author: Ti;ammell :

text:
    Maurice Cross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32735.
    Promulgated December 4, 1931.

      Charles L. Fleece, Esq., for the petitioner.

      Frederick K. Blanker, Esq., and George R. Sheriff, Esq., for the respondent.
   OPINION.

Ti;ammell :

In connection witb the gain or loss on the sale of property the only question before us is the amount expended by the petitioner in making improvements, all the other factors being agreed upon. We think that the agreement whereby the rent was reduced from $8,000 to $5,000 per year and in consideration thereof the lessees were to make these improvements, amounts to the payment therefor by the petitioner. However, the property was leased in 1918 and was sold in 1923, a period in any event not to exceed five years. The petitioner therefore did not pay out through this process more than $15,000. It was the agreement of the parties that, if the lessees did not retain the property for a full five-year period, the petitioner would have to make a refund on account of the expenditures made by the lessees, and there being no evidence of any refund or any controversy raised as to whether any refund was made, we feel warranted in assuming that the lessees retained the property at least five years. We think, therefore, that the petitioner did in effect pay out for improvements and alterations $15,000.

The Commissioner raises the point that some of the amounts paid out by the lessees under this arrangement were for repairs and anjr amount paid therefor should not be added to the capital value of the property; that any amount paid for repairs is not segregated from the amounts paid out for improvements, and therefore no amounts can be added on account of the improvements. We think, however, that the expenditures were for the general improvement, reconditioning, and renovating of the property. In this connection, in the case of I. M. Cowell, 18 B. T. A. 991, we said:

While the characterization of some of the items is such that standing alone or made as periodic repairs they might be deductible as ordinary and necessary expenses, it is impractical from the evidence to make such a detailed classification of the items. Such a classification is not a mere matter of what an item is called, but whether it is a part of the entire capital investment in the improved property. To fix a door or patch plaster might very well be treated as an expense when it is an incidental minor item arising in the use of the property in carrying on business, and yet, as here, be properly capitalized when involved in a greater plan of rehabilitation, enlargement, and improvement of the entire property.

See also Home News Publishing Co., 18 B. T. A. 1008.

It is, therefore, our opinion that the amount of $15,000 should be added to the March 1, 1913, value in determining the profit on the sale of the property in 1923.

With respect to the income from the retail clothing store, since it appears that the books, accounts, and records of the taxpayer were not kept in such a manner or method as to permit of a correct computation of income could be determined therefrom, the determination of the Commissioner by the use of average percentage tables is presumptively correct and will be upheld in the absence of evidence as to what the correct income is. See F. G. Bishoff, 6 B. T. A. 570; affirmed by the Circuit Court of Appeals, 27 Fed. (2d) 91; Jacob Roffwarg, 2 B. T. A. 332; M. & B. Rubin, Inc.., 10 B. T. A. 866; Yorkville Live Poultry Co., 18 B. T. A. 47.

The evidence introduced in this proceeding is not sufficient to overcome the prima facie correctness of the Commissioner’s determination. The taxable income computed or estimated from the books and records would be no more than a guess and this is not sufficient. The petitioner, operating a retail clothing business, kept no inventories of merchandise in accordance with article 1585 of Regulations 62, promulgated pursuant to section 203 of the 1921 Act. This fact alone, without consideration of the insufficiency of the books and records otherwise, would prevent a proper determination of income. The petitioner has not shown that the determination of the Commissioner is erroneous.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Richard H. Oakley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45778.
    Promulgated December 7, 1931.

      J. D. Peeler, Esq., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Van Fossan :

The sole issue in this proceeding is whether or not the individual business of the petitioner theretofore conducted under the name of Oakley Paint Manufacturing Company was properly and legally transformed into a partnership through the various documents executed by the petitioner and his wife on December 31, 1922.

The respondent’s counsel contends that unless the petitioner made a valid gift of a portion of his property on that date he was still the owner thereof and taxable with the income derived from it. He cites the rule laid down in Edwin J. Marshall, 19 B. T. A. 1260, in which we said:

To constitute a gift in contemplation of law, there must be (1) an intention on the part of the donor to give — that is, to surrender complete control and dominion over the property to the donee; (2) there must be an acceptance of the gift by the donee; and (3) there must be a transfer of title accompanied by delivery of the property.

