contracts or agreements dated January 14, 1928, which were agreed to by him in behalf of the Atlanta Laundries, Inc., that the final agreements were drawn by him or prepared in his offi.ce, and that he did not consider it was necessary for the Atlanta Laundries, Inc., to sign the instruments, as it was in the one instance a transferee of stock and in the other the grantee in a deed; further, that the contracts became fully executed upon their delivery on January 16,1928.

The respondent argues that “ Only after consulting their attorneys and considering the question of Federal taxation did the stockholders .attempt to disguise this transaction to make it appear as a nontaxable transaction,” and that we should apply the principal of looking through form to substance and, so viewing the entire transaction, hold that the petitioners exchanged their stock in the Excelsior Laundry Co. for stock in Atlanta Laundries, Inc., and cash.

As we view the matter, under the facts presented here, there is no occasion to apply the principle of looking through form to sub- \ stance. The stockholders of the Excelsior Laundry Co., both in i substance and in form exchanged their stock in that corporation for \ stock only in Atlanta Laundries, Inc., and to reach any other conclu- ! sion by applying a legal fiction would, in our opinion, be inconsistent '< with the facts.

Tax liability must be determined on tbe basis of what actually occurred, and not what might have occurred; or, as said by the Supreme Court in Weiss v. Stearn, 265 U.S. 242, “ Questions of taxation must be determined by viewing what was actualy done rather than the declared purpose of the participants * * But here what was actually done was entirely in accord with the .declared purpose of the participants, so that both substance and form are identical. See also Stock Yards Bank of Cincinnati, 25 B.T.A. 964; Minnie C. Brackett, Administratrix, 19 B.T.A. 1154, 1159; affd., 57 Fed. (2d) 1072; J. Hampton Hoult, 24 B.T.A. 79, 83; Anna M. Harkness, 1 B.T.A. 127.

Also, we think there is no support for the implication to be drawn from the respondent’s argument that only after consultation with their attorneys respecting the question of Federal taxation did the petitioners attempt to make the transaction appear as nontaxable. As above pointed out, this transaction might have been consummated in either one of three forms, and while substantially the same result would have been achieved by either, the tax liability might have been different. In this situation, prior to the carrying out of the contract of November 15, 1927, and prior to the incurring of any tax liability in connection therewith, the petitioners obtained the consent of the other party to modify the contract so that the transaction as carried out thereunder would minimize their tax liability.

In our opinion this conduct of the petitioners is not subject to adverse criticism. The avoidance of tax liability prior to its in-currence is an entirely different thing from the evasion of tax liability after it is definitely incurred. If a transaction is carried out in such form as to avoid or reduce tax liability, it is not subject to legal censure, provided the method adopted is legal. United States v. Isham, 17 Wall. 496. In the absence of fraud, it is immaterial that the method of effecting the transfer here in question was adopted by these petitioners for the express purpose of avoiding taxes. Boggs-Burnam & Co., 26 B.T.A. 988, 993, and authorities cited. See also Weeks v. Sibley, 269 Fed. 155,158.

Finally, the respondent argues that if this transaction did not constitute an exchange of stock for stock and cash, the stockholders would in any event be taxable on the basis of a liquidating dividend under section 115 (c) of the Bevenue Act of 1928, since the $200,000 received by the Excelsior Laundry Co. from the Atlanta Laundries, Inc., was distributed to the stockholders. It is a sufficient answer to this argument to point out that the distribution of that amount did not constitute either a complete or partial liquidation of the Excelsior Laundry Co. The stockholders did not receive the $200,000 in payment or part payment of their stock; they exchanged their stock in the Excelsior Laundry Co. for stock in the Atlanta Laundries, Inc., and received the $200,000 as a dividend. Upon the exchange of those stocks the Atlanta Laundries, Inc., thereupon became the sole stockholder of the Excelsior Laundry Co. The sale or exchange of its stock by a group of individual stockholders to a new corporate stockholder did not constitute a liquidation of the Excelsior Laundry Co. The latter company sold its real estate and a part of its personal property for $200,000 in cash, and the fact that a portion of the cash was used to pay dividends declared from the corporation’s surplus, which was in excess of that amount, does not alter the legal effect of the dividends, and any profit derived from the sale of its assets was the profit of the Excelsior Laundry Co. Frank G. Warden, 23 B.T.A. 24.

