text:
    Standard Knitting Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100834.
    Promulgated July 14, 1942.

      George D. Brdbson, Esq., and J. G. Korner, Jr., Esq., for the petitioner.

      Oliver L. Bright, Esq., for the respondent.
   OPINION.

Disney:

Section 501 (a) (1), Revenue Act of 1936, provides wbat is known as the “unjust enrichment tax”, being 80 percent of net income of every person “from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid.” Two limitations are, so far as here material, set on the amount subject to tax: (1) It shall not exceed the amount attributable to shifting the tax to others, and (2) it shall not exceed net income for the entire taxable year from sale of the articles with respect to which the excise tax was imposed. Section 501 (e) (2) provides, so far as here applicable, a method of determining a presumption as to the amount of the shift of tax to others; and section 501 (i) (1) and (2) contains provisions with reference to evidence to rebut such presumption. The tax is an income tax. Cincinnati Rubber Manufacturing Co., 46 B. T. A. 453. Upon cotton the processing tax was $0,042 per pound of lint cotton processed.

The petitioner, a processor of cotton, filed an unjust enrichment tax return for the taxable year 1935, on February 13, 1937, reporting $55,853.17 as the extent to which the tax was shifted to others. Though another was later filed on April 19, 1937, showing no tax, the former has been treated by the respondent as petitioner’s return, and the petitioner at the hearing indicated a view that the return of February 13,1937, complied with the statute.

Section 501 (e) (2), providing the presumption as to amount of shift of tax to others, in outline, sets up the following formula: First, ascertain, for the taxable year, the aggregate selling price of all articles sold with respect to which the excise tax was imposed. Second, deduct therefrom the aggregate cost of such articles. Seduce the “difference” — result of such subtraction — to a “margin per unit in terms of the basis on which the Federal excise tax was imposed” — in this case pounds of lint cotton processed by the taxpayer and sold in articles. The result is that for each pound of lint cotton sold in articles a “margin” (sec. 501 (f) (1)) between selling price and cost is ascertained. In identically the same way a margin (between selling price, and cost) per pound of lint cotton processed and sold by the petitioner is ascertained as an average over a “base period” of six years next prior to the initiation of the excise tax. This is called the “average margin.” (Sec. 501 (f) (1).) Average margin per unit for the base period is. then subtracted from margin per unit for the taxable year and the excess, if any (called “excess margin”), is presumed to be the amount, per pound of lint cotton sold, in which the unpaid excise tax was shifted by the petitioner to others. Multiplying by the number of pounds of lint cotton contained in the articles sold in the taxable year and as to which the excise tax was not paid, gives the total amount of presumed tax shift. The presumption is, as above stated, subject to rebuttal by either petitioner or Commissioner.

The statute, section 501 (f) (3), defines selling price as meaning selling price minus certain amounts not here involved, so that for the purposes of this case selling price means the amount received upon sale. “Cost” is defined by section 501 (f) (2) as cost to the taxpayer of materials entering into the articles. In other words, the ordinary meaning of the word cost is narrowed for purposes of the section here involved, so that the “difference” between selling price and cost of materials only does not represent actual net profit, though for the sake of clarity sometimes herein it is referred to as “profit.” The term “articles” is not defined by Title III, the title in which section 501 appears, though it is defined in Title VII.

During tbe base period and the taxable year petitioner spun yarn, i. e., it processed cotton. It also purchased yarn from others. These two kinds of yarn were then commingled in the weaving of the yarn by petitioner into cloth. The cloth so woven was then used by the petitioner to produce various kinds and grades of underwear.

The returns of the petitioner were filed under the provisions of section 501 (e) (2) above outlined and providing in effect computation of the presumptive amount of shift of tax to others by comparing the margin of profit in the tax year with the average margin over a test or base period of six years. (“Profit” is used herein only in a restricted sense, as above suggested, as representing the difference between selling price and cost of materials, as by statute prescribed.)

In his determination of the deficiency the respondent followed section 501 (e) (2) and determined an “excess margin” in 1935 of $0.16396111, that is, determined that such amount was the excess of the unit margin in the taxable year over the unit “average margin” in the base period covering the years 1927 to 1932, inclusive, and, multiplying by number of pounds of articles sold with excise tax unpaid, determined therefore that the aggregate amount of $354,737.57 was the extent to which the burden of the processing taxes was presumably shifted to others in 1935. However, pursuant to the provisions of section 501 (e) (3) of the Eevenue Act of 1936, limiting net income subject to tax to the amount of the tax itself, the respondent limited the net income subject to tax to $90,868.97, an amount representing the processing tax of $0.042 per pound, imposed, but not paid, on 2,163,547 pounds of cotton processed by petitioner and sold in articles in 1935 after April 1. At the hearing the respondent filed amendments to his computations. The recomputations disclose a margin in 1935 of $0.1275994 in excess of the average margin, and a reduction to $276,-067.30 of the extent to which the burden of processing taxes was presumably shifted, without, however, any reduction in the $90,868.97 maximum unjust enrichment subject to tax. The deficiency determined by the respondent upon the basis of the election thus made by petitioner under the statute creates a presumption of shifting to others the full burden of the processing tax of $90,868.97. This presumption is rebuttable in whole or in part, by proof, in accordance with section 501 (i) (1) and (2), supra.

The principal difference between the parties herein lies in the interpretation of the meaning of section 501 (e) (2) as to the method for the determination of a presumption as to the amount in which the burden of the excise tax unpaid was shifted to others — rather than in the facts and figures to be used in applying it.

Primarily, the parties disagree, in effect, on two points: (1) The definition or meaning of “articles with respect to which a Federal excise tax was imposed on such person but not paid” (sec. 501 (a) (1)), and (2) the interpretation of the expression in subsection (e) (2): “the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed”; i. e., they differ as to what constitutes “articles with respect to which”, etc., and as to the proper manner of reducing to terms of basis of imposition of excise tax. With regard to “articles” the petitioner argues, as its chief contention, in substance that articles with respect to which excise tax is imposed mean only the cotton content, so far as processed by the taxpayer, entering the manufactured product and that the true and proper rule is to eliminate everything except own-processed cotton throughout the entire computation, i. e., in selling price, in cost deducted therefrom, and in dividing the difference or “profit” to reduce to the “margin per unit.” Petitioner further says, however, that if articles with respect to which excise tax is imposed mean the manufactured product, in its entirety, and is not confined to the lint cotton content thereof which is processed by petitioner, then the entire weight of the article or product must be used throughout the computation, not only in calculating selling price and cost of materials, subtracted therefrom, but also as the divisor in dividing the “difference” (between selling price and cost of materials) to reduce to “a margin per unit in terms of the basis on which the Federal excise tax was imposed.”

The respondent, however, takes the position that the statute requires “article” to be defined as it is defined in Title VII, section 913 (d), Revenue Act of 1936, where it is provided:

When used in this title—
****** *
(d) The term “article” means the product which is obtained by processing a commodity, and includes the product obtained by further manufacture or by combination with other materials.

He therefore includes in his computation the entire selling price of the articles sold by the petitioner, and subtracts therefrom the entire cost of all materials forming the content thereof. From that point on, however, his computation differs from that of the petitioner, for, in reducing the difference or “profit” to “margin per unit”, he divides the difference between selling price and cost by only the number of pounds of “own-processed” lint cotton content in the articles, and not by the total number of pounds in the articles. Such method, the petitioner argues, is improper and illogical.

The definition of articles with respect to which excise tax is imposed and the method of reducing to margin per unit are both of importance here, because of the commingling, in the garments manufactured by petitioner, of its own-processed cotton and purchased cotton yarn, i. e., cotton already processed by another, the excise tax upon which is not material to this proceeding. The inclusion, or elimination, of such purchased yarn is the prime controversy between the parties. :

First, we consider the definition of “articles” with respect to which excise tax is imposed: Our analysis leaves it clear to us that the statute does not permit us to consider merely the own-processed cotton content as the article, that is, eliminate as petitioner urges, the purchased yarn, in arriving at the selling price of articles and in subtracting from the selling price of articles the cost thereof. Though we recognize that the definition in Title VII, section 913 (d), is not controlling, since it is preceded by the provision “When used in this title”, nevertheless, when we consider the close connection and related nature of the two titles, covering as they do the same general subject, we think there would be inconsistency in the use of a definition different in effect in Title III, wherein appears section 501, here involved. The definition above quoted, since it comes from a title which does not govern here, is persuasive only, but it is plainly persuasive. Moreover, the definition of cost in section 501 (f) (2) is enlightening: “The term ‘cost’ means, in the case of articles manufactured or produced by the taxpayer, the cost to the taxpayer of materials entering into the articles.” This plainly, we think, means cost of all materials entering into the product manufactured, and if all materials, that is, those composing the entire product, are to be included in computing cost, then the entire product is necessarily the “article” with respect to which the excise tax is imposed. Likewise if materials enter into articles, then the article is not a mere material, such as lint cotton. Again, the words “articles manufactured or produced” seem to connote more than a mere partial content of the materials comprising the product, which is, in effect, what petitioner regards as the proper use of “articles with respect to which a Federal excise tax was imposed.” Also, section 501 (j) (1) provides that “a Federal excise tax shall be deemed to have been imposed with respect to an article, if it was imposed with respect to * * * any commodity or other article, from which such article was processed.” This language clearly distinguishes between the “article” and a commodity (such as lint cotton) from “which such article was processed.” The statute must be presumed to intend the usual and ordinary meaning for the term in question, which precludes, in our opinion, the use sought by the petitioner. We conclude that “articles” with respect to which the excise tax was imposed mean the product of processing, or of further manufacture, and that selling price, and cost subtracted therefrom to obtain “difference” under. section 501 (e) (2), must be the entire selling price and cost of such product, in this proceeding cotton underwear.