and asserts that the first and third elements are lacking in the case at bar. We do not agree with this contention. Apparently the respondent confuses an interest in the going business of the Oakley Paint Manufacturing Company with the business itself and the assets thereof. By the assignment of December 31, 1922, the peti-

tioner completely divested himself of all interest in and ownership of three-fourths of the enterprise known as the Oakley Paint Manufacturing Company and on the same day he transferred three-fourths of the common shares of the Western Avenue Golf Club held by him. The petitioner, his wife, and his attorney were fully aware that the petitioner so disposed of such interests. There were no reservations or secret agreements of any kind — nothing that would impute bad faith to the transaction. The intention and purpose of the petitioner to give to his wife individually and as trustee for their minor children the three-fourths interest in the paint business were clearly shown by the evidence. The concurrent assignment and transfer of the Western Avenue Golf Club certificates of interest (also known as common shares) were wholly consistent with that intent. The reason for making such a disposition of the petitioner’s property was fully explained and appears sound. The method and means of accomplishing the desired result were entrusted to the petitioner’s attorney. The subsequent acts' of the petitioner, the adjustment of partnership books, the annual audit by outside accountants, the crediting of one-fourth of the income and the debiting of one-fourth of the withdrawals to each partner’s account, unequivocally support this conclusion. H. T. Lofer, 12 B. T. A. 164.

It is conceded by the respondent that the donee accepted the gift.

The assignment and trust agreement definitely and completely transferred the title to the property of the petitioner, namely, the paint business carried on by the Oakley Paint Manufacturing Company and 147.69 shares of the Western Avenue Golf Club, and divested him of all control and dominion thereof. Certificates of interest in the Western Avenue Golf Club were issued to Beatriz Oakley, .individually and as trustee, and hence the title thereto, accompanied by the delivery of the certificates, passed to her. Under the trust agreement the petitioner received 36.93 shares of the Western Avenue Golf Club and a one-fourh interest in the assets of the paint company. The delivery of the transferred interests in the paint business was accomplished by the instrument of assignment duly executed. Thus the requirements set forth in the Marshall case have been fully met.

The establishment of the trust and the formation of the partnership followed the assignment as sequential steps in the plan devised by the petitioner’s attorney. We do not question the fact that the partnership agreement properly created a partnership composed of the petitioner, Beatriz Oakley, individually, and Beatriz Oakley as trustee for Barbara and Jean Oakley. We have held repeatedly that a husband may constitute his wife his partner by giving her an interest in the business. Elihu Clement Wilson, 11 B. T. A. 963; John T. Newell, 17 B. T A. 93, and cases there cited; Glenn M. Harrington, 21 B. T. A. 260.

The respondent has based his denial of partnership status on his determination that the gifts and partnership were not bona fide and that hence he regarded the business as a sole proprietorship. We find in the record no evidence or suspicion of bad faith. The respondent’s counsel claims that the control and dominion of the petitioner’s business were as much his after as before the execution of the several instruments on December 31, 1922, and therefore the assignment did not represent a true gift. The provision of the assignment granting the petitioner the sole authority to conduct the business was contingent upon the formation of the partnership. The articles of copartnership contained a similar but amplified provision. Thus the petitioner’s exclusive management of the business must be viewed in relation to the partnership and not to the gift of the interests in the business. Partners may agree to lodge in one partner the sole management of the business or some department thereof. 47 C. J. 831. In Millard D. Olds, 15 B. T. A. 560, we held:

Government counsel points emphatically to the fact that the three daughters were not able to withdraw their shares of the profits without restraint and that the father retained control over such withdrawals. From this he argues, un-tenably we believe, that the daughters did not possess a right to’ require a division of the profits. The right to demand a division of profits and the right to withdraw such profits are not synonymous. Nor is there anything inconsistent with the existence of the partnership relationship in the provision that except for personal needs the profits should remain in the business subject to the discretion delegated to one member. The right to demand an accounting was not foregone by the delegation of such management and control.

The partnership agreement of December 31, 1922, provided that the partners should share equally in profits and losses. The record discloses that from early in 1923 the existence of the partnership was made known to the friends and business associates of the petitioner. See Leonard M. Gunderson, 23 B. T. A. 45. Hence, we are of the opinion that the petitioner has established that during the years under consideration he was a partner in the business carried on under the name of the Oakley Paint Manufacturing Company and is chargeable with one-fourth of the income thereof.

Judgment will be entered for the fetitioner.


author: Matthews :

text:
    Walter M. Petitfils, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37763.
    Promulgated December 7, 1931.

      Glaude I. Parker, Esq., George H. Roster, Esq., and J. B. Milli-ken, Esq., for the petitioner.

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

Matthews :

The only issue raised in this proceeding is whether the profit realized upon the sale of certain assets to Petitfils Con-fiserie, including the leasehold, the tangible property and the good will of the business which had been conducted by the petitioner individually at 613-615 South Broadway, Los Angeles, Calif., was income to the petitioner. It is the petitioner’s contention that he transferred the assets in question to W. M. Petitfils, Inc., and thereafter acted as trustee or agent for W. M. Petitfils, Inc., in disposing of these assets to Petitfils Confiseri. The respondent questions the bona fides of the purported sale from petitioner to W. M. Petitfils, Inc., and further contends that the olfer and acceptance under the circumstances were insufficient to pass title to W. M. Petitfils, Inc. It is also claimed by the respondent that for all intents and purposes petitioner and W. M. Petitfils, Inc., were one and the same entity and that petitioner did not contemplate that he should be deprived of anything by the organization of W. M. Petitfils, Inc.

