text:
    Umpqua Timber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38826.
    Promulgated November 25, 1932.

      John M. Campbell, Esq., and P. M. Beach, Esq., for the petitioner.

      B. M. Coon, Esq., for the respondent.
   opinion.

Lansdon :

The respondent has asserted deficiencies in income tax for 1923 and 1924 in the respective amounts of $1,050 and $437.51, which arise from his action in adding to income for each of the taxable years the amount of interest called for in certain demand promissory notes received by petitioner in partial payment for its capital stock.

The petitioner is an Oregon corporation, organized in January, 1920, with an authorized capital stock of 2,500 shares having a par value of $100 each. It was incorporated by a group of individuals, most of whom lived in the vicinity of Eau Claire, Wisconsin, to acquire a certain tract of timber land for $440,000, of which ,$110,000 was to be paid in cash. Its stock subscriptions were paid in cash to the extent of $44 per share, the balance of $56 per share being represented by demand promissory notes drawing 6 per cent interest. At the time the notes were given it was understood among the organizers that unless the money was required by petitioner in its business the stockholders would not be held for either principal or interest.

In each of the years 1922 and 1923 the petitioner paid cash dividends of 30 per cent and in the first part of 1924 it paid 9 per cent in cash. On June 2, 1924, the directors voted to pay a dividend as follows:

* * # * * * #
Some discussion was bad as to the disposition of the $140,000 of stockholder’s notes and at the reguest of Mr. Moon and Mr. Bradford, attorney John D. Goss was called in and the matter thoroughly gone over with him. Whereupon Mr. A. E. Bradford offered the following resolution and moved its adoption:
'1* $ SjC
Resolved : That a dividend of $56.00 per share be declared on the outstanding stock of the Company, payable at once, and that the same be charged to the surplus account on the books of the Company.
* * * * ❖ * *
Upon motion duly made, seconded and carried, the interest on stockholder’s notes held by the Treasurer was omitted and cancelled to date.

Shortly after June 2, 1924, the dividend declared as set out above was discharged by the cancellation of the notes in question and the return of the same to the makers thereof.

From the time the notes were given until they were canceled and returned to the makers, petitioner kept them in its possession and neither received nor demanded payments of principal or interest. On its books, which were kept on an accrual basis, it made no entries on account of the interest and no part thereof was accrued as income.

The only question in this proceeding is whether the petitioner, on an accrual basis of accounting, must accrue as income the amounts of interest provided for in the demand notes of its stockholders. The petitioner contends that it never contemplated collection of the interest and is not required to include the amount thereof in its taxable income. ■

The notes in question contained an unconditional promise to pay the face amount, with 6 per cent interest per annum. They were carried as assets by petitioner throughout the taxable years and, so far as the record shows, might have been collected at any time prior to June 2,1924. In our opinion the petitioner was required to accrue interest on the notes until they were canceled and returned to the stockholders.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Van Fossan : Love,

license: Public Domain

text:
    Emily Gale Lowery, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57646.
    Promulgated November 25, 1932.

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

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Van Fossan :

The only question presented in this case is whether or not the assignment of the income from the life interest of the petitioner in the estate of J ames L. Lowery relieves her from paying the income tax thereon.

In Hazel T. Power, 23 B. T. A. 428, we said:

The rule is well established that * * * the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the granting or assignment of such income or profits to another.

When the owner of a property right assigns merely the income arising therefrom and retains the other incidents of ownership which are essential factors in the production of income, he, and not the assignee, must pay the Federal tax on such income.- Bing v. Bowers, 22 Fed. (2d) 450; affd., 26 Fed. (2d) 1017; J. V. Ley dig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; Hazel T. Power, supra; E. D. Smith et al., Executors, 25 B. T. A. 291.

By the terms of the third paragraph of James L. Lowery’s will the petitioner received “ the possession, management, and the control and the rents, profits, use and income ” of his residuary estate. All of those elements combined constituted the property rights she acquired in her husband’s estate. Of them she assigned only one, the income, to her children and grandchildren. The will provides specifically that she should possess, manage, control and use the residuary estate of the testator “ for and during her natural life.” Her life estate, therefore, was so established and defined, and in order to divest herself of her entire property rights she must include in the instrument of conveyance or assignment all the elements of ownership of such estate which were specifically set forth in and granted to her by the will. She did not do so, but chose instead to give to her children and grandchildren only the income flowing from the estate, which she still held. Under such circumstances we must conclude that the income in question is taxable to her.

The petitioner, on deposition, offered testimony tending to show that she had not had the actual possession of the residuary estate of James L. Lowery, nor had she exercised management and control over it. The will created the estate to which the petitioner was entitled. If she elected to permit others to manage it for her, she can not thus be absolved from the responsibilities and legal burdens of its ownership.

The petitioner contended that the instrument of assignment is ambiguous in its terms and offered evidence to explain away such asserted ambiguity. We can perceive no such ambiguity. The petitioner set forth that she was entitled to the income of the residuary estate of her deceased husband and then proceeded to assign and transfer that income to her children and grandchildren in certain stated proportions. We must be governed by the plain words of the instrument itself and conclude that only the income from her life estate was assigned.

Eeviewed by the Board.

Decision will be entered for the respondent.

Black dissents.

Love,

dissenting: Had I been called upon to write this case and render a decision thereon, I would have felt impelled, in view of prior decisions of the Board, as well as decisions of some of the higher courts, including the Supreme Court, to have decided the case as it is decided in the prevailing opinion. But, as is well known, I have consistently challenged the correctness of such prior decisions of the Board and of the courts.

I have been requested to present my views in detail, and, as an individual member of the Board, I feel at liberty to do what I would not feel at liberty to do were I writing an opinion and decision to be promulgated as the decision of the Board. In other words, this dissent is a challenge to the soundness and correctness of the decisions of the courts, and the Board, which constitute a controlling, authoritative basis for the prevailing opinion. If I have a hope or purpose at all, it is that the higher courts may correct what I deem to be erroneous decisions, which are now controlling precedents.

The fundamental doctrine or theory of the instant case, as well as those court and Board decisions upon which the instant case is based, is that one may not assign the usufruct of a corpus estate without assigning also that corpus from which such usufructs flow; that is, the fruit can not be separated from the tree that produces the fruit. The ramifications of the tentacles of that fundamental doctrine reach out and affect hundreds of the ordinary, daily business transactions of business life.

It is said that one may not assign the whole or any part of his future salary under a specified employment contract. It is said that a partner may not assign the whole or any part of his distributive share of the partnership profits. When one acquires, by will, or a trust instrument, the right to receive the rent on a certain piece of real estate, or the dividend on a certain block of stock during a period of time in the future, for life, or a term of years, what he acquires by and as a gift, is the right to receive that income, and that right is property, and in the ordinary sense of the word, is income, but, being acquired by gift, under the statute is not taxable income. The annual payments made to him as a result of that right are not gifts, but are taxable income.

It is said, as in the instant case, that the holder of such a right may not assign it to another and retain in himself title to any part of the corpus from which such income flows. There are many phases of the general principle now under consideration. In discussing the instant case, I shall assume:

1. That what the mother assigned to her children was the right, which she acquired, by and through her deceased husband’s will, to receive, for her own use and benefit, the rents and profits flowing from her husband’s residuary estate during her natural life.

2. That such assignment was and is irrevocable.

The instrument of assignment clearly indicates such a purport, and it is so treated in the prevailing opinion.

The Sixteenth Amendment to the Constitution does not authorize Congress or any judicial tribunal to impose a tax on one person which is based on the income of another person. Hence, the vital question to be determined in any given case is, Whose is the income sought to be taxed ? It matters not what the source of the income is, the vital question is, Whose income is it ?

In the instant case, it is not claimed that under the laws of New York the assignment in question was void and transferred no title to the income as and when received. New York courts recognize such transactions as valid and binding. It is to the state laws and not to the Federal laws that we must look to determine who owns certain property.

Notwithstanding the fact that there are decisions holding that he who earns a salary is the one who must pay the tax thereon, it is now settled law that, in Texas, a wife owns one-half her husband’s salary and may include the same in her return for income tax purposes. Notwithstanding the fact that it has been held that a partner may not assign and thus divide his distributive share of the partnership profit, it is now settled law that a wife in Texas owns and may include in her income tax return one-half of such income. The same may be said with reference to rents or profits flowing from the separate property of the husband, and such is the case not only in Texas, but in all the community property states.

It is said that in the community property states the wife is entitled to share in such incomes by operation of law and not by contract. I do not believe it will be contended by anyone that a title acquired by and through a contract is any less a legal title than one acquired by operation of law. A title emanating from and through a will is no less a legal title than one derived by and through the laws of descent and distribution. They are both legal titles and stand on •aqual footing. Moreover, since when, in the history of American jurisprudence, has a contract been deemed less sacred than a statute?

It has been the burden of the courts for more than an hundred years to impress upon the American people the sanctity and inviolability of contracts. It is only when the collection of income tax is involved that rights derived through contracts have been discounted and ignored.