Two legal transactions, separate both in substance and in form, can not theoretically be considered as one transaction in order to impose a tax. W. A. Hoult, 23 B.T.A. 804. And conversely, separate transactions may not be considered as one in order to avoid a tax. Minnie C. Brackett, Administratrix, supra; J. Hampton Hoult, supra.

A corporation is legally distinct from its shareholders, and in the absence of fraud or unfairness, their separate transactions will not be disregarded, although part of a general plan. In E. H. Nielsen Co., 26 B.T.A. 223, we held that where a contract, after reciting that the shareholders of a corporation desired to sell their interests in the business and property of the corporation as well as their shares, provided that the corporation would sell its assets for $630,000 and declare a dividend of its surplus, and that the shareholders would sell their shares for $200,000, the shareholders received a dividend of $400,000 and sold their shares for $200,000 and did not sell their shares for $630,000.

The principles applied in the above cases are applicable here. The respondent’s determinations are disapproved, but since the deficiencies asserted did not in each instance result entirely from adjustments to income on account of the exchange of stocks hereinabove discussed,

Reviewed by the Board.

Judgment will he entered wnder Rule 50.


author: Smith:

text:
    Charles T. Fisher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47047, 51044, 55321.
    Promulgated August 18, 1933.

      J. Marvin Haynes, Esq., and Robert H. Montgomery, Esq., for the petitioner.

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

Smith:

The question presented by these proceedings is whether the petitioner is liable to income tax in respect of any portion of the dividends received by the trustees for the Charles T. Fisher Trust for any of the years 1924 to 1928, inclusive. The respondent contends that the trust is a revocable trust and that the petitioner is liable to income tax in respect of such portion of the corpus of the trust as the petitioner might at any time revest in himself over the amount required to be paid by him for the acquisition of such part of the corpus.

The applicable statutes are subdivision (g) of section 219 of the Kevenue Acts of 1924 and 1926, and section 166 of the Kevenue Act of 1928, which are identical, and which read as follows:

Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

The purpose of section 219 of the Kevenue Act of 1924 was declared by the Ways and Means Committee of the House of Kepre-sentatives (Kept. No. 179, 68th Cong., 1st sess.) to be “to prevent the evasion of taxes by means of estates and trusts. The changes made are quite important.” The committee further stated:

Subdivision (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to the grantor.

The report of the Committee on Finance (Senate Kept. No. 398, 68th Cong., 1st sess.) upon this section is substantially to the same effect. It states:

Paragraph (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to' the grantor. * * *
The creation of a revocable trust constitutes nothing but an assignment of the right to receive future income. Since such an assignment does not operate to increase the taxable income of the assignor, the creation of a revocable trust should not so operate, but the income of such a trust should be included in the income of the grantor. The bill so provides.

The petitioner contests the applicability of the above quoted provision of the Revenue Acts of 1924. 1926, and 1928 to the trust here in question upon the ground that the grantor did not reserve the right to revest in himself the assets transferred to the trustees, but merely an option to purchase them, and submits that “ ‘ power to revest in himself title to any part of the corpus of the trust ’, as used in the statutes here involved, obviously does not include * * * all cases in which the settlor can by any means whatsoever regain title to the property which he has conveyed to the trust.”

In the interpretation of the applicable provisions of the statutes above quoted, the declared purpose of Congress in the enactment of the statute must not be lost sight of. As was stated by the Supreme Court in Tyler v. United, States, 281 U.S. 497, 508, “ taxation, as it many times has been said, is eminently practical, and a practical mind, considering results, would have some difficulty in accepting the conclusion ” contended for. In Chicago, M. & St. P. Ry. Co. v. Minn. Civic & Commerce Assn., 247 U.S. 490, 501, the Court said :

* * * the courts will not permit themselves to be blinded or deceived by mere forms of law but, regardless of Actions, will deal with the substance of the transaction involved * * * as the justice of the ease may require.