The assets which petitioner agreed to transfer to W. M. Petitfils, Inc., in exchange for the capital stock of that corporation were listed by him as having a net worth of $1,439,651.16, and included property owned by him other than that used in connection with the operation of the cafe and confectionery business at 613-615 South Broadway.

The record indicates that the petitioner’s object in organizing W. M. Petitfils, Inc., was to protect the business which he had been successfully operating as an individual and to turn over to that corporation all of his assets. Petitioner testified that he had considered the matter for perhaps two years before deciding to incorporate “himself,” and that because of the size of the business he thought it best for himself and for his business to operate it through the corporation. Petitioner further testified that he did not remember whether he executed a bill of sale conveying the assets involved herein to W. M. Petitfils, Inc., and that it did not make any difference because it was a personal affair.

We think it is clear that although petitioner may have intended to turn over all his assets to W. M. Petitfils, Inc., at the time this corporation was organized, the proceedings taken by him were not legally adequate to accomplish that purpose.- The petitioner’s claim that title to the assets involved herein passed to W. M. Petitfils. Inc., and that any profit arising out of the sale of these assets to Petitfils Confiserie represented income to W. M. Petitfils, Inc., is not supported by the evidence.

' We have found that the petitioner offered to sell to W. M. Petitfils, Inc., all his assets, including the leasehold and the good will of the business located at 613-615 South Broadway and the merchandise and equipment used in the business, and this offer was accepted by the corporation, but no bill of sale or other instrument of conveyance appears to have been given by the petitioner to the corporation. The lease under which petitioner occupied the premises provided that it could be assigned only with the written assent .of the lessor, and petitioner never procured the lessor’s assent to assigning the lease to W. M. Petitfils, Inc. Petitioner had previously obtained the lessor’s assent to assign the lease to Petitfils Confiserie, and was unwilling to pay any further sum for the lessor’s assent to a transfer of the lease to W. M. Petitfils, Inc. Book entries were made recording the transfer of petitioner’s assets to W. M. Petitfils, Inc., as of May 1, 1923. The corporation reported income from the operation of the restaurant and candy-manufacturing business from May 1, 1923, to June 17, 1923. The capital stock in the amount of $450,000 which the corporation agreed to issue to the petitioner was not issued until several months after the assets in question were transferred to Petitfils Confiserie.

Before the issuance of this stock petitioner had decided to combine his cafe and confectionery business with that of the Brown Candy Corporation and had obtained the consent of W. M. Petitfils, Inc., to transfer to Petitfils Confiserie the assets used in the business which he had conducted as an individual at 613-615 South Broadway for $250,000 plus 3,150 shares of the capital stock of Petitfils Confiserie, it being agreed between petitioner and W. M. Petitfils, Inc., that he would execute and deliver a declaration of trust and hold the proceeds of the sale to Petitfils Confiserie for the benefit of W. M. Petit-fils, Inc. We think that although petitioner had originally agreed to sell all his assets to W. M. Petitfils, Inc., the effect of the consent of this corporation to the transfer by the petitioner ' to Petitfils Confiserie of those assets used in the café and confectionery business was to substitute for such assets the amount which petitioner was to receive therefor from Petitfils Confiserie, namely, 3,150 shares of the capital stock of Petitfils Confiserie and its note for $250,000. The petitioner in his dealings with Petitfils Confiserie did not intimate that he had agreed to transfer his business to W. M. Petitfils, Inc., but, on the contrary, it appears that he represented himself to be the sole owner of the business, and the assets in question were conveyed to Petitfils Confiserie by the petitioner and not by W. M. Petitfils, Inc. The sale to Petitfils Confiserie is not reflected in the income-tax return filed for 1923 by W. M. Petitfils, Inc. The execution by the petitioner of the declaration of trust quoted in our findings of fact is not sufficient to show that any profit derived from the transaction was income to W. M. Petitfils, Inc., instead of to the petitioner.

We do not need to consider the bona fides of the purported sale by the petitioner to W. M. Petitfils, Inc., because we have found that the agreement to sell was not consummated in accordance with the terms of petitioner’s offer of May 8,1923, but was expressly modified by the parties so as to except those assets which were used in petitioner’s cafe and confectionery business.

We conclude that the profit resulting from the sale of the lease and business to Petitfils Confiserie represented income to the petitioner.

Judgment will be entered for the respondent.


text:
    Cripple Creek Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30279.
    Promulgated December 7, 1931.

      Robert Ash, Esg., for the petitioner.