I want to point out and emphasize the fact that in none of the cases which I have in mind, including the instant case, has the bona fides of the contract been questioned. In the instant case, I do not perceive how it can be contended for a moment that the mother did not irrevocably pass from herself to her children the right to receive the income in question, and that from the moment that document was signed, sealed and delivered, she had no more title to such income than any other person, a total stranger to the whole transaction, and that as and when such income was received by those children, it was their income and taxable to them.


author: Black:

text:
    The Permanent Homes Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45156.
    Promulgated November 25, 1932.

      W. O. Magathan, Esq., J. Marvin Haynes, Esq., and G. J. McGuire, Esq., for the petitioner.

      L. W. Oreeúson, Esq., for the respondent.
   OPINION.

Black:

The question we have to decide in this proceeding is whether items of income aggregating $37,285.25 accrued to petitioner in 1926 so as to make them taxable for that year.

For the year 1924 and subsequent years, petitioner kept its accounts and made its income tax returns on the accrual basis. Petitioner contends, in the first place, that the items constituting the $37,285.25 were paid to it in 1926 as advance commissions, and that these commissions were not earned in 1926 and could not be earned until subsequent years and hence could not be properly accrued as income on petitioner’s books in 1926 and were not taxable in 1926. Petitioner further contends, in the alternative, that, if it is wrong in the foregoing contention, then the items of income aggregating $37,285.25 are taxable to it in 1925, because it was in that year that its unequivocal right to receive such sums of money was fixed.

Respondent’s contention is that the sums in question were received by the petitioner during the year 1926 in consideration for the cancellation of the agreement of August 30, 1924, and as such is taxable income in the year in which received. Respondent also contends that nothing accrued to petitioner in 1925 on account of these several contracts mentioned in onr findings of fact. We will discuss these respective contentions in their order.

Petitioner, in support of its first contention, cites the following statement approved by the Commissioner (Law Opinion 1086, C. B. I. 1, p. 87):

In order to be accruable in tbe taxable year for which return is made, a valid right to income must have arisen or existed in that year, which is enforceable on the date the income is due. If, however, the right to the amount is contingent upon the happening of some future event, there is no certainty that it will be paid or will accrue. In this event no income accrues from a fixed and determinable source, and no right to anything arises or exists in the taxable year which can be accounted for as income under any system of accounting.

So say we. This rule was recently approved in substance by the court in Commissioner v. Southeastern Express Co., 56 Fed. (2d) 600. In that case the court held that a taxpayer can not, under the accrual system, accrue items of income or items of expense which are uncertain in .receipt. Says the court: “A mere contingent claim * * * may never be sustained or realized. It is too uncertain in making up income tax returns.” But, suppose that, before the taxpayer’s contingent right to receive the income under the original contract has become fixed, the contract itself is altered and modified and it is agreed that he shall receive a sum certain, without regard to the contingent provisions of the former contract. What then? Is he to be permitted to carry such income on his books in suspense after his right to receive it has become fixed and after he does actually receive the money ? We think not. Petitioner cites many authorities in support of its main contention, all of which we have carefully considered, but none of which we think are in point.

We see no gain in taking up these cited authorities and pointing out one by one why we do not think they are applicable to the facts in the instant case.

Undoubtedly, under the original contract which petitioner had with the East Shore Land Company, the only amount which it was entitled to accrue as a profit when it made a sale of lots was the 25 per cent commission which was to be paid it in the first instance when lots were sold. The additional agency commission or division of profits, whichever it may be called, which it was to receive after total sales had aggregated $400,000 was purely contingent upon sales reaching that point; and, unless and until total sales did aggregate $400,000, there was nothing for petitioner to accrue on its books as income on account of this particular clause of the contract.

But this original contract was terminated in 1925, by mutual agreement, on account of the need for refinancing the property which was being sold, and a new contract was entered into, carrying many of the same provisions of the old contract and modifying and changing others. As an upshot of this new contract and the terminating of the old, it was determined and agreed in 1925 that petitioner, subject to certain conditions, should receive $36,789.36 of the proceeds of the new financing. Just what this was for is not made very clear by the evidence. Petitioner did not actually receive this amount until February 19, 1926, but, as we shall endeavor to point out, that makes no difference if petitioner’s right to receive it became definite and unqualified in the year 1925.

In Lichtenberger-Ferguson Co. v. Welch, 54 Fed. (2d) 570, the court held that when the amount of compensation due the taxpayer from the Government on account of the cancellation of a war contract was definitely approved in August, 1919, it represented income on the accrual basis for 1919, even though payment of the claim was delayed until February, 1920. “ Under the accrual system of accounting,” said the court, “ when an item is definitely ascertained as to its amount and acknowledged to be due, it has accrued.” The court quotes from our opinion in Clarence Schock, 1 B. T. A. 528, as follows : “ Under an accrual system of accounting, one accrues income and does not receive it. Under the receipts and disbursements basis method, one receives income and does not accrue it.”

To the same effect is the recent decision of the Supreme Court in Continental Tie & Lumber Co. v. United States, 286 U. S. 290. It does not matter that the taxpayer, as appears to be the case in the instant case, did not take the item into its accounting until 1926, if the income actually accrued in 1925, for, as we said in Corn Exchange Bank, 6 B. T. A. 158, “Bookkeeping entries are significant only as evidence or records of transactions and the legal effect of such transactions and the method employed in keeping books must be determined from the transactions themselves, and not merely from the book entries affecting them.” So we hold that petitioner’s contention, that this income in question can be held in suspense and rendered for taxation in some future year or years when the aggregate of sales has reached a certain named amount, is untenable. We find no support for such a theory either in the statutes or the decided cases.

Petitioner also contends in its brief that this $36,789.36 was not income in either 1925 or 1926, because it was a loan. We see no merit in that contention. Certainly, if the evidence showed that this $36,789.36 represented money which petitioner borrowed for use in its business, we would not hold that it represented income. Borrowed money does not represent income. But there is no evidence whatever that this sum represented money which petitioner had borrowed. To whom was the petitioner obligated to repay? No one. The money was borrowed by the East Shore Land Company in the sale of its bonds and for which it was primarily liable. Petitioner was in no way obligated for the repayment of this loan or any part of it. So, whether the $36,789.36 is regarded as advance commissions, as petitioner primarily contends, or represents a sum received in payment for the cancellation of a contract, as respondent contends, it is income.

The only question is whether petitioner’s right to receive this amount accrued in the prior year of 1925, or accrued in 1926, the same year in which it was paid. If the latter event is true, respondent is correct in taxing it in 1926. If, however, petitioner’s right to receive this $36,789.36 became definite and fixed in 1925, then, under the authorities we have already cited, it is income for 1925 and not for 1926. There can be no question but that the amount which petitioner was to receive as a result of these refinancing transactions if and when they were completed, was definitely fixed in 1925 to the extent of $36,789.36.

But it is not enough that the parties definitely agree upon the amount. In order for it to be a proper accrual item of income, the obligation to pay the amount fixed must be definite and unequivocal. A promise to pay, if and when certain contingencies take place, is not sufficient to make an item accruable. And herein lies the defect in petitioner’s alternative contention that it should be permitted to accrue this item as income in 1925.

It was agreed that the sum accorded to petitioner in the so-called disbursement agreement was to be paid out of the proceeds of the bond issue, and, if the bond issue failed to go through, there was no obligation to pay petitioner anything. This fact is shown by clause (5) of the “ Disbursement Agreement ” copied in our findings of fact.

Was this bond issue completed in 1925? We doubt it. The so-called disbursement agreement was dated December 23, 1925, and only a short time remained in that particular year to complete the bond issue. It is more reasonable to suppose that the approval of the legal matters connected with the bond issue by the attorneys and the completion of the sale of the bonds did not take place until in 1926. It was in that year, on February 16, that petitioner received the $37,285.25 in question. But at any rate we can not decide cases on uncertainties and suppositions. We must decide them on facts. The facts are that respondent in his determination of the deficiency has determined that this $37,285.25 was not only received by petitioner in 1926, but that it was income which accrued to petitioner in that year and in no other. When the Commissioner has determined that income accrued in a certain year, the burden is on the taxpayer fo prove otherwise. Leo M. Klein, 20 B. T. A. 1057.

The stipulation contains the following clause: “ These bonds were sold to the Union Mortgage Company as authorized in Article III of the agreement herein referred to as Exhibit “ B ” and as stated in the agreement herein referred to as Exhibit “ C If this sale was completed in 1925, the stipulation should so state. We have no evidence which will justify us in holding that the bond transaction was completed in 1925. Until the attorneys had approved the legality of all the matters connected with the bond issue, there was no obligation on the part of the Union Mortgage Company to take the bonds and to credit the East Shore Land Company with the proceeds thereof and to pay petitioner the amount it was to receive. So far as the evidence we have before us shows, the obligation to pay petitioner the agreed sum was purely contingent in 1925.

Reviewed by the Board.

Decision will be entered for respondent.


author: Smith:

text:
    Bunge North American Grain Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47800.
    Promulgated November 28, 1932.

      A. O. Newlin, Esq., for the petitioner.

      Chester A. Cwinn, Esq., for the respondent.
   OPINION.