We next examine the meaning and application of “the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax is imposed”; that is to say, we proceed to determine what is the proper method of such reduction of the difference between selling price and cost of articles sold to a margin per unit of own-processed lint cotton pounds. To do so, the respondent simply divides the aggregate difference or “profit” by the number of pounds of lint cotton content in the articles sold. As above suggested, the petitioner contends that if the entire content of the articles is included in calculating selling price, cost, and therefore difference or profit, then the entire weight of the articles, and not mere own-processed lint cotton pounds, must be used as divisor to obtain the margin per unit. The point of difference between the parties is crucial. We have examined the question at much length, particularly because the two returns filed by the petitioner and the several examinations and computations made by the respondent show that it has given both parties much concern.

In our opinion, the statutory phrase is not properly interpreted or followed, and the unit margin properly ascertained by dividing the aggregate net difference or profit by only the weight of the own-processed lint cotton content, as the respondent has done. The statute requires that there be ascertained a “margin per unit” without specifying how it shall be done. That unit is plainly a pound of lint cotton. We therefore seek to learn what part of the aggregate “difference” or “profit” is to be ascribed to a pound of lint cotton. In our opinion, that object can be accomplished, and accomplished in compliance with the statute, by first ascertaining the proportion, by weight, which own-processed cotton bears to the entire weight of the articles sold, and by then taking that proportion of the aggregate “difference” or profit, thus arriving at a figure which, under the statute, is presumed to be the aggregate profit from own-processed cotton alone. Then by dividing such amount of profit presumed attributable to own-processed cotton, by the number of pounds of own-processed cotton, the result is a presumption of margin profit for a pound — the presumed “margin per unit” described by the statute.

This result is the same as dividing the aggregate profit by total number of pounds of articles, but this is true only because it is presumed under the statute that the profit made on own-processed cotton, and on foreign cotton, respectively, is in proportion to the weight thereof. That, we think, is the presumption contemplated by the statute. Merely dividing profit by total number of pounds of lint cotton content does not give a fair result. Thus, using a simple example, if 2,000 pounds of manufactured products producing a net profit of $10,000 contained 1,000 pounds of own-processed cotton and, in addition, contained 1,000 pounds of other materials, merely dividing $10,000 by 1,000 (respondent’s method) would not fairly indicate that the profit per pound of own-processed cotton is $10, for the other materials formed a large part of the weight and may have contributed a large part of the profit. But by taking, of the $10,000, one-half (the ratio that own-processed cotton, 1,000 pounds, bears to total weight, 2,000 pounds), the aggregate margin on the own-processed cotton, with respect to which the tax was imposed, is thus determined as $5,000, and then by dividing such aggregate margin by 1,000, the number of pounds of own-processed content, the margin per unit is ascertained, i. e., $5 per pound of own-processed cotton. On respondent’s theory, the less the number of pounds of cotton, the greater the margin; thus, if instead of 1,000 pounds of own-processed cotton there were only 800 pounds, respondent would compute a profit margin of $12.50 per pound of own-processed cotton. In our opinion the only way such method and result can be justified is to assume that Congress intended that the ■own-processed lint cotton content should be presumed to earn all of the margin of profit and that presumably none of the profit is ascribable to other materials, such as purchased yarn or wool. Congress might conceivably have so intended the presumption, since it is re-buttable, yet further thought indicates to us that such was not the legislative intent; for if, for example, the own-processed cotton content were only 50 percent of the article, such as a garment manufactured equally from cotton and wool, it would be a hard presumption which would allocate the entire profit to the cotton and none to the wool. Such a result can not reasonably be considered within the intendment of the statute. We think that under the statutory language we should assume only that profit is earned in proportion to weight, by own-processed cotton and foreign material such as purchased cotton herein.

We think that the object of the statute plainly is to ascertain as nearly as possible the actual margin of profit per pound of the processed . commodity, in the base period and the taxable year, and to compare them. That object is attained by ascertaining in each period the proportion of profit margin attributable to own-processed commodity, here lint cotton, i. e., the amount of profit margin presumed to be earned by a pound of own-processed lint cotton, assuming that profit is earned in accordance with weight, á fair assumption. When such pound-margin (“average margin” for the base period) is compared with a “margin” obtained in the same way for the taxable year, it is clear that a fair comparison is obtained, free from variations because of difference in proportions of commodities manufactured, in base period and taxable period, and that thus is obtained a fairly computed presumptive excess of margin of profit, if any, from processing the commodity considered, in the taxable year, over that in the base period, providing a fair and accurate measure by which to presume that the tax was shifted, leaving for a rebuttal only other factors, such as operating costs, etc. We therefore conclude that the two margins should be ascertained by taking in each case, of the aggregate margin computed for articles sold, that proportion which the processed commodity, here own-processed cotton, bears to the articles sold, and that the margin per unit should be determined by using as the divisor the pounds of own-processed cotton.

Before applying the method thus approved to the facts and figures herein involved, it is necessary to pass upon several differences between the parties, especially concerning sales of waste, losses sustained in dealings in cotton futures, and bad debts, all of which affect the amounts to which the method above determined must be applied.

First: The respondent included in aggregate selling prices amounts received upon the sale of waste cotton incident to the production of yarn. The petitioner insists that such waste does not constitute “articles with respect to which such Federal excise tax was imposed” and that the statute contemplates articles manufactured and sold in the regular course of business. We can not agree. Neither regulation nor controlling statute defines “article”, yet we think that it is a “product which is obtained by processing a commodity” within the persuasive, language of section 913 (d), above quoted, that waste is a byproduct,, and that therefore the term “article” covers waste. The statute, in our view, was not meant to exclude that which, equally with the finished! product, is the subject of sale and receipt of income. The waste, like imperfect garments or “seconds” which plainly could not be excluded,, is the result of inability to perfect all material into garments desired! It is a part of the weight upon the basis of which the excise tax is; imposed. If it was in anywise formed into a manufactured product, however simple — such as cotton pads or bandages — these would, under any reasonable definition of “article”, come within the statute. We think that the waste, even though not so treated, fairly constitutes articles. Indeed, the evidence herein does not indicate that waste, was left wholly unchanged. It was included in petitioner’s computations in the return. We think it should not be excluded, and hold that the respondent did not err in including the amounts received therefor in aggregate selling price.

Next, the parties join issue on the question whether “cost to the taxpayer of materials entering into the articles” includes certain losses; sustained by the petitioner in dealings in cotton futures; the petitioner contending that, since no cotton was thereby acquired, the amounts were improperly regarded by the respondent as cost of material. Although we think it clear that the transactions in cotton futures were not merely speculative, nevertheless in our opinion the respondent erred in his treatment of the losses. In Commissioner v. Farmers & Ginners Cotton Oil Co., 120 Fed. (2d) 772, the court says: “A hedge is a form of price insurance; it is resorted to by business men to avoid! the risk of changes in the market price of a commodity.”

Regulations 95, article 1 (h), says:

In determining “cost to tiie taxpayer” and “price paid by the taxpayer” there may be included transportation and other charges incurred in acquiring such materials * * *. [Italics supplied.]

We think such regulation reasonably follows the statute, and that losses in hedging, a form of price insurance, or dealings in cotton futures, can not reasonably be held charges in acquiring the materials. We sustain the petitioner on the point, and the respondent’s figures have been modified accordingly.

Also, the respondent reduced the selling price of articles by amounts for bad debts. Petitioner contends that the definition of selling price in article 1 (g) of Regulations 95 precludes respondent from so doing. That article provides that “The term ‘selling price’ means the price received by the taxpayer from a vendee for the article in question * ■* and that “price received by the taxpayer” means “the invoice price less trade or other discounts.” Respondent, in reply, says that it is immaterial with him whether we reduce selling price by bad debts or treat the item as an expense in production.