      J. A. Adams, Esg., for the respondent.
   OPINION.

Matthews :

We are of the opinion that the action of the respondent in refusing to allow the deduction as an ordinary and necessary business expense of the amounts paid by petitioner to the Transit Company in the years in question is correct. The facts in this proceeding show that the petitioner had borrowed money from the Transit Company, and in order to repay such amount had assigned to the Transit Company its right to reimbursement from the Eail-road under Paragraph NI of the contract of October 4,1917, between the petitioner and the Eailroad. Due to the fact that the Eailroad later made a demand for an additional amount of $52,955.16, the difference between the actual and the estimated cost of the construction of the track, and refused to reimburse the petitioner for the amount already advanced by the petitioner until this amount was paid by a credit of $3 on all commercial coal shipped, the loan could not be repaid in the manner provided for between the petitioner and the Transit Company in the assignment of February 21, 1919. As a result of the Transit Company being unwilling to wait to be repaid until after the Railroad had received the $52,955.16 in the manner provided for, the petitioner and the Transit Company entered into the contract of August 1, 1921, which is set forth in our findings of fact. It is doubtless true that the petitioner entered into this contract in order to keep the business of the Transit Company, which was necessary if the petitioner was to continue to operate its mine. Nevertheless, as we construe this contract, in the light of the circumstances leading up to its execution, we consider that the amounts paid thereunder by way of a credit of $3 to the Transit Company on all coal shipped were payments on a loan, or, as the respondent stated in the deficiency letter, they constituted a “ reduction of a liability.” The fact that the contract did not provide any method for payment in case sufficient coal was not shipped to make up the amount of $62,724.02 at the rate of $3 per car, does not change the essential character of the transaction.

The contract between the petitioner and the Transit Company was a separate transaction from that between petitioner and the Railroad, and the fact that the petitioner might not receive reimbursement from the Railroad does not have any effect on the transaction between the petitioner and the Transit Company. Regardless of whether the petitioner was reimbursed by the Railroad for the entire amount advanced for the construction of the track, it was still obligated to repay the Transit Company for the amounts loaned to it.

Judgment will be entered for the respondent.


author: Trammell:

text:
    Mutual Assurance Society of Virginia, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 43911.
    Promulgated December 8, 1931.

      E. E. Cabell, Esq., for the petitioner.

      Eugene Harpole, Esq., and S. B. Pierson, Esq., for the respondent.
   OPINION.

Trammell:

Petitioner claims with respect to all of the taxable years the right under sections 234 (a) (11) of the Revenue Acts of 1924 and 1926, to deduct, in computing net income, certain premium deposits paid in by its members and retained for the payment of losses and expenses. The parties accept the rule of administrative procedure set out in articles 571 of Regulations 64 and 69 and followed by the Bureau of Internal Revenue since 1920, of presuming, in the absence of specific corporate action to the contrary, that losses and expenses have been paid out of earnings and profits other than premium deposits to the extent of such earnings and profits. This presumption we think is especially sound in the present case, where the other earnings and profits consisted largely of rents and interest clearly to be anticipated and their approximate amounts estimated and might reasonably have been considered as contemplated by the standing committee in determining the amount of assessments upon members. Under these facts it is not a strained presumption that the premium deposits exacted from the members were intentional provisions in excess of current requirements.

The pertinent provisions of the Revenue Acts of 1924 and 1926 are identical and as follows:

Sec. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *****
(11) In the case of mutual insurance companies (including inter-insurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (9), inclusive, unless otherwise allowed, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.

A comparison of the facts here proven with the statutory provisions shows that the petitioner meets every requirement of the quoted sections, it being (1) a mutual fire insurance company; (2) it required its members to make premium deposits to provide for losses and expenses; (3) the deduction now claimed is not otherwise allowed by statute; and (4) the amount for which the deduction is claimed consists of premium deposits retained for the payment of losses and expenses.

The respondent contends that if the deduction is allowed it will amount to a double deduction in that the losses and expenses incurred during the taxable years have already been allowed as deductions and that another deduction should not be allowed on account of retained premium deposits. But the statute provides that in addition to other deductions, these premium deposits to provide for losses and expenses should be deducted. It seems clear that the statute intended to make provision, not only for a deduction for actual losses and expenses, but also for the retained premiums to provide for other losses anticipated. They are to provide for losses and expenses. We can not say that such premium deposits are not in fact retained ior the payment of losses and expenses, because the company had other funds out of which it could pay the actually sustained known losses during the year. The record discloses that these quotas or premium deposits were determined according to the best judgment of the standing committee; that they were made in good faith for the purpose of providing for losses and expenses; and that the amounts were retained for such purpose.