Smith:

The respondent has determined deficiencies against the petitioner of $7,790.57 for the period February 16 to December 81, 1926, inclusive, and $10,552.32 for the calendar year 1927. The respondent now concedes that there is no deficiency for the period February 16 to December 31,1926. The only question at issue, therefore, is whether the petitioner may carry forward to 1927 the unabsorbed portion of its statutory net loss for 1925. The material facts have been stipulated and are as follows:

1. Petitioner and Bunge Western Grain Corporation were incorporated under the laws of the State of New York on March 17, 1923 and April 18, 1923, respectively.
2. The entire capital stock of Petitioner and said Bunge Western Grain Corporation at all times was owned and controlled by Bunge & Born, Lda., S. A., Commercial Financiera ETndustrial, a South American corporation not doing business in the United States.
3. The business of Petitioner consists in exporting from and importing into the United States all kinds of grains, and acting as selling agent in the United States for its parent. The business of Bunge Western Grain Corporation was the same as that of Petitioner, except its activities were confined to the Pacific coast and the Orient.
4. Bunge Western Grain Corporation was dissolved December 29, 1925 by the filing of a certificate of dissolution on that date in accordance with the laws of the State of New York.
5. From December 29, 1925 to and including February 15, 1926, Bunge Western Grain Corporation was in the process of liquidation and was finally liquidated on the latter date.
6. Upon the dissolution of Bunge Western Grain Corporation, Petitioner took over the territory and carried on the business formerly handled by it.
7. Petitioner and Bunge Western Grain Corporation filed consolidated Federal income tax returns for the calendar years 1925 and 1926.
8. Petitioner sustained a separate net loss for the calendar year 1925, computed in accordance with Section 206 of the Revenue Act of 1926, of $417,169.18.
9. Bunge Western Grain Corporation sustained a separate net loss for the calendar year 1925, computed in accordance with said Section, of $175,857.05.
10. Petitioner had a separate net income for the period January 1, 1926 to February 15,1926 of $8,321.52, before deducting any part of its separate net loss for the calendar year 1925. Petitioner’s income for said period did not include any dividends from domestic corporations or tax exempt interest, and its net income did not reflect any non-business deductions, depletion based on discovery value, or percentage depletion.
11. Bunge Western Grain Corporation had a separate net loss, computed in accordance with Section 206 of the Revenue Act of 1926, for the period January 1,1926 to February 15,1926, of $84,918.01, before deducting any part of its separate net loss for the calendar year 1925.
12. Petitioner had a net income for the period February 16, 1926 to December 31, 1926 of $57,707,94, before deducting any part of its separate net losses for the calendar year 1925 and the period January 1, 1926 to February 15, 1926. Petitioner’s income for said period did not include any dividends from domestic corporations or tax exempt interest, and its net income did not reflect any non-business deductions, depletion based on discovery value, or percentage depletion.
13. Petitioner had a net income for the calendar year 1927 of $78,165.36, before deducting any part of its separate net losses for the calendar year 1925 and the period January 1, 1926 to February 15, 1926.
14. Petitioner was not affiliated with any other domestic corporation during the period February 15, 1926 to December 31,1926, and the calendar year 1927.
The annual accounting period of both Petitioner and Bunge Western Grain Corporation during the time covered by this appeal was the calendar year, and both Corporations computed net income upon a calendar year basis.

Section 206 (b) of the 1926 Act provides, with respect to net losses, as follows:

If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

A taxable year is defined in section 200 of the 1926 Act as follows:

(a) The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. * * *

The respondent contends that no part of the petitioner’s 1925 net loss may be carried beyond December 81, 1926; that, with respect to the disposition of the petitioner’s net loss for 1925, the petitioner’s second taxable year was the period January 1 to February 15, 1926, for which the petitioner was required to file a consolidated return with its affiliated company, and that the period from February 16 to December 31, inclusive, for which the petitioner was required to file a separate return, was the third taxable year. The respondent, in support of his contention that the petitioner was required to file a consolidated return for the period January 1 to February 15, 1926, cites Sweets Co. of America v. Commissioner, 40 Fed. (2d) 486; Swift & Co. v. United States, 69 Ct. Cls. 171; and Tolerton & Warfield Co., 23 B. T. A. 892.

In Sweets Co. of America v. Commissioner, supra, two corporations were affiliated for the first six months in 1929, when a new corporation was organized and affiliated with them. The three corporations remained affiliated for the next four months, when the two first affiliated companies were merged into the new company. The court held that there was required a consolidated return for all three companies for the first 10 months of the year (reversing the Board’s ruling that two separate consolidated returns were required for that period) and a single return for the merged corporation for the last two months of the year. The same court, the Circuit Court of Appeals for the Second Circuit, later held in American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508, that, where a parent corporation was organized in April, 1918, to take over a subsidiary which had existed from the beginning of the year, only one consolidated return was required for the entire year, in which should be reported the separate income of the subsidiary for the period prior to affiliation and the consolidated income of the subsidiary and parent for the remainder of the year. Commenting on its prior decision in Sweets Co. of America v. Commissioner, supra., the court said:

* * * We required a consolidated return for the first period of ten months, during part of which two affiliates were alone, and a separate return for the second period of two months during which the “parent” was alone. It is a little hard to see why, if one return was proper for the first ten months, it was not proper for the whole year; there was no period in which any two affiliates were in existence at the same time but unaffiliated. The business of all was thus strictly a unit throughout the year, though managed by successive companies. Possibly we were influenced by the fact that the “ subsidiaries ” were merged in the “ parent ”; because if this resulted in giving the “ parent ” a new corporate personality, a separate return for the last two months was of course proper. So far as we required the second return, the decision must stand upon that assumption; so far as we required a single return for' the first ten months, it is authority for our present action. * * *

In the instant case, there was no merger of the affiliated companies resulting in the creation of “ a new corporate personality.” The affiliated company here was dissolved and its existence was terminated during the year, leaving the petitioner with the same corporate personality that it had at the beginning of the year and at all times during the year.

Swift & Co. v. United States, supra, is not authority for the position taken by the respondent in this proceeding. The case holds, in effect, that changes in the, affiliated group by which one corporation was separated from and another added to the group did not affect the taxable year of the affiliated group composed of other companies, which continued without corporate change throughout the entire year. The decision seems to us to be less favorable to the respondent than to the petitioner’s contention in this proceeding that its taxable year was not affected by the withdrawal or dissolution during the year of its affiliated company. It may be noted, however, that Swift & Co. v. United States arose under the 1918 Act and that no consideration was there given to the statutory definition of a “ taxable year ” appearing in section 200 (a) of the 1924 and 1926 Acts. See Tolerton & Warfield Co., supra; Weissberger Moving & Storage Co., 26 B. T. A. 1375.

In Tolerton & Warfield Co., supra, we held that the taxpayer was required to file a separate return for the period of 1924 prior to its affiliation with two other corporations, which occurred on April 26, 1924, and that the three companies were required to file a consolidated return for the remainder of the year. All three of the corporations were in existence for the entire period of 1924 preceding the affiliation.

In other cases where we have held that separate returns were required of corporations for fractional parts of a year, either prior or subsequent to affiliation, the corporations had a separate existence for such period. On the other hand, we have held in numerous cases that where one corporation or an affiliated group of corporations is in existence for the entire year, either calendar or fiscal, and during the year a new corporation is organized and becomes affiliated with the old corporation or group of corporations, only one consolidated return is required for the entire year. See Automatic Fire Alarm Co. of New York, 13 B. T. A. 1195; Hutt Contracting Co., 17 B. T. A. 818; Margay Oil Corp., 26 B. T. A. 199; H. S. & M. W. Snyder, Inc., 26 B. T. A. 692, and cases therein cited. To the same effect is Sweets Co. of America v. Commissioner, supra; American Paper Exports, Inc. v. Bowers, supra. In Automatic Fire Alarm Co. of New York, supra, we said:

* * * There was no period in 1920 for which the Delaware company was liable to file a return of its separate income. At all times during its existence in 1920 it was affiliated with the New York company. For the purposes of the computation of net income, it had no separate existence, but was merged with the New York company into an affiliated group. There is no such necessity for requiring several returns as existed in the case cited above or in the case of B. T. Couch Glue Co., 12 B. T. A. 1321, where one of the corporations concerned had a short separate existence. We are of the opinion that the income of these two companies for 1920 must be computed on the basis of a consolidated return of their income for the full year. See Carroll Chain Co., 1 B. T. A. 38; United States v. Carroll Chain Co., 8 Fed. (2d) 529. It may be noted that this conclusion is in accord with articles 634 of Regulations 69.

We do not see that any distinction should be made where, as in the instant case, one of the corporations which was affiliated for the first part of the year was dissolved during the year and the other continued in business throughout the year. There was no period during the entire year when the petitioner and its affiliated company were both in existence and not affiliated.

We are of the opinion, therefore, that only one consolidated return was required of petitioner for the entire calendar year 1926 and that, with respect to the petitioner’s 1925 net loss, the calendar year 1926 was the petitioner’s “ succeeding taxable year,” and that the calendar year 1927 was the petitioner’s “next succeeding taxable year,” and that the excess of the petitioner’s net loss for 1925 over its 1926 income is an allowable deduction in computing its income for 1927.

Since the petitioner’s net loss for 1925 exceeded its income for 1926 and 1927, the result is no taxable income for either of the periods for which the respondent has determined the deficiencies herein.