We agree with petitioner on this item. No accounting practice within our knowledge treats bad debts as a reduction in selling price. No business extending credit can avoid the risk of incurring bad debts, but they do not affect gross sales like cash discounts, which arei a reduction of sales price if the amount of the sale is paid within a prescribed time. Bad debts are deductible items, but not a cost of material under the applicable statute. Accordingly, the total selling prices should not be reduced by amounts for bad debts.

Further, the petitioner objects to the computations of margin and average margin by the respondent because like articles were not compared in the taxable year and base period. It is pointed out that, as petitioner did not manufacture athletic shirts in 1927 or 1928, only a small experimental number were produced in 1929, and that such garments produced in 1930, 1931, and 1932 were made from a type of cotton material different from that used in 1935, and therefore there is no means of computing its margin of profit on this article in the base period, thereby rendering it impossible to make a comparison with the margin in 1935. The contention is that like articles must be compared to reach a correct result, heavyweight underwear and athletic shirts being unlike articles, and that, since heavyweight underwear was the only product manufactured by it during all of both periods, the marginal computation should be confined to that garment. The statute does not so limit the comparison. Section 501 (e) (2), supra, specifically provides that the difference between the selling price and cost of articles of the processor “shall be reduced to a margin per wait in terms of the basis on which the Federal excise tax was imposed.” (Italics supplied.) Petitioner elected to file its return under that section and method. The “articles” produced by petitioner were various styles and weight of underwear and the excise tax was imposed upon lint cotton, the commodity from which the garments were manufactured. Thus the “unit” here is pounds of lint cotton and not the articles themselves. Any doubt as to the meaning of the provision is resolved by section 501 (i) (1), supra, authorizing the submission of proof of changes in margin due to “factors other than the tax”, including “type or grade of article”, to meet any presumption created by the computation under section 501 (e).

■Section 501 (f) (1) provides that the term “margin” means “the difference between the selling price of articles and the cost thereof” and defines'the term “average margin” as meaning “the average difference between the selling price and the cost of similar articles sold by the taxpayer during his six taxable years preceding the initial imposition of the Federal excise tax in question ⅜ * *.” (Italics supplied.) Thus Congress did not confine the comparison to margins on identical articles but definitely contemplated that there would be changes in articles manufactured by broadening the comparison to similar articles. Regulations 95, article 1 (j) (1), furnishes a reasonable definition of “similar article”, for purposes of computation under section 501 (e) (1):

* * * A “similar article” is an article which resembles in all respects another article, or, if the taxpayer had no articles resembling in all respects such other article, the similar article is one which most nearly resembles such other article in all material respects (such as quality, weight, size, content, and use).

At all times important petitioner manufactured garments from cotton. The principal change was from heavyweight underwear to heavy and lightweight underwear, a mere change of type or grade of article. In our.opinion, the petitioner produced similar articles in the two periods compared, within the statute and regulation, even if the same criterion applicable to section 501 (e) (1) were here applicable. However, here we are proceeding under section 501 (e) (2), and therein the comparison is not of “articles”, but of units. The language requires that the margin and the average margin shall be “computed for the same unit.” That unit is a pound of lint cotton. Regulations 95, article 13, method II, provides that the commodity processed and entering into the margin computation be merely of the same kind. This, in our opinion, is a fair interpretation of the statutory requirement that it be a comparison of the same unit. We find in the suggested difference in articles no valid attack upon the method employed by respondent in his computations.

We have found the selling price, cost of articles, and units processed and sold in the base period and the taxable year to be the amounts set forth in the amended unjust enrichment computation of respondent, adjusted, however, to reflect our holdings above set forth on the questions as to cotton futures and bad debts. These adjustments increase the average margin and margin determined by the respondent to $8,621,245.45 and $2,136,087.11, respectively. Applying now the method which we have above approved as to ascertaining amount of' presumptive tax shift: As only 29,655,353/31,838,860 or 93.1420063 percent in the base period and 5,186,564/6,559,240 or 79.0726364 percent in the taxable year, of the weight of the articles, represented cotton processed by petitioner, such ratios and portions of the adjusted difference in the two periods, or $8,030,000.98 and $1,689,020.86, are the aggregate average margin and margin, respectively. By dividing such adjusted average margin for the base period by 29,655,353 and such adjusted margin for the taxable year by 5,186,564, these figures being the pounds of own-processed cotton in the respective periods, we determine a margin of $0.270777453 per unit in the base period and a unit margin of $0.32563141 in the taxable year. The difference between them, or “excess margin”, is $0.054875688, and that amount, multiplied by 2,163,547, representing the units sold on which the excise tax was imposed but not paid, gives the amount of $118,726.13 as the extent to which the burden of the processing taxes was presumably shifted to others, without apportionment, however, for any production costs in 1935 in excess of those in the base period.

We have now interpreted section 501 (e) (2) and indicated, in our opinion, its proper application to the facts here presented. However, as above pointed out, the use of the method there laid down results only in a presumption as to the amount of excise tax shift by the taxpayer to others; and the presumption is rebuttable under section 501 (i) by either the Commissioner or the taxpayer. The petitioner urges that proof adduced by it meets the presumption and demonstrates that no tax is due. It is of course clear that under the statute either party may affect excess of margin over average margin by evidence, including such evidence as of increased cost of production, change in type or grade of manufacture, etc.

Invoices rendered by petitioner in 1933 contained separate charges for processing taxes. In 1934 petitioner’s price lists contained statements that the specified prices included such tax. The price list published by petitioner for the fall season in 1935 contained nothing about the taxes. The return filed by petitioner in April 1937 disclosed unjust enrichment in the amount of $55,853.17. At the hearing counsel for the petitioner admitted that petitioner made every effort to pass the tax on to its vendees, but was unable to do so in 1935.

The petitioner particularly urges that improved machinery, change in type of garment manufactured from heavy, full weight winter union undergarments to a light two-piece pattern and savings in costs are responsible for any excess of margin in the taxable year over the average margin of the base period, and that therefore there was no tax shift. The respondent himself adduced proof showing an increase in production costs in the taxable year amounting to $0.0346468 per unit more than those in the base period, and contends that this covers all change in production costs.

In an effort to rebut the statutory presumption, petitioner submitted in evidence, over strenuous objections of the respondent, computations purporting to show the profit per dozen and per pound of cotton of representative styles of garments in the respective periods. The proof was offered by deposition.

The computation primarily relied upon was prepared to show the production cost of groups of garments, itemized to include the cost of raw cotton and expense involved in converting it into cloth for use in the manufacture of garments and labor costs for cutting, seaming,, folding, boxing, and packing, and the selling price thereof. We think the proof allowed by section 501 (i) is broad enough to include the computation and accordingly overrule (with exception granted) the objections made by respondent to the admission of the exhibit in evidence. Numerous errors, however, appearing in the exhibit greatly reduce its probative value: The petitioner used baled cotton weight, and not lint cotton weight, i. e., weight of bagging and ties were not deducted; also sales of cotton waste were not considered. The petitioner did not keep cost records for every style in each group of garments it produced and listed in the document, on account of which cost records kept for one style in each group was used as a basis for determining an average cost for the entire group by comparing the relationship of one group to another. The method followed was described by petitioner’s cost accountant, who prepared the exhibit, as follows:

⅜ ⅜ * I took my total cost on the annual statement and the dozens produced and sold, and searched our cost records, and arrived at a total cost for each group, and then turned to the cost records to find a month in which the respective garment would most nearly approximate the cost of each group which I had and I took similar costs from different garments in different groups to show each breakdown * * *.

The lack of production costs for each group of garments listed in the computation compelled the petitioner to use a balancing figure to make the total cost agree with its annual statement. For some items it was necessary for petitioner to obtain costs from records kept in the subsequent year. These errors and others clearly appearing in the exhibit conclusively show that the cost figures set forth do not represent actual costs.

The selling prices used for each group are not in line with price lists published by the petitioner or actual selling prices, notwithstanding the fact that petitioner’s books reflect total sales and the dozens of garments sold each year. Imperfect garments known as seconds are not reflected in the computations except to the extent that they are included indirectly in the figures for total sales. Neither do the computations reflect changes of prices during the year. The items of cost and selling price in the computations are in the final analysis nothing more than estimates and do not prove the extent to which costs and selling prices of various garments increased or decreased.