The deduction in section 234 (a) (1) on account of such retained premium deposits for the payment of losses and expenses is not allowable if those same losses and expenses are otherwise allowed under other subdivisions of section 234. Only losses and expenses paid or incurred are allowed as deductions. The premium deposits were placed in a reserve and reported in income-tax returns as reserves. They can be retained for payment of losses and expenses anticipated in the future without actually being paid out in the taxable years, and meet, literally, the language of the statute. The statute provides that if they are retained for such purposes they are deductible. We see no reason why they may not be retained during the entire year.

Eespondent raises the question as to difficulties of administration in some future period if and when the deposits retained are availed of for the payment of the losses and expenses of future periods. We are not now, however, faced with that problem, if it in fact should be one in the future. This, however, is-apparently provided for in article 5†1 of Regulations 69. We see no conflict between our views here expressed and the regulations of the Commissioner.

We conclude that the premium deposits under consideration fall within the class provided for in the quoted sections and are subject to deduction in computing taxable income for the years in question.

Judgment will be entered pursuant to Bule 50.


author: ARitndeIíL :

text:
    E. B. Galbreath, Petitioner, v. Commissioner of Internal Revenue, Respondent. Galbreath Lease, Trust No. 314, Security Trust and Savings Bank, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42432, 42564, 45996, 51767.
    Promulgated December 8, 1931.

      Melvin D. Wilson, Esq., for the petitioners.

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

ARitndeIíL :

In the recent case of Jackson-Wermich, Trust, 24 B. T. A. 150, we concluded, after a review of numerous cases of both the Board and the courts dealing with questions such as the one before us in this proceeding, that the real tests to be applied in determining whether a particular taxpayer is a trust or an association taxable as a corporation are whether the beneficiaries of the alleged trust " have voluntarily associated themselves together in £ the general form and mode of procedure of a corporation ’ and are organized to and in fact are engaged in the active conduct of a business for profit, or whether the trustees are merely holding the property and collecting the income therefrom and distributing it to those beneficially interested.” G. F. Sloan et al., 24 B. T. A. 61, and Extension Oil Co., 16 B. T. A. 1028 (affd., 47 Fed. (2d) 65), are to the same effect.

The petitioner has none of the essential characteristics of a corporation. It bears the name of a trust rather than that of a corporation; it did not issue capital stock or other similar evidence of beneficial interest in the trusteed property; it had no officers, offices of its own, by-laws or stationery; it did not declare and pay dividends out of earnings in a manner peculiar to corporations, but distributed the proceeds from the sale of royalty oil monthly to those entitled thereto; and it did not operate under a charter. The interests of the beneficiaries were not subject,to transfer without an assignment of the lots themselves, a restriction never found in stock certificates, due probably to the well established rule that stockholders hold no title to corporate property. The declaration of trust did not provide for meetings of the beneficiaries of the trust and none was ever held.

The beneficiaries of the trust were fee owners of adjoining lots in which it was believed oil could be found in paying quantities. To make their properties more attractive to responsible oil companies they pooled their interests and placed them in trust for the sole purpose of negotiating a lease on the whole tract and if oil were found, to receive their royalty interest through the agency of a trustee. The declaration of trust evidences no intention to actively engage in business. Eather it shows a desire merely to dispose of such minerals as were under the premises through the instrumentality of a lease, with a royalty on any minerals found as a consideration for its execution. This was done by the trustee with the approval of the beneficiaries as provided for in the trust instrument. Thereafter, the only activities carried on by the trustee were the receipt of moneys paid by the lessee for the sale of royalty oil and the monthly distribution of the remittances, less its charges for services performed, to those entitled thereto. Such acts do not constitute doing business. Von Baumbach v. Sargent Land Co., 242 U. S. 503.

Control by the beneficiaries over the management and operation of the trusteed property is not determinative of the question. E. A. Landreth Co., 11 B. T. A. 1; Lloyd M. Willis et al., 22 B. T. A. 564; and Jackson-Wermioh Trust, supra. Such control as the beneficial owners of the property had here was confined to the approval of a lease on the tract and the selection of a new trustee. The former was merely a preliminary matter to the placing of the trust in operation and does not make the case any different than it would be if the lease had been executed concurrently with the declaration of trust.

Our conclusion is that the trust under review was not of the general form and mode of a corporation and was not organized to and did not in fact actively engage in business for profit, but for the purpose of collecting the income earned by property and distributing the same to those entitled thereto. The respondent erred in holding it to be an association taxable as a corporation. Having reached this conclusion, it is not necessary to decide whether petitioner is within the provisions of secton 704 (b) of the 1928 Act which are applicable to the years prior to 1928.

Petitioner Galbreath is entitled to a deduction of $6,016.07 in 1924 for depletion of his property interest in the corpus of the estate. Merle-Smith v. Commissioner, 42 Fed. (2d) 837; Mary Alphin et al., 21 B. T. A. 1101; and Ida L. Kuhn et al., 24 B. T. A. 216.