In Lucas v. Earl, 281 U.S. 111, it was stated:

* * * But this case is not to be decided by attenuated subleties. It turns on the import and reasonable construction of the taxing act. * * *

In Corliss v. Bowers, 281 U.S. 376, the Supreme Court had before it a case involving a so-called revocable trust created in 1922. The tax liability arose under the Revenue Act of 1924. The Court held that income from a revocable trust may constitutionally be taxed to the grantor, though actually paid to the beneficiary. In the course of its opinion, the Court, speaking through Mr. Justice Holmes, said:

But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid. If a man directed his bank to pay over income as received to a servant or friend, until further orders, no one would doubt that he could be taxed upon the amounts so paid. It is answered that in that case he would have a title, whereas here he did not. But from the point of view of taxation there would be no difference. The title would merely mean a right to stop the payment before it took place. The same right existed here although it is not called a title but is called a power. The acquisition by the wife of the income became complete only when the plaintiff failed to exercise the power that he reserved. * * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent. The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. We consider the case too clear to need help from the local law of New York or from arguments based on the power of Congress to prevent escape from taxes or surtaxes by devices that easily might be applied to that end.

The record does not show the fair market value of the 21,000 shares of Fisher Body Corporation stock turned over to the trustees by the petitioner in 1923. No contention is made that the $10 required to be paid by a holder of a class A certificate for the reacquisition of a share of Fisher Body Corporation was a fair consideration for the purchase of such share. For all that the record shows the amount was only a nominal consideration. The dividends received by the trustees upon the stock in 1924 and subsequent years would tend to show that such was the fact. If the fact was otherwise, the burden was upon the petitioner to prove it. He has not carried such burden.

In these proceedings, the respondent is not attempting to tax the petitioner upon the full amount of the income of the trust, but only upon such portion of the income as the revocable portion of the trust bears to the total average value of the trust in each year. He is not attempting to tax the petitioner upon such portion of the income as the cash payment required of the grantor to gain possession of the assets of the trust bears to the total average value of such assets. The petitioner does not question the correctness of such allocation, provided it is held that he is liable to income tax upon any portion of the income of the trust. The allocation made by the respondent is approved.

The petitioner further contends that if it should be held that petitioner’s right to purchase was equivalent to the power to revest in himself title to the corpus of the trust, section 219 (g) of the Revenue Acts of 1924 and 1926 and section 166 of the Revenue Act of 1928 are unconstitutional in so far as they affect this trust. In support of such contention the petitioner cites Reinecke v. Smith, 61 Fed. (2d) 324. This is substantially the same question which was involved in Corliss v. Bowers, supra. The constitutionality of section 219 was sustained. We see no difference in principle between the proceedings at bar and the above cited decision of the Supreme Court.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Goodrich:

text:
    Robert P. Bay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66014.
    Promulgated August 18, 1933.

      Morton P. Fisher, Esq., and Louis J. Sagner, Esq., for the petitioner.

      C. A. Ray, Esq., for the respondent.
   OPINION.

Goodrich:

Again we must determine the relationship between a taxpayer and his state government that we may decide whether the compensation paid him for his services by the state may be subjected to the Federal income tax. Petitioner contends that he was either an officer or an employee of the State of Maryland, rendering services to one of its instrumentalities engaged in the discharge of an essential function of government and, consequently, his salary may not be levied upon by the United States. Fox Film Corp. v. Doyal, 286 U.S. 126; art. 648, Regulations 74. The record discloses that there attached to him some of the characteristics of both classifications. Authority for his appointment was given by statute; an oath of office was required of him, and the appointment was approved by the chief executive of the state. (Sec. 5, art. 101, Bagby’s Code.) He was classified as an employee under the state law (art. 64-A, Bagby’s Code); his compensation, upon a salary, not a fee basis, was appropriated by legislative act and paid him from the funds of the state. His services were regular and continuous, and in general were prescribed, and not limited to the accomplishment of a particular object. Truitt v. Collins, 122 Md. 526; Burnet v. Livezey, 48 Fed. (2d) 159; affirming 15 B.T.A. 806; Metcalf & Eddy v. Mitohell, 269 U.S. 514.