Petitioner further contends that testimony of its president alone is sufficient to show that the burden of the tax was not shifted. Among the facts alleged to be established by the witness’ testimony and relied upon is one that profits on heavyweight winter underwear were constantly declining. His testimony, unsupported by records, is to. that effect. Some of the documentary evidence just discussed herein reveals otherwise. For one group of underwear the exhibit shows a substantial increase of profit per dozen in 1930 over the three preceding years, a decline in 1931 and 1932, and an increase in 1935 over 1932. In another group the profit per dozen increased in 1931 over 1930, then decreased in 1932 slightly below 1930, and then increased in 1935. A reduction in profits is not of itself proof that the processor bore the burden of the tax, for the difference in results could be due to many other factors. See Greenwood Packing Plant, 46 B. T. A. 430. Neither does a mere showing that petitioner was required to manufacture lightweight underwear in greater quantities, commencing in about 1930, and to do so, to purchase new machinery and train employees to produce the new garment efficiently, answer our problem without some proof of how it affected the shifting of the burden of the tax. The rebuttal evidence offered by the petitioner, in our opinion, is in many respects vague and general and is insufficient to demonstrate increased cost of production above the amount shown by the evidence offered by the respondent, as above adjusted. We therefore conclude and hold that the above determined presumptive tax shift of $0.054875688 per pound is affected by rebuttal evidence only to the extent of increased costs of production. This we find to be not $0.0346468 per pound, as conceded by the respondent, but $0.028528261, because of the elimination, in computing costs of material, of losses from dealing in cotton futures and the elimination of bad debts from, reductions in selling price. The concession was made on the theory that losses in cotton futures were costs of material, and that bad debts should be deducted from selling price. Since we have hereinabove disagreed with that theory, the concession should accordingly be, and is, decreased.

However, section 501 (i) (1), with reference to rebuttal evidence and changes in cost, provides:

* ⅝ * If the Commissioner determines that the change in margin was dne in part to the tax and in part to the increase in other cost, he shall apportion the change in margin between them.

Since, under the computations as approved by us above, the presumptive excess margin less the amount of increased cost of production is less than $0.042 per pound, the amount of the excise tax imposed, it is obvious that the statute requires apportionment. The increased profit or “excess margin” should not, in the absence of evidence showing otherwise, be ascribed wholly either to shift of tax or wholly to increased cost of production, but apportioned between them in accordance with the method adopted in E. W. Stockton, 44 B. T. A. 514. We find no evidence herein demonstrating that the increased margin should be ascribed exclusively either to tax shift to others, or to increased production costs.

We therefore, in compliance with section 501 (i) (1), inquire what portion of the excess margin of $0.054875688 is ascribable to each: We add $0.042, the tax, to $0.028528261, the increased cost of production, giving a total of $0.070528261. Of such total, the excess margin, $0.054875688, is 77.8066,653 percent. Therefore 77.8066653' percent of the $0.042 processing tax, or $0.032678799, is ascribable to tax shift, and the remainder, 22.2933347 percent, to increased cost, of production. Multiplying $0.032678799 by the 2,163,547 units involved, i. e., pounds of lint cotton sold upon which the processing tax was unpaid, gives $70,702.12, the tax burden shifted. Accordingly, we hold this amount subject to the tax imposed by section 501 (a) (1), supra.

Decision will be entered wider Bule &0.

       SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person ■which arises from the sources specified below :
      (1) A tax equal to 80 per centum of that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid which is attributable to shifting to others to any extent the burden of such Federal excise tax and which does not exceed such person’s net income for the entire taxable year from the sale of articles with respect to which such Federal excise tax was imposed.

       (e) For the purposes of subsection (a) (1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows :
      (2) If the taxpayer so elects by filing his return on such basis, from the aggregate selling price of all articles with respect to which such Federal excise tax was imposed and which were sold by him during the taxable year (computed without deduction of reimbursement to purchasers with respect to such Federal excise tax) there shall be deducted the aggregate cost of such articles, and the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed. The excess of such margin per unit over the average margin (computed for the same unit) shall be multiplied by the number of such units represented by the articles with respect to which the computation is being made: * * *

       (i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. Such proof may include, but shall not be limited to:
      (1) Proof that the change or lack of change in the margin was due to changes in factors other than the tax. Such factors shall include any clearly shown change (A) in the type or grade of article or materials, or (B) in costs of production. If the taxpayer asserts that the burden of the tax was borne by him while the burden of any other increased cost was shifted to others, the Commissioner shall determine, from the respective' effective dates of the tax and of the other increase in cost as compared with the date of the change in margin, and from the general experience of the industry, whether the tax or the increase in other cost was shifted to others. If the Commissioner determines that the change in margin was due in part to the tax and in part to the increase in other cost, he shall apportion the change in margin between them.
      (2) Proof that the taxpayer modified contracts oí sale, or adopted a new contract of sale, to reflect.the initiation, termination, or change in amount of the Federal excise tax, or at any such time changed the sale price of the article (including the effect of a change in size, package, discount terms, or any other merchandising practice) by substantially the amount of the tax or change therein, or at any time billed the tax as a separate item to any vendee or indicated by any writing that the sale price included the amount of the tax, or contracted to refund any part of the sale price in the event of recovery of the tax or decision of its invalidity; but the taxpayer may establish that such acts were caused by factors other than the tax, or that they do not represent his practice during the period in which the articles in question were sold.

       (g) Selling price. — The term “selling price” means the price received by the taxpayer from his vendee for the articles in question ⅜ * *.
      ⅜ * * * * * *
      “Price received by the taxpayer” means the invoice price, less trade or other discounts (except strictly cash discounts approximating a fair interest rate), including transportation and other charges incurred in delivering the goods, provided a consistent practice is followed by the taxpayer with respect to such items, in all computations under Title III.


source: Caselaw Access Project

author: Kern:

license: Public Domain

text:
    Sacramento Medico Dental Building Co., a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102466.
    Promulgated July 14, 1942.

      John G. Altman, Esq., and Willard L. Ellis, Esq., for the petitioners.

      Harry R. Sorrow, Esq., for the respondent.
   OPINION.

Kern:

The first issue for our determination is whether the petitioner corporation acquired the land and building pursuant to a plan of reorganization as that term is defined in section 112 (g) of the Revenue Act of 1934, thereby entitling petitioner to use as its basis for depreciation on the building, and fixtures the adjusted cost basis thereof to the old corporation.

Since the parties to this proceeding filed their briefs the Supreme Court has handed down five important opinions concerning “reorganizations.” Those opinions are to be found in Commissioner v. Alabama Asphaltic Limestone Co., 315 U. S. 179; Palm Springs Holding Corporation v. Commissioner, 315 U. S. 185; Commissioner v. Southwest Consolidated Corporation, 315 U. S. 194; and Commissioner v. Marlborough Investment Co., 315 U. S. 189; and Helvering v. Cement Investors, Inc., 316 U. S. 527.

Many of the contentions made by both parties to the instant controversy are considered in those cases and finally disposed of, and therefore it is unnecessary for us to consider them in this opinion.

It is obvious that if the transaction here in question is to be treated as a reorganization within the meaning of the statute, it must be by virtue of section 112 (g) (1) (B) of the Revenue Act of 1934.

The transaction can not be considered a reorganization within the meaning of this section under the rule enunciated by the Supreme Court in the Southwest Consolidated Corporation case, supra. In addition to the voting stock (see Federal Grain Corporation, 18 B. T. A. 242), an amount of cash and bonds were also exchanged by the petitioner in return for the property acquired by it. The plan recognized the probability that there would be nondepositing bondholders. In fact, there were. According to the plan they were to be paid off by Santa Inez, which was to be repaid by petitioner. While this is the effect of what happened, the plan called for a series of intricate steps to bring about both the payment and repayment-Santa Inez paid the money to the committee, which paid it to Batt-son, the trustee under the original bond indenture, as part of the purchase price and he, in turn, paid it to the nondepositors. The repayment to Santa Inez was accomplished by the issuance of certain bonds by the new corporation in the face amount of $38,300 which Santa Inez was required to turn over immediately to the committee, the committee being required to pay Santa Inez therefor the sum of $16,950 ($9,185.38 of which represented the cash advanced by Santa Inez to pay off the nondepositors). The committee was then required to turn in these special bonds to the petitioner; they were to be immediately canceled; and the committee -was to receive nothing in exchange therefor. In the Southwest Consolidated Corporation case certain security holders of the old corporation were paid off in cash,, which was raised during the reorganization on a loan assumed by the respondent. The Court said:

⅜ * * in substance the transaction was precisely the sanie as if respondent had paid cash plus voting stock for the properties. * * * The rights of security holders against the old corporation were drastically altered by the sale-made pursuant to the plan. The sale not only removed the lien from the property and altered the rights of the security holders in it; it also limited and defined the rights of the individual creditors if they elected to take cash rather than participate in the plan. * * •

Although Santa Inez was actually paid by tbe committee, the committee was acting as the agent of the petitioner and the petitioner stood behind the committee’s obligation. The several steps were mere “intermediate procedural devices utilized to enable the new corporation to acquire all the assets of the old one pursuant to a single reorganization plan.” Commissioner v. Alabama Asphaltic Limestone Co., supra. The fact that Santa Inez was one of the depositing bondholders rather than an outsider is immaterial. It can not be said that the assets of the old corporation were exchanged solely for voting stock, as required under clause B, and, therefore, we must conclude that the assets in question were not acquired under a tax free “reorganization” as that term is defined in section 112 (g).

It is, therefore, unnecessary to discuss the other contentions of respondent with regard to the same question.