Decisions will be entered for the petitioners.


author: Lansdon:

text:
    Charles Hallock Whitehead, Executor of the Estate of Mary Heaton Whitehead, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32062.
    Promulgated December 8, 1931.

      Lynn Webb, Esq., for the petitioner.

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

Lansdon:

During her lifetime Mary Heaton Whitehead was the owner of certain real estate in the State of Missouri, valued at $45,-000. She also owned an interest in certain personal property derived from the estate of her husband, Charles H. Whitehead, deceased in 1908, whose will, among other things, provided as follows:

All the rest and residue oí my estate whether real, personal or mixed and wherever situate I give, devise and bequeath to my wife Mary H. Whitehead and to my son Charles Hallock Whitehead and to the survivor of them to have and to hold as joint tenants and not as tenants in common. The said Mary H. Whitehead and Charles Hallock Whitehead shall keep the property herein given to them separate and apart from their individual estates. They shall have absolute control of and dominion over said property as joint owners so long as they both shall live, and either may at any time withdraw from the joint estate such sum or sums of money as said beneficiaries may jointly agree upon, provided that an equal sum of money shall at the same time be turned over to the other beneficiary. The said Mary H. Whitehead and Charles Hallock Whitehead shall so long as both shall live, keep an account showing the property received by them under this will together with the earnings thereof and the amounts expended, or distributed as above provided, and upon the death of either of said beneficiaries the balance of said joint estate shall vest absolutely in the survivor. It is my intention by this provision of my will to allow my said wife and son the unrestricted enjoyment and benefit of my said estate during their joint lives the balance remaining at the death of either to go to the survivor.

It is stipulated that the value of the decedent’s interest in such property for Federal estate-tax purposes, if subject thereto, at the time of her death was $111,818.10.

Mary Heaton Whitehead died in 1922, and the son, Charles Hal-lock Whitehead, was appointed one of two joint executors of her estate. These executors filed their report in final settlement of the estate with the probate court of Jackson County, Missouri, on July 12, 1924, on which date an order was issued discharging them from their trust.

No Federal estate-tax return was filed by the executors in behalf of the estate of Mary Heaton Whitehead, but more than two years after its settlement, on April 21, 1921, the petitioner, as beneficiary, filed with the collector of internal revenue at Kansas City, Mo., a preliminary notice, as required under the Kevenue Act of 1926, purporting to give information in respect to its assets. This notice reported personal property valued at $37,485 as constituting the gross estate of the decedent at the time of her death. The respondent determined that the real estate belonging to the decedent at the time of her death was subject to the Federal estate tax, and asserted a deficiency in respect thereto of $292.18, of which he notified the petitioner in a letter dated September 1, 1927, addressed to him as “ Executor Estate of Mary Heaton Whitehead.” From the assertion of this deficiency the petitioner appealed to this Board on October 28,1927. At the hearing of this case the respondent, upon authority of the decision of the United States Supreme Court in Crooks v. Harrelson, 282 U. S. 55, conceded that the real estate involved, valued at $45,000, should be excluded from consideration in determining the tax, if any, due from the estate. The respondent, however, has filed an amended answer in which he avers that the decedent’s interest in the personal property bequeathed by Charles H. Whitehead to Mary Heaton Whitehead and Charles Hallock Whitehead as joint tenants should be included in the taxable estate and moves that the deficiency be accordingly increased in the proper amount on the basis thereof.

As reasons why the respondent’s request should not be granted, the petitioner contends (1) that inasmuch as the estate of Mary Heaton Whitehead was settled and the executors discharged in July, 1924, there was no taxable entity of that name in existence at the time the deficiency was asserted, and the Board is, therefore, without jurisdiction to redetermine the tax; and (2) that in view of the terms of the will, which gave to decedent only a joint interest in the personal property, with remainder vesting absolutely in the surviving tenant, upon her death, no interest survived in the personal property which could bo included in her gross estate.

We see no merit in the jurisdictional question raised by the petitioner. The settlement of the estate and final discharge of the executors, before the tax obligations were discharged, neither extinguished the tax nor relieved the petitioner from his liability under the law to pay it. Section 400 of the Bevenue Act of 1921 includes the following:

The term “ executor ” means the executor or administrator of the decedent, or, if there is no executor or administrator, any person in actual or constructive possession of any property of the decedent.

Section 300 of the Revenue Act of 1924 reenacts this definition with slight changes that are not material in this proceeding. Charles Hallock Whitehead, the petitioner here, was the regularly qualified executor of this decedent, the residuary legatee and the distributee of the bulk of the estate. As the executor, he received the deficiency notice and petitioned for a redetermination. In the light of the facts and the statutory provisions above cited, we are of the opinion that all the requirements of section 308 (a) of the Revenue Acts of 1924 and 1926 have been satisfied and that the Board has jurisdiction over this proceeding.