Judgment will be entered for the petitioner.


author: Lansdon :

text:
    W. S. Scamehorn, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48559-48567.
    Promulgated November 28, 1932.

      W. B. Alban, Esq., and J. B. Little, Esq., for the petitioners.

      J. G. Gibbs, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Flora B. King; Alexander King; Frank MeLister; Urban F. Wolpert; Walter A. Strayer; W. R. Alban; R. B. Cohen; Jay S. Paisley.

   OPINION.

Lansdon :

Within the statutory period of limitations the respondent determined and assessed a tax against the company for the year 1925. A warrant of distraint was issued and it was found that the taxpayer was no longer in existence and had owned no assets after November 1, 1926. In these circumstances we are satisfied that the respondent properly decided that the tax could not be collected from the taxpayer, and that his subsequent procedure under section 280 of the Revenue Act of 1926 was in conformity with the law.

The record of these proceedings is needlessly confusing, but it is clear that the company sold certain of its assets for $100,000 and retained others which, at the time, were valued at $53,000, subject to a mortgage in the amount of $14,500. There is no question that the stock of the minority shareholders was liquidated at $125 per share. It is equally clear that, after the payments to such minority stockholders and the discharge of the debts of the company, there were left in the possession of Cohen and Paisley about $22,500 in cash and title to the real property and accounts receivable that were not included in the sale. In a settlement between themselves Paisley acquired Cohen’s interest in the real estate for $15,000, of which he has paid $7,500 in cash. It is obvious, therefore, that Cohen and Paisley each received assets of the corporation in liquidation of his stock in excess of the amount of the deficiency determined against the taxpayer. We think it follows that each is liable for the unpaid taxes of the company, in conformity with the rule established in Grand Rapids National Bank, 15 B. T. A. 1166, and a long line of decisions based thereon.

Each of the minority stockholders received $125 per share in the liquidation of his interest in the company, and to the extent of such receipts was a transferee of the assets of the taxpayer. Counsel for petitioners admitted at the hearing that Alban, Alexander King, Flora King and Scamehorn owned stock of the company at the date of liquidation in the respective amounts of 60, 20, 20, and 20 shares and that based on that ownership each received $125 per share in liquidation. Such stockholders, therefore, were transferees of the assets of the company in the respective amounts of $7,500, $1,200, $1,200 and $1,200, and, to the extent of the amounts received, each is liable, under section 280 of the Revenue Act of 1926, for the unpaid taxes of the company for the year 1925. Grand Rapids National Bank, supra.

The record contains no competent and persuasive evidence that petitioners McLister, Wolpert and Strayer were stockholders of the company at the date of the liquidation thereof. We hold, therefore, that their liability as transferees has not been established.

Petitioners adduced some fragmentary evidence for the purpose of overcoming the presumption that the respondent’s determination of the deficiency against the company is correct. Most of such testimony was to the effect that the value of assets disposed of by sale exceeded the basis used by the respondent in his determination of profit derived therefrom. Even if the value alleged had been proved, it could not be material, since the basis for determining gain or loss on the sale of capital assets is the cost thereof and not their value at the time of the sale. On this issue the respondent is affirmed.

Decisions will be entered for the respondent in the proceedings at Docket Nos. 48559, 48560, 48561, 48565, 48566 and 48567, and for the petitioners at Docket Nos. 48562, 48563 and 48564-


author: Lansdon:

text:
    Watson P. Davidson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46486.
    Promulgated November 28, 1932.

      W. H. Oppenheimer, Esq., for the petitioner.

      B. M. Ooon, Esq.,- for the respondent.
   OPINION.

Lansdon:

The evidence is clear that the payment of attorneys’ fees in the amount of $1,686.90 on May 4, 1927, was an expense incurred in securing three leases on real estate. This was a capital expenditure, amortizable ratably over the life of the leases. Columbia Theatre Co., 3 B. T. A. 622; Mary C. Young, 20 B. T. A. 692; affd., 59 Fed. (2d) 691; M. & F. Holding Corp., 26 B. T. A. 504.

The amounts of $2,000 and $650 paid by the petitioner as attorneys’ fees and traveling expenses in 1927 in connection with his unsuccessful efforts to secure leases on additional acreage adjacent to the lands already acquired were ordinary and necessary business expenses, and are deductible as such from petitioner’s income for the taxable year. Immediately following his acquisition of the tract of 11,631 acres covered by the first three leases and at a time when he was assured that he would secure a much larger adjacent tract on the same condition, the petitioner constructed a drainage ditch with capacity sufficient to serve the tracts already under lease and a considerable portion of the additional acreage which he then expected to secure. The ditch was completed at a cost of $14,709.84, all of which was paid in the taxable year. The evidence shows that a ditch large enough to drain the original tract could have been constructed at a cost not in excess of $4,000. The petitioner contends that the difference between the amount actually expended and the cost of a ditch adequate to drain the lands already under lease was a loss in the taxable year. The evidence is clear that the excess ditch capacity was useless and of no value to the petitioner and that its cost was incurred in the confident expectation that the additional acreage would be secured. Changes in the policies and laws of the proposed lessors over which the petitioner had no control deprived the greater part of the drainage ditch of any value. In these circumstances we think the petitioner sustained a loss in 1921 in the amount of $10,709.84. This conclusion seems to be well supported by Commissioner’s Eegulations 74, article 178, as well as by the conclusion in Kilby Car & Foundry Co., 4 B. T. A. 1294; Multibestos Co., 6 B. T. A. 1060; Fraser Brick Co., 10 B. T. A. 1252; and Ingle v. Gage, 52 Fed. (2d) 738.

Decision will be entered under Bule 50.

       Aet. 173. Loss of useful value. — When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 111 and article 561) and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be fully explained in the return of income.


author: Sternhagen :

text:
    Automatic Sprinkler Company of America, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60887.
    Promulgated November 28, 1932.

      F. O. Graces, Esq., for the petitioner.

      Bernard D. Hatlwock, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency oí $2,958.88 in petitioner’s income tax for 1929. Only one of several items adjusted by the Commissioner is assailed by petitioner. The facts in respect of this item are embodied in a written stipulation, which need not be copied here.

The petitioner, a Delaware corporation, succeeded in 1922 a New York corporation of the same name by acquiring its assets in.consideration for certain debentures, shares, cash and the assumption of its liabilities. When in 1927 a deficiency was assessed against the New York corporation of $34,909.41 in tax for 1918 and 1919, together with $9,214.96 interest thereon, the petitioner offered $11,031.09 in compromise of all the New York corporation’s liability for 1918 and 1919 for tax, interest and penalties. The offer was accepted and the amount paid.

The petitioner claims that this $11,031.09, was computed at 25 per cent of the total deficiency of tax and interest, that it should be proportionately broken up into separate payments of $8,727.35 tax and $2,303.74 interest, and that the latter amount is deductible by it as interest within the meaning of section 23(b), Revenue Act of 1928.

None of these propositions is sustained. The petitioner paid a lump sum which was less than the assessed tax, and nothing in the offer or acceptance identifies any part of it. As respondent in the notice of deficiency correctly said: “ The fact that $11,031.09 happens to be exactly 25 per cent of both your tax and the amount of interest thereon does not give any portion of the above $11,031.09 the status of interest paid. * * * an offer in compromise is merely an offer in compromise and not interest paid.”

But passing that, the amount paid was, as to petitioner, neither taxes nor interest, but part of the consideration for the New York corporation’s assets, which was no more deductible than the other parts. Athol Mfg. Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230; Sigmund Spitzer, 23 B. T. A. 776. The statutory deduction for interest is confined to amounts chargeable qua) interest against the taxpayer, and excludes amounts contractually paid to or for another to discharge the other’s interest obligation. William Ainslie Colston, 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640; Caldwell & Co., 26 B. T. A. 790.

Judgment will be entered for the respondent.


author: GOODRICH: Smith, VAN Foss AN,

text:
    Fred T. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38808.
    Promulgated November 20, 1932.

      V. L. Kaye, Esq., and Milton Sevier, Esq., for tbe petitioner.

      F. B. Shearer, Esq., for tbe respondent.
   OPINION.

GOODRICH:

While the issue expressly raised by the pleadings relates to the character of the distributions received by petitioner from the Lakemont Company under the resolutions adopted by its directors on December 15, 1925, the further problem called to attention upon brief naturally arises under the issue presented and, since its determination is necessary to the ascertainment of petitioner’s tax liability for the year 1925, we will consider it. Petitioner, relying mainly upon Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982; affd., 17 Fed. (2d) 79; certiorari denied, 274 U. S. 751; and Hadley v. Commissioner, 36 Fed. (2d) 543; affirming 6 B. T. A. 1031, contends that, because he was the sole owner of the stock of this corporation and gave to the corporation no notes representing his indebtedness for the funds received by him on its behalf and by him retained in years prior to 1925, such funds should be treated as distributions made by the corporation to him in those years, without the necessity of corporate declaration, and taxable to him when received, despite the fact that the company’s books of account reflected these sums as accounts receivable from petitioner.