Having concluded that petitioner did not acquire the assets in question as the result of a “reorganization” as that term is defined in section 112 (g) of the Revenue Act of 1934, we are now faced with the further issue of what basis to apply to the newly acquired property for depreciation or for gain or loss in the hands of the petitioner. The adjusted cost basis of the old corporation, which would have been the permissible basis only if we had concluded that the transaction was a “reorganization”, may not be used by petitioner* Petitioner must be considered as having acquired the property from the bondholders’ committee, which, in turn, had acquired it upon foreclosure. Upon the transfer of this property to petitioner by the committee, the depositing bondholders represented by the committee became entitled to voting trust certificates representing only 45 percent of the common stock of petitioner. The other 55 percent of the beneficial interest in the common stock was represented by voting trust certificates issued to the stockholders of the old corporation which had been placed in escrow and were subject to cancellation in the event defaults occurred under the deed of trust securing the bonds of the new corporation. Therefore, the transfer by the committee to petitioner was not one covered by section 112 (b) (5) of' the Revenue Act of 1934, since, by reason of section 112 (h), the transferors were not in control of the transferee corporation immediately after the exchange.

Since no provision of section 112 is applicable, the basis of the property in the hands of petitioner corporation is the cost of such property to petitioner. Sec. 113 (a), Revenue Act of 1934. In return for the property acquired petitioner issued its promises to pay certain amounts, in the form of bonds. The face amount of the bonds issued by petitioner for the property in question must sbe considered as the cost of the property, since it represented the sum which petitioner was obligated to pay therefor. Cf. Consolidated Coke Co. v. Commissioner, 70 Fed. (2d) 446.

Although petitioner actually issued bonds in the amount of $400,000, the “plan” under which they were issued never contemplated that there would be more than $361,700 in bonds outstanding, and specific provision was made for the purchase by the committee from Santa Inez of $38,300 face amount of bonds and for their immediate retirement by petitioner without compensation. Consequently, we treat the transaction as one in which petitioner acquired certain assets in return for its bonds calling for the payment of the principal sum of $361,700.

Among the assets so acquired was certain cash. From petitioner’s financial statement in evidence, it appears that the committee turned over to the petitioner $20,837.55, the balance of the cash in its hands. The portion of that $20,837,55 which was not used to pay current taxes already a liability at the time of the exchange must be considered as value received by petitioner in addition to the realty in exchange for the new bond issue. Real estate taxes in the amount of $7,719.20 for 1934-1935 were paid by the petitioner out of this $20,837.55. This amount appears to have been a tax lien against the property at the time of the exchange, and, therefore, the $7,719.20 will not be considered when computing the assets acquired in return for the bonds. Thus computed, petitioner, in return for its bonds in the face amount of $361,700, received cash hr the sum of $13,118.35 and certain property. This property must therefore be considered as having been acquired at a cost of $348,581.65.

In allocating this cost between the depreciable building and fixtures on the one hand, and the land on the other, we shall use the only helpful figures on the matter which appear in the record — those having to do with fair market values as of 1934. Expert testimony was given that the fair market value of all of the property was $300,000, and that the value of the building and fixtures was $220,000. Applying the ratio of 220,000/300,000 established by this testimony to the total cost, we conclude that the cost which should be allocated to the building and fixtures was $255,626.54 and the cost to be allocated to the land was $92,955.11.

Since the facts indicate that a different rate is used in calculating the depreciation on the fixtures than that used in calculating the depreciation on the building, it becomes necessary to go one more step in allocating-the cost — this time between the building ajid the fixtures. In determining a proper ratio to be used in this allocation, we resort to the figures showing cost to the old corporation. The depreciated cost of the building in the hands of the old corporation was $397,155.63, and the depreciated cost of the fixtures was $8,602.11. Applying the ratio of these figures to the sum of $255,626.54 (the cost Ave have allocated to both building and fixtures), we arrive at an allocation of $250,207.27 to petitioner’s cost of the building and $5,419.27 to petitioner’s cost of the fixtures. See Texas Chemical Co., 11 B. T. A. 390.

Having determined that the basis to petitioner of the property acquired by it in return for its bonds was the face amount of such bonds less an amount equivalent to the cash received by it, there is no reason which seems to us persuasive to allow petitioner.any amortization on account of discount. As Ave stated in Southern Railway Co., 27 B. T. A. 673, 688, “The promise to pay a greater sum than the value of the property does not establish if so facto the presence of discount in the transaction.” As petitioner points out, if the basis for determining gain or loss upon the disposition of this property by petitioner had been held by us to be a sum considerably less than the face amount of the bonds issued by it in return for the property, as, for example, the amount bid for the property at the foreclosure sale or its fair market value at the time of such sale, then a strong argument might be made that inequities would result from the dis-alloAvance of discount amortization, since, upon a later disposition of the property for a sum equivalent to the face amount of the bonds, a fictitious profit would arise, Avliich could only be offset by a previously allowed deduction on account of discount. However, in view of our decision that the basis of this property to petitioner is equivalent to the face amount of the bonds issued by it in return therefore, we do not have that question before us, and therefore, do not decide it. The basis of the property being as vre have decided it to be, we conclude that, under the facts presented by the instant proceeding, petitioner did not issue its bonds at a discount and is, therefore, not entitled to any deduction on account of discount amortization.

Petitioner’s contention that it realized no gain on the purchase and retirement of its bonds is conditioned upon our decision on the first two issues that (a) the basis of the property acquired by petitioner in 1934 was its then fair market value, or $300,000, and (b), petitioner is not entitled to deductions on account of a discount in the issuance of its bonds.

Our decision on the first issue, to the effect that the basis of the property acquired by petitioner is an amount equivalent to the face amount of the bonds issued by it for such property, makes this alternative contention of petitioner untenable. Therefore, we decide this issue for respondent.

Reviewed by the Board.

Decision will be entered wider Bule 50,

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      * * * * * * *
      (g) Definition of Reorganization. — As used in this section and section 113—
      (1) The term “reorganization” means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock r: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation; * * *

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (b) Exchanges Solely in Kind.—
      *******
      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be-recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the' exchange such person or persons are in control of the corporation ; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       (h) Definition of Control. — As used in this section the term “control” means-the ownership of at least 80 per centum of the voting stock and at least 80 per centum, of the total number of shares of all other classes of stock of the corporation.


author: Black:

text:
    Kentucky Natural Gas Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103308.
    Promulgated July 16, 1942.

      John P. OKI, Esq., for the petitioner.

      T. F. Oallahan, Esq., for the respondent.
   OPINION.

Black:

The two questions which we have to decide in this proceeding are:

(1) Whether the plan of reorganization of the Kentucky Natural Gas Co. and the steps taken in consummation thereof, pursuant to which the Kentucky Natural Gas Corporation, the petitioner herein, acquired substantially all the assets of the Kentucky Natural Gas Co. in exchange for shares of its voting preferred and common stocks, constituted a “reorganization” within the meaning of section 112 (i) (1) of the Revenue Act of 1932? If this question is answered in the affirmative, the principal issue in the case must be decided in favor of the petitioner. If question (1) is decided in favor of petitioner, then respondent has raised question (2). It is:

(2) Whether interest incurred during construction of the Kentucky Natural Gas Co.’s main transmission lines may be properly capitalized as a part of the cost thereof and used in computing depreciation deductions ?

We shall first take up issue 1.

The Kentucky Natural Gas Corporation acquired its properties in 1933 from the Kentucky Natural Gas Co.

The primary question involved, as we have already stated, is whether the transaction in question constituted a “reorganization” under that portion of section 112 (i) (1) of the Revenue Act of 1932 which provides:

The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.

Section 112 (b) (4) provides:

* * * No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

Section 113 (a) (1) provides that the basis of property shall be the cost of such property, except that :

* * * If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

The taxable year 1935 was governed by the Revenue Act of 1934. Section 113 (a) (12) provides as follows:

* * * If the property was acquired, after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof, for the purposes of the Revenue Act of 1932 was prescribed by section 113 (a) (6), (7), or (9) of such Act, then for the purposes of this Act the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932.

As to the years 1936 and 1937, they are governed by the Revenue Act of 1936 and a like provision is to be found in section 113 (a) (12) of that act.

Since the hearings in the instant case the Supreme Court has decided Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179; Palm Springs Holding Corporation v. Commissioner, 315 U. S. 185; Marlborough Investment Co. v. Commissioner, 315 U. S. 189; and Helvering v. Southwest Consolidated Corporation, 315 U. S. 194 (all Feb. 2, 1942). The parties were given leave to file briefs following the Supreme Court’s decisions in these cases. The petitioner has filed a brief in which it relies upon Helvering v. Alabama Asphaltic Limestone Co., supra, as a case particularly in point and controlling as to the disposition of the primary issue here involved. The commissioner has not filed any brief.