In respect of the personal property in dispute, section 402 (d) of the 1921 Revenue Act seems to anticipate the exact situation which here obtains and provides as follows:

To file extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or deposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money’s worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is sliown to Rave been at any time acquired by such other person from the decedent for less than a fair consideration' in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy in the entirety by the decedent and spouse, or where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of one-half of the value thereof; * * *

Therefore, we must hold contrary to petitioner’s contention on this point. The parties have stipulated that at the date of her death the value of the interest of Mary Heaton Whitehead in the joint tenancy created by the will of her husband in 1908 was $177,313.10. This amount should be included in her estate subject to Federal estate tax. Mary Allen Emery, Executrix v. Commissioner, 21 B. T. A. 1038; Tyler v. United States, 281 U. S. 497; Knox v. McElligott, 258 U. S. 546.

Reviewed by the Board.

Decison will be entered under Bule 50.


author: Matthews:

text:
    William H. Dunbar, George R. Nutter and Esther Fiske Hammond, as Trustees of the Fiske & Hammond Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43470, 43471, 45029.
    Promulgated December 8, 1931.

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

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

Matthews:

The sole question presented for our consideration is whether the Fiske & Hammond Trust is a trust or an association taxable as a corporation. The years involved are 1924, 1925 and 1926. Since there is no evidence as to when the return for 1924 was filed, we need not consider the provisions of section 704 (a) of the .Revenue Act of 1928, and it is clear that we are not concerned with the provisions of section 704 (b) thereof.

There have been numerous cases decided by this Board and the courts upon the question here involved in which the general principles have been discussed at length. As we pointed out in the case of Morriss Realty Co., 23 B. T. A. 1076, there are three tests: (1) business purpose; (2) business operations; and (3) quasi-corporate structure. The Supreme Court of the United States in the case of Hecht v. Malley, 265 U. S. 114, emphasized the test of business purpose and operation rather than that of structure; that is, the control or lack of control exercised by the beneficiaries. One of the organizations in that case, the TIecht Eeal Estate Trust, was established by the members of the Hecht family upon real estate in Boston, used for offices and business purposes, which they owned as tenants in common. The shares thereof were transferable. The court, in holding that the organizations involved therein were associations, said:

The trustees of the Hecht and Haymarket Trusts earnestly rely, however, upon the decision in Croclcer v. Malley, supra, as conclusively determining that they cannot be held to be “ associations ” unless the trust agreements vest the shareholders with such control over the trustees as to constitute them more than strict trusts within the Massachusetts rule. * * *
* * * * * * ⅝
It results that Crocker v. Malley is not an authority for the broad proposition that under an Act imposing an excise tax upon the privilege of carrying on a business, a Massachusetts Trust engaged in the carrying on of business in a quasi-corporate form, in which the trustees have similar or greater powers than the directors in a corporation, is not an “ association ” within the meaning of its provisions.
We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; this being true independently of the large measure of control exercised by the beneficiaries in the Hecht and Haymarket Cases, which much exceeds that exorcised by the beneficiaries under the Wachusett Trust. We do not believe that it was intended that organizations of this character — described as “ associations” by the Massachusetts statutes, and*subject to duties and liabilities as such — should be exempt from the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries that they might be deemed strict trusts within the rule established by the Massachusetts courts.
That the Crocker Association is engaged in carrying on business within the meaning of the Act, is obvious. And so of the Hecht and Haymarket Trusts. A corporation owning and renting an office building is engaged in business within the meaning of an excise statute. Flint v. Stone-Tracy Co., supra, page 171 (31 Sup. Ct. 342) ; Zonne v. Western Syndicate, supra, at page 190 (31 Sup. Ct. 361.)

We do not see any distinction between the Fiske & Hammond Trust and the trust involved in the Hecht case. In the instant proceeding the property, with the exception of the building at 9 Harrison Avenue which was owned by Mrs. Hammond, was held by Mrs. Hammond and her brother, or by trustees in their behalf, as tenants in common. The building that was not owned by the parties as tenants in common was rented to the same tenant as one of the other buildings. For convenience in tbe management of this property and in order to unify the title, the property was conveyed to trustees. The trustees were given very broad powers to purchase additional property, etc., although, as a matter of fact, their activities during the taxable years were confined to the collection of rentals, payment of taxes and insurance, collection of amounts due on the mortgage notes, the recording of receipts and disbursements, and the distribution to the beneficiaries. The leases on the properties had been entered into prior to the taxable years; in fact, prior to the execution of the trust agreement, and did not expire until 1928. The tenants made repairs under the leases and furnished their own heat and janito'r service. Two of the buildings were sold soon after the execution of the trust and the only duties of the trustees in connection therewith were the collection of interest and payments due on the deferred purchase money notes. The only control exercised by the beneficiaries was the right to select a trustee in case of a vacancy, and the right to assent to any change in the trust instrument.