Respondent does not deny that the commission was an agency of the state engaged in carrying out an essential function of government — see chapter 800, Acts 1914, Maryland; Solvuca v. Ryan, & Reilly Co., 131 Md. 265 — but maintains that petitioner was neither an officer nor employee of the state, but an independent contractor. He argues that, since no member of the commission was a physician, the commission failed to retain the right to control petitioner’s services fully, as it could not direct him as to how. his work should be done, as well as what he should do, citing Singer Mfg. Co. v. Rahn, 132 U.S. 518, and other cases. With that we disagree. In our opinion, petitioner was an employee of the commission, and therefore of the state. G. Ridgely Sappington, 25 B.T.A. 1385. As we see it, the commission fully controlled petitioner’s services, not only as to the tasks to which they should be applied, but also as to the method by which the work should be accomplished. Petitioner did not undertake the usual duties of surgeon to patient; his work was strictly limited to examinations of such persons as were sent to him. The commission told him what it wanted done, when to do it, and how to accomplish and report his work. His results, it accepted or rejected as it saw fit; if dissatisfied with them, it directed him to take further action in the matter. The record shows that he was continuously at the call and direction of the commission. True, the members of the commission could not tell him how to interpret the sounds transmitted to him through his stethescope, the conclusions to be made from his observations in tests of muscle and nerve, or the meaning of conditions revealed by blood count. Such things were beyond their knowledge; and that they might have such information respecting the cases pending before them they retained petitioner, who, by the application of his medical training and skill, could advise them in these matters. Respondent would have us say that, because petitioner’s examinations called for the exercise of training and knowledge different from that possessed by the members of the commission, he was beyond their control in conducting those examinations and, consequently, could not be an employee. In our opinion, such a construction of the term “ control ”, in view of the circumstances here obtaining, is too narrow. Should the term require that the members of the commission be able to do what petitioner was employed to do for them, which is the effect of respondent’s argument, it would follow that an expert stenographer could not be an employee for the reason that the commission members perhaps were unable to write in the cryptic hieroglyphics known as shorthand and could not give instructions as to which keys of the typewriter should be pressed with certain fingers in order to obtain the maximum of speed and accuracy. The decision in Packard Thurber, 20 B.T.A. 1208, relied on by respondent, is distinguishable upon its facts from the case at bar.

Judgment will be entered for the petitioner.


author: Sternhagen :

text:
    T. W. Henritze, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nell Henritze, Petitioner, v. Commissioner of Internal Revenue, Respondent. T. R. Henritze, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. B. Henritze, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60606-60609.
    Promulgated August 18, 1933.

      J. R. Sherrod, Esq., for the petitioners.

      J. M. Johnston, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioners, having owned all of the shares of the Snodgrass Co., carried out an agreement whereby they first exchanged such shares for cash and shares of the Delaware corporation and then immediately exchanged the shares of the Delaware corporation for shares of the Maryland corporation, thus leaving the parties in the same situation as if there had been a technical merger or consolidation of the Snodgrass corporation and the Maryland corporation. There was, therefore, a statutory reorganization, sec. 112 (i) (1), Revenue Act of 1928. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462; cf. Minnesota Tea Co., 28 B.T.A. 591. Upon this the parties agreed.

The issue arises from the respondent’s determination that in such reorganization the petitioners realized gain and that such gain must be recognized in accordance with sec. 112 (c) (1) and taxed to the extent of the cash received. The petitioners contend not that 112 (c) (1) is inapplicable, but that the fair market value of the shares received, with cash, for their Snodgrass shares is to be taken as zero, because, since-the petitioners were bound, during the year of acquisition, not to sell their shares without the bankers’ consent, there was no market therefor and hence no fair market value. A secondary contention is that if any fair market value is to be recognized for the shares, it is in fact less than that determined by respondent.

1. A contractual obligation assumed by the recipient of shares not to exercise an owner’s right of sale does not as a matter of law establish the absence of fair market value. Newman v. Commissioner, 40 Fed. (2d) 225; rehearing denied, 41 Fed. (2d) 743; certi-orari denied, 282 U.S. 858; Henry S. Parker, 11 B.T.A. 1336, 1350; H. H. Champlin, 28 B.T.A. 264; Tex-Penn Oil Co., 28 B.T.A. 917. The restrictive provisions, although stamped upon the share certificates are not inherent attributes of the shares. Between the corporation and the shareholder exist all of the normal legal incidents of such a relation. The restriction deprives the shareholder of none of his rights qua shareholder and adds nothing to either the rights or duties of the corporation. Held, for example, by a trustee prohibited by the trust to sell, they would nevertheless have full market value. Like any other property, such as land, buildings or chattels, they may have substantial fair market value despite a local or temporary obstacle to their cash realization by the one who happens to own them at a given time:

The very purpose of the restriction in this instance is shown by the evidence to be for the protection and enhancement of value rather than its destruction. The hypothesis of fair market value is the existence of willing seller and willing buyer, and it is a manifest anomaly to attempt an ascertainment of what a willing seller would take in respect of property which by reason of a voluntary contractual inhibition he has made himself unwilling to sell. Could it be said, for example, that one who receives as compensation for services a marketable railroad bond, with the agreement with his employer that he will not sell it for a year, has received nothing of fair market value? Cf. Harry B. Hurd, 12 B.T.A. 368; H. L. Carnahan, 21 B.T.A. 893. Instances of wide diversity come to mind which would make the statute incredibly vulnerable. It has been held in other connections that taxpayers may not, by private contracts or definitions, determine their income tax liability. Lucas v. Earl, 281 U.S. 111; Mitchel v. Bowers, 15 Fed. (2d) 287; certiorari denied, 273 U.S. 759; Phelps v. Commissioner, 54 Fed. (2d) 289; certiorari denied, 285 U.S. 558. And the doctrine is, we think, applicable to a contractual restriction upon the sale or disposition of income received. The petitioners’ point, therefore, that because of the restrictive clause upon the shares they were without fair market value, is rejected.

2. Since the shares have been held by the respondent to have a fair market value when received and the petitioners have not shown that they are without fair market value, it is necessary to consider the petitioners’ secondary contention that the fair market value determined by the respondent is too high. They claim that the value was not more than $2.81 a share. At the time, in September 1929, when the MacMarr shares were received by petitioners, such shares bearing no restrictive clause were the subject’ of active daily trading on the New York Curb. Prices, it is agreed, were from 40 to 40y2. We have found as a fact an average price of $40.25 per share, which is the figure used by the respondent in determining statutory gain. While the evidence indicates that this trading price was affected in some way by the manipulation ” of the bankers, there is nothing to indicate that there was other than a free market or, if the market were other than free, how else a free market would have operated upon the price. Cf. Walter v. Duffy, 287 Fed. 41. Quite clearly, book value of either or both the Snodgrass and MacMarr properties and business did not reflect the value of the shares, for the public seems to have felt that the future was more important than either past experience or book value. The MacMarr shares, it must be remembered, were not merely the substitute for the Snodgrass shares so as to reflect the history of the Snodgrass Co. alone, but represented an amalgamated and constantly expanding business which was absorbing others more or less like Snodgrass. From the evidence it is impossible to appraise the MacMarr shares with reference only to the history of the businesses which those shares represented when received by these petitioners. While there is evidence to show that earnings actually dropped from 1929 to 1980, it can not be assumed, contrary to the optimism of the market which the record otherwise discloses, that this drop was reasonably in prospect at the valuation date of September 17, 1929; and if it was reasonably in prospect, it must have been a factor of the market appraisal at $40.25 a share.

There seems to be no escape, therefore, in this record from the treatment of the curb market price for actual sales as the fair market value of the shares. It is not necessary in this case to go so far as to say that the measure of value to be applied to such restricted shares is always or as a matter of law the stock exchange price of unrestricted shares. Whether in fact this is generally true may remain to be seen. In this case, however, the evidence fails to demonstrate that the fair market value of the shares received by these petitioners was less than the price fixed by traders on the curb.

The respondent’s determination as to value is therefore sustained. 3. In computing the deficiency the respondent determined that all of the income received by the petitioners in the reorganization was ordinary income or capital gain. The petitioners contend, apparently under section 112 (c) (2), that a portion of the cash received was in distribution of surplus of the Snodgrass Co. and therefore taxable as dividends subject to surtax only. The respondent makes no mention of this, either in the notices of deficiency or in his argument. The evidence shows that on September 17,1929, the Snodgrass Co. had a surplus of $391,073.51, and it is therefore apparent that to this extent the cash distributed must be treated as dividends to the petitioners and the deficiencies modified accordingly.

Judgment will be entered under Bule 50.