The “reorganization” considered in the Alabama Asphaltic Limestone Co. case was governed by section 112 (i) (1) of the Revenue Act of 1928, which is identical with section 112 (i) (1) of the Revenue Act of 1932. We think it is clear that the Supreme Court’s decisions in the Alabama Asphaltic Limestone Co. and the Palm Springs Holding Corporation cases are decisive in petitioner’s favor as to issue (1).

The decisions of the Supreme Court in Marlborough Investment Co. v. Commissioner, supra, and Helvering v. Southwest Consolidated Corporation, supra, decided the same day as the Alabama Asphaltic Limestone Co. and Palm Springs Holding Corporation cases, supra, are distinguishable both from the latter two cases and from the instant case.

Marlborough Investment Co. v. Commissioner, supra, is distinguishable in that the Court there found that the property was not acquired by the committee or the new corporation from the Marlborough Investment Co., the old company. The Court stated:

For tbe reasons stated in Helvering v. Alabama Asphaltic Limestone Co., supra, this transaction clearly would have been a “reorganization” within the meaning of § 112 (i) (1) but for one fact. That fact is that the property was not acquired by the committee or the new corporation from Marlborough Investment Co. * * *

Helvering v. Southwest Consolidated Corporation, supra, is distinguishable in that it arose under the Revenue Act of 1934, wherein the meaning of ‘‘reorganization” was differently defined. The Court recognized that had the reorganization been governed by the Revenue Acts of 1928 or 1982 (tlie acts involved in Alabama Asphaltic Limestone Co. and Palm Springs Holding Corporation, supra) there would have been a reorganization in the Southwest Consolidated Corporation case. On this point the Court said:

Under the statute involved in MeVoering v. Alabama, Asphaltio Limestone Co., * * * decided this day, there would have been a “reorganization” here. For the creditors of the old company had acquired substantially the entire proprietary interest of the old stockholders. * * *

The Court went on to state that a change was made in the definition of “reorganization” by the Revenue Act of 1934, which laid down a much stricter test. Since the facts there showed that the new company had given class A warrants to unsecured creditors and class B warrants to stockholders,.the new company there was not in a position to contend that it had acquired all or substantially all of the assets of the old company “solely for voting stock”, and consequently there was no “reorganization.” Cf. Helvering v. Cement Investors, Inc., 316 U. S. 527.

Having decided issue (1) in petitioner’s favor, it becomes necessary to decide issue (2), which respondent raised as an alternative issue.

The Kentucky Natural Gas Co., the transferor of the properties of the Kentucky Natural Gas Corporation, constructed certain so-called “main transmission lines”, and as a part of the cost thereof it included interest incurred during the period and prior to the completion of the construction of such properties. The amount of such interest included in the cost of construction and in the reserves for depreciation to November 1933 is stated in our findings of fact above.

By a reference to our findings of fact, it will be observed that the interest capitalized is segregated as between that incurred prior to August 6, 1931, and that incurred subsequent thereto. The reason for such segregation is that T. D. 4321, X-2 C. B. 169, amended article 561 of Regulations 74 so as to provide an exception in favor of the allowances of carrying charges paid or incurred, as the case may be, prior to August 6,1931.

In March 1931 the Fifth Circuit, in Central Real Estate Co. v. Commissioner, 47 Fed. (2d) 1036, affirmed the Board’s opinion at 17 B. T. A. 776, and held that the regulations had been incorrect in including carrying charges such as taxes and interest in the basis of the property.' The treasury recognized the force of the Central Real Estate Co. case as applied to future carrying charges, but despite the holding of the decision, took a view that items prior to August 6,1931, which had not been deducted as expenditures might be included in the capital amount. T. D. 4321, X-2 C. B. 169 (Aug. 6, 1931), amended Regulations 74 of the 1928 Act, as follows:

In computing the amount of gain or loss, however, the cost or other basis of the property shall be properly adjusted for any expenditure, receipt, loss, or other item properly chargeable to capital account, including the cost of improvements and betterments made to the property since the basic date. Carrying charges, such as interest and taxes on unproductive property, may not be treated as items properly chargeable to capital account, except in the ease of carrying charges paid, or incurred, as the case may he, prior to August 6, 1931, by a taxpayer who did not elect to deduct carrying charges in computing net income and did not use such charges in determining his liability for filing returns of income. [Emifhasis supplied.]

It is petitioner’s contention that under the foregoing amended regulations it has the right to capitalize the interest charges incurred prior to August 6, 1931, in the construction of its main transmission lines, although conceding that the remainder of the interest incurred in 1931 could not be capitalized. We do not agree that the foregoing regulation is applicable. The taxable years before us are 1935, 1936, and 1937. The Treasury regulations applicable to the year 1935 are contained in Regulations 86, covering the Revenue Act of 1934. Article 113 (b) — 1 of those regulations contains the following provision :

⅜ * * In the ease of unimproved and unproductive real property, carrying charges, such as taxes and interest, which have not been taken as deductions by the taxpayer in determining net income for the taxable year, or a prior taxable year, are properly chargeable to capital account. [Emphasis supplied.]

Article 113 (b) (1) of Regulations 94, covering the Revenue Act of 1936, contains an identical provision. These provisions of the regulations simply carry out section 113 (b) (1) (A) of the Revenue Act of 1932, which is identical in the Revenue Acts of 1934 and 1936. Section 113 (b) (1) (A), Revenue Acts 1932, 1934, and 1936, read as follows:

(1) General Rule. — Proper adjustment in respect of the property shall in all cases be made—
(A) for expenditures, receipts, losses, or other items, properly chargeable to capital account, including taxes and other carrying charges on unimproved and unproductive real property, but no such adjustment shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining net income for the taxable year or prior taxable years. [Emphasis added.]

Now, if the “main transmission lines”- of petitioner’s predecessor corporation can be classed as “unimproved and unproductive real property” then undoubtedly under the above quoted statute and regulations petitioner should be allowed to capitalize the interest which it claims. Cf. Queensboro Corporation, 46 B. T. A. 1216. See also discussion in ¶18.172, Paul and Mertens Law of Federal Income Taxation.

As a matter of fact, petitioner does contend in its brief that the small expenditure of $1,179 in 1932 for interest and that of $190.92 in 1933 in connection with the construction of these transmission lines should be capitalized under the provisions of section 113 (b) (1) (A) of the Revenue Act of 1932. This, of course, would only be allowable on the ground that the “main transmission lines” in question are “unimproved and unproductive real property.” We think it is clear that these transmission lines do not fall into such classification and petitioner’s contention in that respect can not be sustained. To avoid misunderstanding, it should be made plain that petitioner does not claim that the $270,177.95 interest expended by its predecessor prior to August 6,1931, should be capitalized under section 113 (b) (1) (A) of the Revenue Act of 1932. As has already been stated, petitioner contends that such interest should be .capitalized under Regulations 74, article 561, as amended by T. D. 4321, already quoted in this opinion. Obviously, Regulations 74 does not apply to either of the taxable years which we have before us. As we have already said, the applicable regulations governing the years which we have before us are Regulations 86 and 94, and these regulations only provide for the capitalizing of interest which has been expended in the carrying of unimproved and unproductive real property and has not been taken as a deduction in determining net income of the taxpayer for some prior year.

Under the Board’s decision in Central Real Estate Co., supra, affirmed by the Fifth Circuit, we think issue 2 must be decided in favor of the Commissioner.

Decision will he entered wider Rule 50.


author: Arundell:

text:
    Lawrence L. Tweedy and Grace V. Tweedy, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 106646, 107217.
    Promulgated July 16, 1942.

      Martin D. Jacobs, Esq., for the petitioners.

      Rickard C. Flesck, Esq., for the respondent.
   OPINION.

Arundell:

The major question presented is whether or not respondent was correct in treating only 20 percent of the amounts received by Tweedy from the partnership as earned income from sources without the United States. Petitioners contend that all the amounts in question constitute compensation for personal services rendered outside this country and as such are excluded from gross income by virtue of the provisions of section 116 (a) of the Revenue Acts of 1936 and 1938. Respondent argues that the only amounts excluded from gross income under that section are those which constitute earned income and that in order to determine what is earned income we are required by section 116 to look to section 25 (a) of the respective acts, which defines earned income in general. He maintains that, since capital is admittedly a material income-producing factor in the business of the firm of which Tweedy is a member, the latter’s earned income cannot exceed 20 percent of his share of the firm’s net profits.

Respondent would appear to be correct if Tweedy’s trade or business is that of the firm of which he is a partner and from which the income in question was received. The only peg on which petitioners hang their argument, that capital was not a material income-producing factor in Tweedy’s business, is the fact that Tweedy did not personally make a capital contribution to the partnership of which he was a member. But this would draw the line where the statute does not. When Tweedy ceased to be an employee of the firm and -became one of its general partners he obtained a proprietary interest in the business, and this stake so acquired brings him within the statutory limitation on earned income. This view, we think, conforms with the whole pattern of the section.