We think those decisions are not controlling of the case at bar. There, the taxpayers had received money from the corporations without the formal declaration of dividends, and the Commissioner treated such sums as income to them when received. The taxpayers failed to convince the courts that the Commissioner’s action was erroneous. Here, the Commissioner has treated the sums received by petitioner according to the facts as presented by the records of the corporation, that is, he has regarded them, not as income to petitioner when received, but as debts owing to the company. Petitioner has failed to convince us that this action is erroneous. Prior to May 15, 1923, petitioner was not the sole owner of the stock of the corporation, yet had received and withheld substantial amounts of the corporate funds. What arrangements, if any, he had made with the other stockholders respecting this matter, we do not know. This record discloses no reason why the amounts charged to petitioner should not be regarded as accounts receivable from him as reflected by the books, notwithstanding the fact that the conduct of the corporate business was exceedingly informal. The company might have undertaken a new venture — its powers were sufficiently broad — and called upon petitioner for payment; former stockholders might have demanded pro rata payment of the funds retained by petitioner; creditors of the corporation might have required repayment — such occurrences were possible during the course of the company’s operation. True, book entries are not necessarily binding if proved to be in error, but, we repeat, petitioner has failed to prove to us that the corporate records reflecting the sums retained by petitioner as an account receivable from him did not disclose the facts and that such sums now should be treated as distributions and taxable to him when received.

However, we are convinced that the distributions declared by the resolution of December 15, 1925, were in liquidation of the corporation. Liquidation has been defined as the operation of winding up the affairs of a corporation by realizing upon its assets, paying its debts and appropriating the amount of its profit or loss. W. E. Guild, 19 B. T. A. 1186, and cases there cited. It differs from the normal operation of the corporation for current profit in that it ordinarily results in the winding up of the corporation’s affairs. There must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. It contemplates an impairment of capital or a retirement of outstanding stock, though a distribution, if one of a series of distributions in liquidation, may be a liquidating dividend even if it, of itself, does not impair capital. Liquidation can not be brought about by mere declaration, and the question of whether a corporation is in liquidation is therefore one of fact. See W. E. Guild, supra; James P. Gossett, 22 B. T. A. 1279; affd., 60 Fed. (2d) 484; Martha Briggs Phelps, 20 B. T. A. 866; affd., 54 Fed. (2d) 289; E. G. Perry, 9 B. T. A. 796; Milton Tootle, Jr., 20 B. T. A. 892.

In the case before us, the facts show that the Lakemont Company was in the process of liquidation at the end of 1925. Its ordinary business had been the subdivision, development and sale of a certain tract of land. This it had accomplished — there remained to do only certain incidents necessary in installment sales and it engaged in no other activities. There was a declared intention to liquidate, manifest by the instructions given respecting compliance with the formal requisites of the distribution of the company’s assets, and there was an impairment of its capital. It was engaged in winding up its affairs and was dissolved when that had been accomplished. We hold, therefore, that the distribution declared by the resolution of December 15, 1925, was one made in partial liquidation of the corporation within the meaning of paragraph (h) of section 201 of the Revenue Act of 1926; that the gain resulting to petitioner upon the receipt thereof should be determined as provided in paragraph (c) of that same section, and taxed as capital net gain in accordance with petitioner’s election. Cf. Hellmich v. Hellman, 276 U. S. 233.

Reviewed by the Board.

Judgment will be entered vmider Bule 50.

Smith,

dissenting: The respondent has treated the 1925 dividends, to the amount of the corporation’s surplus at the date of the payment of the dividends ($50,204.18), as ordinary dividends under section 210 (a) of the Revenue Act of 1926. The respondent followed the letter of the law in such treatment. There were no distributions in complete liquidation under section 201 (d) in 1925, and none in partial liquidation as that term is defined in section 201 (h), which subdivision reads:

As used in this section the term “ amounts distributed in partial liquidation ” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

There was clearly an intent that the dividend of $60 per share declared in 1925 should be a liquidating dividend. The petitioner recognized, however, that the dividend of $90 per share in 1925 was not in partial liquidation of his stock and returned the amount as a taxable dividend in his original return. There was no actual liquidation until 1927.

VAN Foss AN,

dissenting: I find myself in disagreement with the majority of the Board in this case. The question originally raised by the parties, i. e., whether under the facts dividends credited to petitioner’s account by the Lakemont Company were liquidating dividends, involves consideration of the legal effect of the prior conduct of the company’s affairs under which, from 1920 to 1925, petitioner, the sole stockholder of said company, retained all moneys collected by him as selling agent, paid all expenses, and was charged on the company’s books with the net amount so retained.

Petitioner contends in his brief that the sums so retained by him were tantamount in law to distributions by the corporation and became income to petitioner in the years collected by him and charged on the books of the company. He relies on Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982; affd., 17 Fed. (2d) 79; certiorari denied, 274 U. S. 751; Hadley v. Commissioner, 36 Fed. (2d) 543; affirming 6 B. T. A. 1031, and other cases.

As appears from the findings of fact, petitioner during and prior to the taxable year was the sole stockholder of the Lakemont Company. After 1923 he was also, in his individual capacity, its selling agent. He or his sales force made all sales, collected all money, and paid all expenses and Wood pocketed what remained. No money was ever turned in to the corporation and it had no bank account. The company kept incomplete books, but did charge to Wood’s account the net amount above expenses paid retained by Wood. There is no evidence of an intention later to account or pay to the corporation. Wood gave no notes or other evidence of indebtedness to the corporation and paid no interest, and, being the sole stockholder, was in as full enjoyment and use of the funds so retained as though the usual formalities of business — payment into the corporation of funds collected, entries on the books, payment of corporate expenses, formal declaration and payment of dividends to him as a stockholder — had been strictly complied with. Were the Government here contending that the amounts so received and retained were income to petitioner in the years when received regardless of the year when formal dividends were later declared, ample authority would be found for sustaining its position. In Chattanooga Savings Bank v. Brewer, supra, the court said:

In order to be dividend for tbe purposes of income tax, a distribution need not be called a “dividend.” There need be no formal declaration. Holmes’ Federal Taxes, p. 774, sec. 407. This fund constituted a portion of tbe earnings or profits of tbe Key-James Brick Company for tbe year 1920, and was as a matter of fact distributed to its two shareholders in that year.
I cannot concur in the proposition, so plausibly advanced by able counsel, that the resolution of the board of directors of July 14, 1921, declaring a dividend and ordering a distribution, ipso facto impressed this fund with the characteristics of income for 1921. At the date of this resolution directing that “ the sum of $70,805.52 be withdrawn from the surplus account and distributed to the stockholders in proportion to their shareholding,” and the further direction that distribution be made to James and Key, the corporation did not have the money to withdraw or distribute. The money had the year before been withdrawn and distributed by Mr. Key.
Real facts, rather than record resolutions, give rise to income. Resolutions of directors, after all, are no more than evidential. Doyle v. Mitchell, 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054 (T. D. 2723); Southern Pac. R. Co. v. Muenter, 260 F. 837, 171 C. C. A. 563 (T. D. 2944); Douglas v. Edwards, (C. C. A.) 298 E. 229. In other words, the government is not precluded from going behind the corporation’s books and assessing the tax upon the basis of actual facts. If the distribution of the money by Mr. Key in 1920 was a distribution at all, as distinguished from a loan, then it by the very terms of the act of 1918 — section 201, subsec. (a) — was conclusively presumed to be taxable for 1920, and this because it was not the policy of Congress, as pointed out in the cases of Harder v. Irwin (D. C.) 285 F. 402 (T. D. 3420), and Douglas v. Edward (C. C. A.) 298 F. 237, to allow taxpayers by means of bookkeeping or otherwise to determine for themselves to what year such distribution should be allocated.

And in Hadley v. Commissioner, supra, the court observes as follows:

It is elementary that the mere declaration of a dividend does not constitute either a dividend or a distribution. Before there can be a dividend there must be a declaration of such by the proper officers and funds set aside for its payment. It then becomes the property of the stockholder to the extent that he may maintain an action against the corporation for its recovery. While there was no declaration of a dividend in this ease, there was a determination of the amount of profits or earnings to which the respective stockholders were entitled. One stockholder was paid his share in cash. The shares of the others were credited to their respective accounts on the books of the corporation in such a manner as to bring the fund within the absolute and unqualified dominium and control of the stockholder. While, technically speaking, this would not amount to the declaration of a dividend, it would amount to a distribution of the assets in such manner that the theory of corporate entity is not affected or disregarded, since it is settled law that the division of profits of a corporation among its stockholders amounts to a constructive dividend whether it is intended by the directors or stockholders to constitute a dividend or not. Chattanooga Savings Bank v. Brewer, (C. C. A.) 17 F. (2d) 79, certiorari denied 274 U. S. 751, 47 S. Ct. 764, 71 L. Ed. 1332.

After commenting on the Chattanooga Savings BanJc case, to which it referred with approval, the court further states:

It does not clearly appear whether the taxpayer rendered his returns on a cash or accrual basis, but we think this is not material, since the mere credit of his account with the earnings constituted an accrual. United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347. However, according to the practice of the Department, the amounts were constructively received when credited. Under article 4, paragraph 51, Treasury Regulations 33, art. 53, it is provided as follows: “ Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by bim at any time is subject to tax for the year (luring which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. * * * The distinction between receipt and accrual must be kept in mind. Income may accrue to the taxpayer and yet not be subject to his demand or capable of being drawn on or against by him.”
Clearly, under this rule the earnings set aside in the present case must be construed as a receipt instead of an accrual, since the share of the earnings belonging to the appellant was not only placed to his credit on the books of the corporation, but was brought unqualifiedly subject to his demand. It was money available for his use as much as if it had been placed in his bank account subject to check.

See also F. G. Lamb, 14 B. T. A. 814; Lincoln, National Bank, Executor, 23 B. T. A. 1304.

In the instant case it does not clearly appear whether petitioner’s returns are on a cash or an accrual basis, but in line with the above reasoning I deem it immaterial to this decision.

Here the parties are reversed as respects position. The taxpayer is urging the soundness of the above propositions of law and the Government has determined that the sums in the hands of the petitioner constitute income in the year in which dividends were declared, without regard for when the funds came into petitioner’s hands. Such, at least, is the effect of respondent’s determination.

However, the law is not fixed by the relative positions of the respective parties. It is based on principles of logic and reason. The immediate incidence of a ruling is usually of small concern. We believe the authorities cited, and others to the same effect, require a holding that formal declarations by the corporation of dividends were not necessary to the fixation of petitioner’s income and that the funds collected and retained by him became income in the year when so collected. It follows that the action of the corporation in declaring dividends in any year was a futile gesture and was of no legal effect, except in so far as they applied to earnings of the current year. As to this year such declarations constitute ratification of the action of petitioner in retaining the funds, but added nothing to income already acquired by him when the funds were received and retained.

The effect in this case of the above conclusions is that for the taxable year 1925 petitioner should be held liable for tax on income received measured by the amount actually received and retained by him. There being no evidence that leads me to conclude that at the time the funds were received by Wood they were, under the above principles, other than ordinary distributions of earnings, the amount received in 1925 should be taxed as an ordinary dividend. From Exhibit 10 it appears that the amount added to Wood’s account in 1925 was $28,333.50. In my view of the case this amount should be taken as his taxable income for that year. The balance of the Wood account, having been received by Wood in prior years, would not be taxable in 1925.


text:
    Bessie R. Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58285.
    Promulgated November 29, 1932.

      Allison L. H. Newton, Esq., for the petitioner.

      Maxwell M. Maham/jf, Esq., for the respondent.
   OPINION.

Lansdon:

Sections 166 and 167 of the Revenue Act of 1928 provide that, where the grantor of a trust has the power “ either alone or in conjunction with any person not a beneficiary of the trust ” to divert to himself either the corpus or income of the trust, he shall be taxable on such income or the income from such corpus. In the instant case the power to revoke was in conjunction with the two trustees who were beneficiaries of the trust in the event the grantor did not exercise the power of appointment reserved to her. The respondent contends that such a contingent beneficial interest was not contemplated by the word “ beneficiary ” as used in sections 166 and 167 of the Eevenue Act of 1928. In Smith v. Commissioner, 59 Fed. (2d) 56, however, where the Circuit Court of Appeals for the First Circuit reversed the Board’s decision reported in 23 B. T. A. 631, it was held that the word “ beneficiary ” included all classes of beneficiaries under the trust. In the course of its discussion the court stated:

It would, seem that Congress did not intend, by the use of the term “ beneficiary ” in Section 219 (g) only a beneficiary having a present vested interest, but intended to include within that term a beneficiary or beneficiaries having-contingent interests as well as those having present or vested ones.
Undoubtedly Congress could have drawn a line between beneficiaries holding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is, therefore, far more reasonable to conclude that by the word “ beneficiary ” Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.

In, accordance with the opinion of the Circuit Court in the Smith case which is controlling here, we conclude that the trust of July 1, 1927, was not revocable within the meaning of sections 166 and/or 167 of the Eevenue Act of 1928. Cf. White v. Erskine, 47 Fed. (2d) 1014; and Lewis v. White, 56 Fed. (2d) 390. It follows that petitioner is taxable on the ordinary net income only.

Since no part of the profit from the sale of the trust assets is taxable to the petitioner, it is unnecessary for us to determine the basis for computing such profit.

Eeviewed by the Board.

Decision will he entered v/nder Rule SO.

Muedock concurs in the result.


author: Seawell: MuRdock,

text:
    Iola Wise Stetson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41743.
    Promulgated November 29, 1932.

      George S. Jones, Esq., Fred L. Van Dolsen, Esq., and Scott Russell, Esq., for the petitioner.

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

Seawell:

A report in this proceeding was promulgated on June 13,1932, (26 B. T. A. 390) and a decision therein, in conformity with the principles and reasoning enunciated in the case of Emma Louise Smith, 23 B. T. A. 631, was on June 14, 1932, entered in favor of the respondent.

On June 30, 1932, the petitioner filed a motion that the findings of fact and opinion promulgated as stated be reviewed by the entire Board for reasons set forth in the motion, which motion was on July 1, 1932, denied.

On May 31, 1932, the Circuit Court of Appeals for the First Circuit (59 Fed. (2d) 56) reversed the decision of the Board in the Smith case, supra. Based on this decision of the Circuit Court of Appeals, which was not available to us prior to the promulgation of our report, the petitioner in due season filed a motion with the Board to reconsider our report, which motion was heard September 29,1932.

In rendering its opinion reversing the Smith case, supra, the Circuit Court of Appeals said:

It would seem that Congress did not intend, by the use of the term “ beneficiary ” in Section 219 (g) only a beneficiary having a present vested interest, but intended to include within that term a beneficiary or beneficiaries having contingent interests as well as those having present or vested ones.
Undoubtedly Congress could have drawn a line between beneficiaries holding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is, therefore, far more reasonable to conclude that by the word “ beneficiary ” Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.

In the Smith case, supra, the Board took the view that the word “ beneficiary ” in section 219 (g) of the Bevenue Acts of 1924 and 1926 has reference “ to a present beneficiary of a trust, not to one who has only a remote possibility of becoming a beneficiary in the future,” and because the likelihood of her husband ever taking a vested interest under the trust was remote, he was not a beneficiary in the sense of the statute.

We have fully and carefully considered the motion of the petitioner made herein and argument thereon, and the decision of the Circuit Court of Appeals in the Smith case, as well as our own report in the case of Joseph H. Bromley, 26 B. T. A. 878, in which reference is made to the Smith case, and conclude that the word “beneficiary,” within the meaning of section 219 (g) of the Bevenue Acts of 1924 and 1926, includes one having either a present vested interest or a contingent interest under a trust of the character here involved. Cf. Reinecke v. Smith, 61 Fed. (2d) 324. We are of the opinion, therefore, and so hold, that the petitioner’s husband, under the trust made by her, is a contingent beneficiary within the meaning of said section 219 (g), and hence said trust is, in the sense of the law, irrevocable and the income here in question from such trust is taxable equally to petitioner and her four stepchildren. The motion of the petitioner herein is accordingly granted, our decision heretofore entered vacated, and set aside, and our promulgated determination overruled.

Reviewed by the Board.

Judgment will be entered under Bule 50.

MuRdock,

concurring: I agree with the results reached in this case and in the case of Bessie B. Jones, promulgated this day. But I want to deny a possible inference from these cases that I was ever of the opinion that a beneficiary had to have a present vested interest as opposed to a contingent interest in order to be the kind of a beneficiary meant by section 219 (g). Furthermore, this question was not decided in Emma Louise Smith, 23 B. T. A. 631.

Eugene W. Stetson is a beneficiary under the trust instrument, inasmuch as it provides that in case his wife predeceases him “ he may cancel and terminate this agreement by an instrument, in writing, duly executed and acknowledged, and filed with the Trustee or Trustees then acting, and upon such termination and cancellation, the said husband shall be entitled to receive the corpus of the trust fund and any undistributed income, to hold and dispose of absolutely for his own use.” This provision is somewhat contradictory, but nevertheless it gave the husband the corpus and undistributed income of the trust fund under certain contingencies. The case of Emma Louise Smith v. Commissioner, 59 Fed. (2d) 56, is in point. The court there took the view that Emelius W. Smith, the husband, was a beneficiary under the trust instrument because the statute of distribution of Massachusetts was made use of in the trust instrument to define a class of persons of which the husband would be one upon the happening of a contingency named in the trust instrument. This case reverses the Division decision of the Board mentioned above, but it does not indicate a disagreement between the court and the Board on the question of whether or not the word “ beneficiary ” in section 219 (g) -includes one having only a contingent interest. The Division decision in the Smith case held that Emelius was not a beneficiary at all under the trust instrument, but would take, if ever, by virtue of the statute of distribution of Massachusetts. The opinion did not distinguish between beneficiaries having a vested interest and those having a contingent interest, but distinguished between those who were presently beneficiaries and those who were presently not beneficiaries at all. The original Division decision in the present case was based upon a sentence from the opinion in the Smith case, which, no doubt, was somewhat misleading when taken from its context. In any event, it was given an application in the original decision in this case which its use in the Smith case did not justify. The Bromley case is on another point entirely.

SteRNíiageN, Love, and Goodeigh agree with this concurring opinion.


author: Van Fossan:

text:
    John Crosby Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49141.
    Promulgated November 29, 1932.

      John W. Fisher, Esq., for the petitioner.