As we are dealing here with the income of a member of a partnership, section 4 of the Revenue Acts of 1936 and 1938 would seem to require that we examine section 185 of those two statutes. Section 185 provides that the earned income of partners shall be determined in accordance with the rules and regulations prescribed by the Commissioner with the approval of the Secretary of the Treasury. Article 185-1 of the Commissioner’s Regulations 94 and 101, which was promulgated to give effect to section 185, supra, provides that, where a partnership is engaged in a trade or business in which capital is a material income-producing factor and a partner renders personal services in connection therewith, that partner’s earned income, for purposes of the earned income credit granted by section 25 (a), may not exceed 20 percent of his share of the net profits of the partnership. This regulation makes no distinction between a partner who has contributed capital and one who has not contributed capital. The sole test is whether capital is a material income-producing factor of the partnership. These are “legislative” regulations and must be accorded great weight so long as they are not arbitrary. Helvering v. Wilshire Oil Co., 308 U. S. 90.

Petitioners urge, in the alternative, that so much of Tweedy’s income as was designated “salary” should, in any event, be treated as earned income. Prior to his admission to the partnership Tweedy received a salary which was clearly compensation for services and was earned income. Although he continued to perform substantially the same duties after he became a member of the partnership as before, his relationship to the firm became an entirely different matter. Even if his drawing account was termed “salary” or “compensation”, the amounts withdrawn were in reality either profits or anticipated profits. See Karl Pauli, 11 B. T. A. 784. As a partner he may not pay a salary to himself. Estate of S. U. Tilton, 8 B. T. A. 914. Nor do we think it important that Tweedy’s “salary” was payable regardless of whether the firm had net profits. The partnership agreement provides that each general partner shall contribute his share of the firm’s losses. Thus, although the “salaries” are payable whether or not there are earnings, the absence of earnings would cause the partnership to operate at a loss and as a consequence Tweedy would have to make good his share of such losses. What he received in each of the taxable years was his share of the firm’s net profits, however those profits were designated. It follows that Tweedy’s earned income may not exceed 20 percent of the total amount received by him in each year from the partnership. ^Respondent is sustained on this issue.

The final question before us is whether or not petitioners, who filed a joint return for the taxable year 1937, may deduct a total of $4,000 for capital losses where each of petitioners sustained a net capital loss in excess of $2,000. We have recently held that a husband and wife filing a joint return are limited to only one $2,000 capital loss deduction. Marvin L. Levy, 46 B. T. A. 1145. Our opinion there controls the disposition of this issue and respondent’s action is accordingly sustained.

Decision will be entered for the respondent.

       SEC. 116. EXCLUSIONS FROM GROSS INCOME.
      In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
      (a) Earned Income from Sodeces Without united States. — In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income as defined in section 25 (a) if received from sources within the united States; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.

       Section 116 (a) of the Revenue Act of 1938 is identical to that in the 1936 Act.

       SBC. 25. CREDITS OB INDIVIDUAL AGAINST NET INCOME.
      (a) Credits eor Normal Tax Only. — There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income:
      *******
      (4) Earned Income Definitions. — Bor the purposes of this section—
      (A) “Earned income’’ means -wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include any amount not included in gross income, nor that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 iier centum of his share of the net profits of such trade or business, shall be considered as earned income.
      *

       SEC. 4. SPECIAL CLASSES OB TAXPAYERS.
      The application of the G.eneral Provisions and of Supplements A to D, inclusive, to each of the following special classes of taxpayers, shall be subject to the exceptions and additional provisions found in the Supplement applicable to such class, as follows:
      *******
      (b) Members of Partnerships, — Supplement B. *******

       Section 4 of the Revenue Act of 1938 is identical to that in the 1036 Act.

       SEC. 185. EARNED INCOME.
      In the ease of the members of a partnership the proper part of each share of the net income which consists of earned income shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary and'shall be separately shown in the return of the partnership.


author: Hill:

text:
    Frank H. Mason Trust, First Central Trust Company, Akron, Ohio, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106844.
    Promulgated July 16, 1942.

      Robert Guinther, Esq., for the petitioner.

      W. W. Kerr, Esq., for tbe respondent.
   OPINION.

Hill:

The Commissioner has determined income tax deficiencies of $1,238, $629.53, and $473 for the taxable years 1937, 1938, and 1939, respectively. The only adjustments were the disallowances in each year of deductions for sums paid to the beneficiaries of a trust. The deductions were claimed by petitioner under section 162 (b) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code.

The facts as stipulated are adopted as our findings of fact and only those necessary to an understanding of the issue are set forth herein.

The petitioner is the Frank H. Mason Trust, acting through its fiduciary, the First-Central Trust Co., Akron, Ohio, as trustee.

The trust agreement under which the trustee was acting in the taxable year was executed on October 28,1930, and contains, inter alia:

II.

It shall on the first flay of each month, beginning on the 1st day of November, 1930, pay out of the income arising from said property hereinbefore described, to the following persons, the following amounts:
To Richakd P. Mason and Chart.es E. Mason, of Akron, Ohio, brothers of Prank H. Mason, each the sum of Two Hundred Fiftt Dollars ($250.00) ;
To Willis H. Mason, of California, brother of said Frank H. Mason, the sum of Two Hundred Fifty Dollars ($250.00) ;
To Maby E. Mason, of Airón, Ohio, sister of said Frank H. Mason, the sum of One Hundred Fifty Dollars ($150.00) ; and
To Charles A. Dexter, of Pensacola, Florida, brother-in-law of Frank H. Mason, the sum of Form Hundred Dollars ($400.00) ;
which payments shall so continue during the lives of said above-named persons.
Said Trustee shall pay the balance of all of such income derived from the property hereinbefore described, quarterly, to said Frank H. Mason during the period of his life.
Upon the death of any one or more of said beneficiaries above named, the' amounts theretofore paid to such deceased beneficiary or beneficiaries shall be by said Trustee paid, monthly, to said Frank H. Mason.
Upon the death of said Frank H. Mason, said Trustee shall pay any income derived from said property and theretofore being paid to said Frank H. Mason, to Frank M. Raymond and John G. Raymond, grandchildren of said Frank H. Mason, in equal amounts.
* * * ⅜ * * *
IV.
Said Trustee shall further have the power and authority, if for any reason it shall become necessary because of decreased income from such property, or otherwise, to sell such of said property held by it hereunder as may be necessary to make, promptly, said monthly remittances hereinbefore set forth; it being the purpose of said Frank H. Mason in creating this trust, to insure, beyond any reasonable question, the payment of such annuities to said brothers and sister and brother-in-law above mentioned throughout their lives.
* * * * ⅞ * ⅜

Petitioner did not sell any of the trust assets during the taxable years and there-was sufficient income out of which to make all the payments required by the trust instrument.

The amounts o.f the deductions disallowed by respondent which are referred to-above were $15,600, $7,450.67, and $7,800, respectively, for the taxable years. These were the only adjustments made and give rise to our only issue.

Respondent contends that the amounts were annuities payable whether there was sufficient income or not. Therefore, the petitioner is allowed no deduction under section 162 (b) of the applicable revenue acts. He cites and relies upon the following cases, Helvering v. Pardee, 290 U. S. 365; Union Trust Co. of Pittsburgh v. Commissioner, 115 Fed. (2d) 86, affirming memorandum opinion of this Board; and Union Trust Co. of Indianapolis v. Commissioner, 111 Fed. (2d) 60.

Petitioner contends that the wording of the trust instrument directed the trustee to make monthly payments to the named individuals “out of the income arising from said property.” Thus, the distributions were “to be distributed currently by the fiduciary to the beneficiaries.” Petitioner made all distributions out of the current income. Thus, such distributions come within the express wording and meaning of section 162 (b), which allows the fiduciary a deduction.

Petitioner admits that there are many cases which seem to deny the deduction where there is a right to invade corpus, as in the instant case. However, it attempts to distinguish these cases upon two grounds. The first is that those cases involved bequests, devises, or gifts and “not annuity contracts.” The second is that the principal cases arose under the revenue acts prior to the 1932 Act, which for the first time, by section 22 (b) (2), made annuities taxable, and that the 'Court was attempting “to plug the gap” which would allow such income to escape all taxation. Helvering v. Pardee, supra. The change made in the 1932 Act “closed the gap” so that the courts need no longer attempt to judicially do so. Petitioner attempts to distinguish Burnet v. Whitehouse, 283 U. S. 148, upon the further ground that there the annuity was created by a will and there was no “annuity contract.”

In the instant case petitioner contends the payments could not be bequests since at the time the trusts were established the settlor “was in full life”, and they could not be gifts in 1937, 1938, and 1939, for the settlor “was long since deceased.” Moreover, petitioner contends that by the express provisions of section 22 (b) (2) the income was taxable in the hands of the beneficiaries and now the respondent is attempting to tax it twice by taxing the same income to the petitioner.