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

Van Fossan:

Section 214 (a) (5) of the Revenue Act of 1926 provides that in computing net income there shall be allowed as deductions losses sustained during the taxable year and not compensated for by insurance, or otherwise, if incurred in any transaction entered into for profit, though not connected with the taxpayer’s trade or business.

The petitioner contends that the loss of his investment in the stock of the Hurley Playing Card Company was sustained in 1927, when the transfer of that corporation’s plant, equipment and other assets to the King Press Inc. was made by the receiver. Respondent disallowed the deduction for the year 1927.

The facts disclose that the petitioner and some of his fellow stockholders of the Hurley Playing Card Company, suspecting mismanagement of the company, proceeded in August, 1926, to investigate its affairs and that as a result of the investigation the stockholders and directors of the company held meetings on November 1, 1926, at which the president was ousted from office. It was charged by the petitioner at the hearing that the president of the company had made unauthorized payments of the company’s funds and had altered its books of account. It appears that on November 1, 1926, the company had insufficient cash on hand to meet pressing liabilities and was threatened with serious injury by default in the payment of insurance premiums and inability to meet payments on some of its machinery which had been purchased under conditional-sale contracts. A custodial receiver was, therefore, appointed on that day by the Chancery Court of New Jersey. Shortly thereafter a statutory receiver was appointed, the order of appointment stating, among other things, that the court was satisfied from the proof that the Hurley Playing Card Company had suspended ordinary business operations and would not be able to resume business in a short time with safety to the public or its stockholders.

In the month of November, 1926, the petitioner wrote the letters referred to in the findings of fact. These letters furnish evidence contemporaneous with the appointment of the receiver of the conclusions to which the petitioner’s investigation of the company had brought him and the other investigating stockholders. These letters, written in 1926, certainly imply that from facts within the knowledge of the petitioner and the other investigating stockholders the petitioner considered that he and they had lost their investment in the stock of the company and that there was nothing in the company worth saving. Although, in accordance with the terms of the statute, it is not the time of the ascertainment, but the actual sustaining of the loss which is controlling (Leigh Carroll, 20 B. T. A. 1029; Jessie S. Meachem, 22 B. T. A. 1091), nevertheless, the fact that the petitioner concluded in 1926 he had lost his investment and there was nothing in the company to save argues persuasively against petitioner’s present contention that the stock of the company did not become worthless until 1927. A study of the financial condition of the company leads to a similar conclusion.

The petitioner contends that the assets of the company were fairly valued in its balance sheet stating the financial condition of the company as of October 21,1926, the day before the custodial receiver was appointed, and that this balance sheet shows that the company was solvent at that time. In our opinion the evidence is to the contrary. In the balance sheet the patents used by the company are valued in the sum of $1,016,489, although the Hurley Playing Card Company did not own them and the company’s right to use them was absolutely contingent on the continuance of the patentee, Hurley, in the employment of the company. When the statutory receiver was appointed in November, 1926, the continuance of the employment of Hurley, the patentee, by the company was entirely problematical. Equally uncertain was his future employment in the event of the reorganization and refinancing of the company. The record contains no evidence as to the real value of these rights, if any such existed.

The land, plant and equipment of the company were valued in the balance sheet in the sum of $272,756.79. However, when the receiver offered the entire plant for sale in December, 1926, he received a bid of $150,000 for the factory, plant and equipment, with options to purchase adjoining property and with the right, title and interest of the receiver and of the corporation in the patents and patent rights. A separate bid of $46,000 was made by another party for the factory premises free and clear of all encumbrances. No appraisal or other persuasive testimony of the real value of these or any of the other assets was produced. It follows that the petitioner, on whom rested the burden of proof, has not proved the value of the assets at the time the receiver took charge.

The petitioner contends there was no certainty at any time in 1926 that the company would not be reorganized and that the possibility of reorganization continued until April, 1927, when the plant, equipment and rights of the receiver were transferred to the King Press Inc. The petitioner, therefore, argues that it can not be said that the stock of the Hurley Playing Card Company became worthless until after the possibility of reorganization had terminated. Though there is some evidence that the petitioner and other stockholders talked with each other about possible reorganization of the company, the record discloses that no actual or tentative plan of refinancing or reorganizing the company was adopted by the parties in interest either in 1926 or at any other time. Nor would it follow that a reorganization, if carried out, would establish petitioner’s contention that the stock of the old company was not worthless in 1926. A contrary inference would be more reasonable.

Though the receivership continued until September, 1931, it is well settled that the loss of the investment in the stock of a corporation should be deducted in the year in which the stock becomes worthless, without waiting until the corporation has been wholly liquidated through a receivership or otherwise. Remington Typewriter Co., 4 B. T. A. 880; J. J. Melich, 6 B. T. A. 70; Floyd E. Poston et al., Administrators, 17 B. T. A. 921.

Upon consideration of all the evidence, we hold that the petitioner has not proven that respondent erred in his determination that the petitioner’s investment in the stock of the Hurley Playing Card Company became worthless in the year 1926.

Reviewed by the Board.

Decision will Toe entered for the respondent.

Lansdon dissents.


text:
    Rosalie C. Rand, as Executrix of the Last Will and Testament of William Rand, Deceased, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46659.
    Promulgated November 29, 1932.

      Mwrray D. Welch, Esq., for the petitioner.

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

Van Fossan:

The sole question presented for consideration in this case is whether or not the original petitioner was an officer of the State of New York and his income as such therefore entitled to exemption from Federal taxation. There is no suggestion that the services he performed as Special Deputy Attorney General did not relate to a governmental function exercised by the State of New York. Cf. Leland Powers et al., Executors, 26 B. T. A. 1381.

The petitioner contends that he was a public officer of the State of New York and that his duties were established by law. The sections of the law of the State of New York under which it is claimed petitioner’s appointment was made and he performed the services in question are sections 61, 62, 200 and 201 of the Executive Law. Reference is also made to section 9 of the Public Officers’ Law.

It is obvious that under the terms of the state statutes involved the Attorney General, or his duly appointed deputy, whenever required by the Governor so to do, might assume the authority and powers of the district attorney in certain designated criminal actions. The latter officer thereupon became subject to the former’s direction and supervision. It is indisputable that a district attorney is a state officer occupying an essential position in the machinery of government. His duties are too well known to require comment. The same is true of the Attorney General and his position in the state government. The provisions of the Executive Law authorizing and directing the substitution of the Attorney General or his deputy for the District Attorney under certain conditions likewise are clear and unmistakable. And so are the statutory regulations governing the appointment of deputies in general and deputy attorneys general in particular. Pursuant to all of these statutes the petitioner received his appointment. His term of office was coterminous with that of his principal officer, the Attorney General. He took the constitutional oath of office. His compensation was fixed by the Attorney General and payable by the County of New York. His appointment was made under section 61 of the Executive Law and as such was a general investiture of the powers and authority of the Attorney General. The duties of the Attorney General and his deputies are established by law and not by agreement.

The instructions issued by the Governor under section 62 of the Executive Law merely directed the Attorney General or one of his deputies to supersede the district attorney in certain criminal proceedings. The petitioner’s appointment as Special Deputy Attorney General was general in character. As such he was required to perform whatever duties were assigned to him by the Attorney General during the term of office of that official. His designation to appear for and represent the Attorney General in criminal proceedings and investigations was directory in its tenor and served as his authority to appear before the grand jury. He served the State of New York in the enforcement of its laws in the manner prescribed by its statutes, and not in his individual capacity. Frederick A. Brown, 22 B. T. A. 581.

In Metcalf & Eddy v. Mitchell, 269 U. S. 514, the Supreme Court of the United States defined the term “ office ” as follows:

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

In speaking of the plaintiffs in that case the opinion states that “ there were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law.”

In the case at bar the evidence is convincing that the petitioner held the status of an officer of the State of New York. This conclusion is supported collaterally by the fact that the Executive Law contains a special provision, section 65, authorizing the appointment of such “ additional counsel ” as may be required to carry out the provisions of section 62.

Since the petitioner was not employed under section 65, we may well assume that it was the intent of the Governor and Attorney General to constitute him an officer of the state rather than an employee thereof. The cases cited by the respondent and those heretofore decided by us denying exemption do so usually on the ground that the taxpayer was an independent contractor and not an employee of a state or political subdivision thereof. See Metcalf & Eddy v. Mitchell, supra; Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699; Charles M. Haft, 20 B. T. A. 431; Edwin J. Rater, 20 B. T. A. 975; and numerous other cases. Cf. Hugh W. Ogden, 24 B. T. A. 1239; G. Ridgely Sappington, 25 B. T. A. 1385.

But, since we have determined that the petitioner was an officer of the state, those cases are not in point. Neither do we think it material that the petitioner retained his membership in his law firm and shared in the profits thereof. Many public officers do not devote their entire time to the duties of their office. As we said in Edwin J. Baber, supra, “ it is possible for an officer or employee to accept outside employment without changing the character of the services rendered by him.”

Reviewed by the Board.

Decision will be entered under Bule 50.

MoRRis, Sternhagen, Smith, Lansdon, and Murdock dissent.


text:
    Robert W. Bingham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51051.
    Promulgated November 29, 1932.

      Donald V. Humber, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Sternhagen :

Respondent determined a deficiency of $20,061.92 in petitioner’s income tax for 1928 by treating short sales of Victor Talking Machine stock as if they were ordinary sales of Victor stock previously purchased by petitioner. The facts are stipulated as follows:

(1) The petitioner is an individual and a resident of Louisville, Kentucky. He is now and has been since prior to 1928, the owner and publisher of the Courier-Journal and The Louisville Times. For the calendar year 1928, he filed his individual income tax return with the Collector of Internal Revenue at Louisville, Kentucky.
(2) Throughout the years 1927,1928 and 1929, petitioner traded in stocks with the brokerage firm of Clement, Curtis & Company of 231 South LaSalle Street, Chicago, Illinois, a member of the New York Stock Exchange.
(3) Petitioner’s trading was done through his nephew, Lawrence K. Callahan, a resident of Chicago and a member of the firm of Clement, Curtis & Company.
(4) During the years 1927,1928 and 1929, petitioner maintained with Clement, Curtis & Company, an investment account and “ long ” and “ short ” trading accounts. These two latter accounts were margin accounts.
(5) Attached hereto marked Exhibit “A” are photostat copies of original records of Clement, Curtis & Company, consisting of eleven pages, reflecting orders to purchase and sell Victor Talking Machine Company stock in behalf of the petitioner.
(6) Attached hereto marked Exhibit B ” are photostat copies of original records of Clement, Curtis & Company, consisting of ten pages, reflecting purchases and sales of Victor Talking Machine Company stock in behalf of the petitioner.
(7) When the purchases of Victor stock were made for petitioner’s long account, the certificates which were delivered to Clement, Curtis & Company on account of these purchases were not registered in petitioner’s name or otherwise earmarked. Under the broker’s practices, these certificates were freely used by the brokers. They might be pledged, they might be loaned to other brokers for delivery against short sales, or they might be borrowed by Clement, Curtis & Company and used to cover short sales in Victor Talking Machine Company stock made by their own customers. However, the brokers were obligated to make delivery of an equal amount of this stock to petitioner upon payment of the purchase prices at which these shares were purchased for petitioner, or to deliver such amount of stock in fulfillment of sales of the stock made by petitioner’s orders. The certificates which petitioner would receive if delivery was made to him, or which would be delivered in fulfillment of petitioner’s order to sell would not be the same certificates as were received by Clement, Curtis & Company, when the purchases for petitioner’s long account were made, except by an unusual coincident [sic].
(8) When sales were made for petitioner’s short account, delivery in fulfillment of the sales was made either out of Victor Talking Machiné Company stock purchased and in the possession of Clement, Curtis & Company, on account of its margin customers generally, or from stock borrowed from other brokers for purposes of the short sale, and the certificates so delivered were not the certificates received when the purchases for the long account were made, unless by mere coincident [sic], and even in that event the delivery would have been of stock borrowed from the broker’s general holdings with an obligation to return a like amount in order to satisfy the requirements of the long accounts of its customers.
(9) In making his income tax return for the calendar year 1928, petitioner reported profits of $84,120.00 and $18,285.00 from his purchases and sales of Victor Talking Machine Company stock made through Clement, Curtis &
Company, arrived at as follows:
Feb. 27, 1927 Bought 1000 at 36%_ $37, 025. 00
Sept. 6,1927 “ “ "36%___ 36,650.00
$73, 675. 00
Mch. 7, 1928 Sold 1000 at 70_ $69, 785. 00
Mch. 26, 1928 “ “ " 88%_ 88,010. 00
$157, 795. 00 73, 675. 00
Profit_ $84,120. 00
Dec. 14, 1928 Bought 100 at 121%_ $12, 150. 00
“ 100 “ 121%_ 12, 162. 50
“ 300 “ 121%_ 36,525.00
" 100 “ 124%_ 12,512.50
“ 400 " 125_ 50,100.00
$123, 450. 00
Nov. 30,1928 Sold 500 at 148_ $73, 855. 00
Dec. 5, 1928 “ 100 “ 136%_ 13, 596. 00
400 " 136_ 54,284.00
$141, 735. 00
123, 450. 00
Profit_ $18, 285. 00 27 B. T. A.
(Id) In auditing said income tax return of the petitioner for the calendar year 1928, respondent accepted as correct the profit of $84,120.00, as reported by petitioner. Respondent, however, increased the profit of $18,285.00, as reported by petitioner, to $142,402.50 by applying the rule of “ first in-first out,” as follows:
Sale of 500 Shares of Victor Tanting Machine Company Stock on November SO, 1928.
Selling price-$73, 855.00
Cost_ 21,237.50
Profit___ 52, 617. 50
Sale of 500 Shares of Victor Talking Machine Company Stock on December 5, 1928.
Selling price_$67, 880. 00
Cost_ 21,237.50
Profit 46, 642. 50
Sale of 500 Shares of Victor Talking Machine Company Stock on December 17, 1928.
Selling price_$71, 855. 00
Cost_ 28,712.50
Profit__ $43,142.50
The question which the parties have argued as arising from this stipulation is merely whether a short sale of Victor common may and must be matched against a prior margin purchase of Victor common, with a computation of the resulting gain or loss; in which event, the computation is made upon the first in-first out rule of article 58, Regulations 74. The first in-first out rule, within its proper sphere, has been several times approved. Snyder v. Commissioner, 54 Fed. (2d) 57; affirming 20 B. T. A. 778; Skinner v. Eaton, 45 Fed. (2d) 568; certiorari denied, 283 U. S. 837; Estate of Richard B. Turner, 26 B. T. A. 1204; Burdett Stryker, 21 B. T. A. 561. Thus far, however, the question has not arisen whether or to what extent the rule is applicable to short sales. By its terms, it is restricted to the sale of shares from lots of stock purchased at different times which can not be identified. Wherever, for one reason or another, the shares sold can be and by the evidence are identified with the lots purchased, there is no occasion to use the rule of article 58. By invoking the rule, therefore, in the present case, the respondent implies that the shares of Victor stock sold short are from lots purchased at different times and can not be identified.

We think that the respondent’s position can not be sustained. It loses sight of the nature of a short sale and treats it as an ordinary sale. But the essence of a short sale is that what is sold has not yet been acquired by the seller. Cf. Provost v. United States, 269 U. S. 443; Cook v. Flagg, 251 Fed. 5. A short sale of property already on hand is an anomaly. An instruction by a broker’s customer to sell short puts into operation a machinery which is entirely inconsistent with a simple sale of shares already held in the customer’s account. Provost v. United States, supra. While the specific question has not, so far as we have been able to ascertain, been determined, enough has been said in the extensive discussion of cognate questions to indicate at least a doubt whether a broker instructed by his customer to make a short sale is authorized without specific permission to consummate such sale by the use of the shares in the customer’s long account. Clearly he could not do so before giving the customer a reasonable time and opportunity to make a profitable purchase to cover. Campbell v. Wright, 118 N. Y. 594; 23 N. E. 914; Rosenthal v. Brown, 247 N. Y. 479; 160 N. E. 921; Ingraham, J., in In re Mills, 139 App. Div. 54; 123 N. Y. S. 671.

In the present case the stipulation suggests that the broker was given a wide freedom in the use of petitioner’s shares. The brokerage contracts are not in evidence and, hence, the extent of the broker’s powers in this respect is not entirely clear. It would seem, however, that he has no right to close out the petitioner’s long account by using the long shares to make an immediate delivery under a short sale. Even if the broker had the right to borrow the customer’s long shares for delivery under his short sale, cf. Jones v. DeRonde, 255 N. Y. S. 505, this would be less than saying, as the respondent does, that the long shares were sold for the petitioner.

A short sale imports a subsequent covering purchase. It leaves open the accounts of both the customer and the broker. No profit or loss exists until by the covering purchase the obligation of the short sale is discharged. Brown v. Carpenter, 182 App. Div. 650; 168 N. Y. S. 921; see S-1179,1 C. B. (1919) 60; I. T. 2187, IV-2 C. B. 25. It is in this respect unlike an ordinary sale. While some attributes are present in both transactions, the more important attributes of a short sale are those which entirely distinguish it from the ordinary sale.

While, therefore, it may be that article 58 is applicable on occasions to short sales, so, for instance, as to justify the use of a first in first out rule to successive unidentified short sales of the same class of stock, this would be quite different from applying the rule indiscriminately to a congeries of short sales and long purchases. The respondent’s application of the rule to the facts here finds less support either in law or administrative convenience than its application to stock bought by a single customer through several brokers. Christian F. Leng, 22 B. T. A. 149.

In our opinion, the gain or loss in respect of a short sale is to be ascertained by matching it against the covering purchase, and this requires that the respondent’s determination be reversed. This is in accordance with the respondent’s rulings, G. C. M. 1451, IX-I C. B. 81; G. O. M. 8426, IX-2 C. B. 92; and I. T. 2187, ÍY-2 C. B. 25.

Reviewed by the Board.

Judgment will l>e entered under Rule 50.

Smith concurs in the result.

Sea well dissents.

Lansdon did not participate in the consideration of or decision in this proceeding.

       Represents % of cost of 1,000 shares purchased on November 4, 1927 for $42,475.00.

         Represents of cost of 1,000 shares purchased on January 9, 1928 for $57,425.00.