No one contends that the payments represented bequests or that they were gifts in 1937, 1938, or 1939. Frank H. Mason made a gift on October 28,1930, to certain named persons, measured by a designated monthly payment to each of them for life. To provide for such monthly payments Mason on the date named conveyed certain property in trust, empowering and enjoining the trustee to control, manage, and administer the trust property and to make the monthly payments above referred to (a) out of the income from such property to the extent that such income should be available therefor, and (b) out of the trust property itself to the extent of any balance required therefor. It was provided in the trust instrument that the full amount of monthly payments to the donees named therein should be paid in any event, regardless of whether the trust income was sufficient therefor. Property deemed by Mason to be sufficient to assure such payments, either out of trust income or corpus, or both, was irrevocably placed in trust for that purpose. Thus, there was a gift in praesenti by Frank H. Mason on October 28,1930, to the donees named in the trust instrument. The income from the trust property inured’to the trust. II s utilization under the provisions of the trust instrument in making-the monthly payments to the designated donees was merely in execution of the gift made by Mason on October 28, 1930, and its application to such purpose did not constitute a distribution of income under section 162 (b), supra. The donees -were not entitled to a distribution of the trust income as such, but only in discharge, in full or pro tcmto, of the payments provided for in the trust instrument.

We think it obvious that the trust arrangement for the payments to be made thereunder did not constitute an annuity contract under section 22 (b) (2) of the Revenue Acts of 1936 and 1938. No money or other economic consideration flowed to Frank H. Mason for the gifts evidenced by the trust instrument. Certainly, the trustee had no obligation to pay an annuity. It undertook only to manage the trust property and to make the prescribed payments out of the income or corpus of the trust. For this managerial service the trustee was compensated out of trust funds. There was no purchase of an annuity by or for any one. What the payees received under the trust arrangement was not an annuity in the statutory sense.

Since the donees under the trust did not receive the payments in question either as a distribution of trust income or as a statutory annuity, they had no tax liability in respect thereof and such payments were not deductible by the petitioner in computing its income tax liability.

The payments in question being payable in full at all events and not only if the current income was sufficient therefor, we approve the determination of the respondent. Helvering v. Pardee, supra; Union Trust Co. of Pittsburgh v. Commissioner, supra; certiorari denied, 312 U. S. 700; Union Trust Co. of Indianapolis v. Commissioner, supra; Chase National Bank of the City of New York et al., Executors, 40 B. T. A. 44; Equitable Trust Co. et al., Trustees, 38 B. T. A. 641; cf. St. Louis Union Trust Co. et al., Trustees, 40 B. T. A. 165.

Decision will be entered for respondent.

         SEC. 162. NET INCOME.
      * * * ⅜ * * *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * » but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. » * »


author: Harron:

text:
    Estate of Horatio Gates Lloyd, Deceased, H. Gates Lloyd, Jr., Richard W. Lloyd, and Charles D. Dickey, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107397.
    Promulgated July 16, 1942.

      Calvin H. Rankin, Esq., Philip Wallis, Esq., and Frederick E. S. Morrison, Esq., for the petitioners.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Harron:

The question is whether the value of the trusts established by decedent for his two sons should be included in decedent’s gross «state under section 302 (c) and (d) (1) of the Revenue Act of 1926, as amended, which is set forth in the margin. Respondent contends that the value of the trusts should be included in the decedent’s gross estate, first, on the ground that at the time of his death decedent retained the power to alter or modify the trust, and, second, on the ground that decedent had a possibility of reverter. Petitioners, on the other hand, contend that the decedent’s power to alter or modify the trusts was exhausted by the amendments of December 27, 1926, and that decedent’s theoretical possibility of reverter did not render any part of the trust taxable as a part of his gross estate. In the alternative, petitioners contend that, in the event it is determined that a deficiency is owing, they are entitled to statutory credits by reason of any additional state estate, inheritance, or legacy taxes which they may be required to pay by reason of the increased Federal estate tax.

The primary issue is whether or not decedent’s power to alter or modify the trusts was exhausted by the amendments of December 27,1926. In this respect the facts of the present case are indistinguishable from Day v. Commissioner, 92 Fed. (2d) 179, in which the Circuit Court of Appeals for the Third Circuit held that, under the laws of Pennsylvania, the exercise of a power to alter, amend, or revoke exhausts that power. Although in the Day case the court speaks about a power to revoke, the power which was exercised was, in fact, no more than a power to change the beneficial interest in the trust. Charles Day created two trusts, in each of which he reserved the power, with the concurrence of the beneficiary, to alter, amend, or revoke the trust. In one trust the income was payable to Day for life, and then to his wife for life, and in the other trust, the income was payable to Day’s mother for life, and upon her death the principal was to be paid to Day’s estate. In the case of the wife’s trust the grantor revoked the clause calling for the payment to himself for life, and provided that the income from that date forth should be paid to his wife during her life. In the case of the trust for his mother, the grantor revoked the clause giving the principal to his estate and provided that it should go to three trusts established for his children. In neither instrument changing the beneficial interest in the trusts did the decedent expressly reserve any future power to alter, amend, or modify. Under those circumstances the Circuit Court of Appeals held that the grantor’s power to alter, amend, or revoke was exhausted. On the authority of Day v. Commissioner, supra, it is held that the power to alter, amend, or declare new trusts, which Horatio Gates Lloyd originally retained, was exhausted by the amendments of December 27,1926. Accordingly, petitioners must be sustained as to the first question. It is held that the value of each trust is not includable in the value of the gross estate under section 302 (d), as amended.

The remaining question is whether or not the principal of the two trusts, or any part thereof, must be included in the value of the gross estate under section 302 (c) of the Revenue Act of 1926, as amended. Respondent relies upon Helvering v. Hallock, 309 U. S. 106, as authority in support of his contention that the entire value of each trust must be included in the value of the gross estate.

The facts of the present case are indistinguishable from those in the Hallock case, and its companion cases, Rothensies v. Huston, 308 U. S. 538; and Bryant v. Helvering, 309 U. S. 106. In all of those cases the property was to revert to the grantor upon the death of the life tenant, during the grantor’s lifetime. In the present case, certain additional conditions are added, namely, that the life tenant of each trust die without having exercised a power of appointment, and that he die leaving no surviving wife or issue. Those conditions make more remote the possibility that the property will come back to the grantor» However, as was pointed out in Estate of John E. Cain, Sr., 43 B. T. A. 1133, the degree of remoteness is not determinative.

Petitioners rely upon Commissioner v. Kellogg, 119 Fed. (2d) 54. In that case the trust agreement did not set forth any circumstances upon which the trust property would revert to the grantor. Under certain circumstances, the property was to go to the grantor’s next of kin, but he did not reserve any strings by which it could come back to him during his lifetime. In the present case, however, the grantor did provide that under certain circumstances, the property should come back to him during his lifetime. On that basis, the Kellogg case is distinguishable, and some part of the value of the trust property must be included in decedent’s gross estate.

Petitioners argue that, in the event the trusts for the decedent’s two sons are held to come within the ruling in the Eallock case, only the value of the reverter, and not the full value of the principal;of the trusts, is to be included in the gross estate. In support of that position, petitioners cite Central National Bank of Cleveland v. United States, 41 Fed. Supp. 239, in which the Court of Claims points out that the deficiency which was ultimately determined in the Dallock case excluded from the gross estate the value of the life estate, which was in effect at the grantor’s death. The same was true in the Bryant case. Accordingly, it is held that the value of the life estate of the decedent’s two sons must be excluded from the value of the decedent’s gross estate in determining the proper amount of the deficiency. The value of the life estates as stipulated will be adjusted under section 302 (j) (2) of the Revenue Act of 1926, as amended, in accordance with the provisions of article 11 of Regulation 80 (1937 Ed.).

In recomputing the amount of the deficiency in estate tax under Rule SO, consideration should be given to petitioners’ claim for an increased credit for additional state estate, inheritance, legacy, or succession taxes which petitioners are required to pay, and do pay, by reason of the increased Federal estate tax under the holding made here. Under section 802 (a) of the Revenue Act of 1932, amending section 301 (b) of the Revenue Act of 1926, the credit for state inheritance taxes, not to exceed 80 percent of the Federal estate tax, shall be in the amount of state inheritance taxes actually paid before the expiration of 60 days after the Board’s decision becomes final.

Decision will be entered wider Bule 50.

       [Section S02 (c) of the Revenue Act of 1926, as amended by section S03 (a) of the Revenue Act of 1932, and as further amended by section 404 of the Revenue Act of 1934; and section 302 (d) (1) of the Revenue Act of 1926, as amended by sections 401 and 404 of the Revenue Act of 1934, and as further amended by section 805 of the Revenue Act of 1936.]
      Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the united States.
      *******
      (e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.
      (d) (1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona-fide sale for an adequate and full consideration In money or money’s worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent’s death.