It is true that in some of the decided cases, organizations, the activities of which were similar to those of the Fiske & Hammond Trust, have been held to be trusts and not associations. However, a study of those cases shows that they involved situations where the trust was created primarily for the liquidation of property, some by an ancestor for his heirs, and some by heirs themselves. In the case of C. W. Cowell Co., 21 B. T. A. 1274, we said:

In Wilson Trust, 20 B. T. A. 549, we endeavored to point out the distinction between a trust such as is created when an ancestor conveys property to trustees for the equitable benefit of designated beneficiaries and such a trust as the I-Ieeht Real Estate Trust described in Beeht v. Malloy, supra, and' the trust described in the instant case, where persons who own property as tenants in common associate themselves together for their own convenience and profit for the purpose of holding title to property, collecting' rents thereon, preserving the property, selling certain of the assets and reinvesting the proceeds, distributing the income and ultimately disposing of and distributing the property. .In endeavoring to point out this distinction we quoted from Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43, wherein the court said:
* ⅜ * A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy of donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose. Section 219, Revenue Act of 1921 (42 Stat. 246).
We do not think the trust involved in the instant case can be classed as one falling within the classification involved in the Wilson Syndicate Trust, supra, and Wilson Trust, supra, but is rather one where persons-, members of the same family, owning property as tenants in common, have associated themselves together, under the designation of “ O. W. Cowell Company,” for purposes of convenience and profit, and although under the laws of Colorado such an association is classed as a partnership, it is, under the Revenue Act of 1924, an association taxable as a corporation.

And in Wilson Trust, supra, we said:

It' will be conceded that if the beneficiaries of the Wilson Trust, petitioner in this proceeding, had been the owners of the several tracts of real estate conveyed to the trustees and had organized themselves together in such a voluntary association for the purpose of renting and leasing the property, collecting and disbursing the rents, keeping up the improvements, selling some tracts and buying others, paying the expenses and distributing the profits, it would be an association carrying on a business and would be taxable as a corporation, regardless of the form of its organization or whether it was recognized as a partnership or trust in some States. Lansdowne Realty Trust, 20 B. T. A. 119; Hecht v. Malley, 265 U. S. 144; Burke-Waggoner Oil Association v. Hopkins, 269 U. S. 110. But where the facts show, as they do in this case, that the beneficiaries, save the grantor Walter H. Wilson, had no legal or equitable title to the property conveyed to the trustees, but were only the beneficiaries of an interest which their father was setting up in their behalf as a gift, and that the trust was created to hold and administer this interest, we think a different rule would apply. * * *

We do not believe that the recent cases of Commissioner v. Atherton, 50 Fed. (2d) 740; Lansdowne Realty Trust Co. v. Commissioner, 50 Fed. (2d) 56; and Gardiner v. United States, 49 Fed. (2d) 992, are controlling in this proceeding. In the Atherton case the trust was created for the sole purpose of selling property owned by a public utility corporation. The market for such real estate was not in a good condition at that time, but the property was sold by the trustees as rapidly as possible. In the Lansdowne case the trust was created to succeed another trust. The property was conveyed to the trust in trust to convert the same into money,” and to manage it, “ pending final conversion and distribution of the property.” The other provisions of the trust instrument were very similar to the one in this proceeding and the activities of the trustees were practically the same. In the Gardiner case the trust was created under a decree of a probate court in order to wind up an estate. In both of these latter cases the court, in holding the organizations to be trusts, emphasized the fact that the trustees were merely collecting the rents and paying them over and were not engaged in business. Such is the situation here, but we have this difference, that the Fiske & Hammond Trust was created to hold property in a common title for convenience and not primarily for liquidation. The trustees had the power to sell but it does not appear that this was the primary purpose of its creation; thus, the situation is similar to that in the Cowell case, supra.

We are, therefore, of the opinion that the Fiske & Hammond Trust is an association taxable as a corporation.

The fact that the respondent for purposes of the capital-stock tax held that this organization was not an association is not material. The letter so holding was written on April 14,1923, prior to the time the return for 1924 was due, and the regulations of the Commissioner in force at that time were later changed. Moreover, we have held that the Commissioner may change his position on a question of law and make a redetermination of the amount of tax due at any time prior to the expiration of the statutory period of limitations. See Frances P. McIllhenny et al., Executors, 13 B. T. A. 288, affd., 39 Fed. (2d) 365; Stein-Bloch Co., 23 B. T. A. 1161.

Reviewed by the Board.

Judgment will be entered for the respondent.

Trammell dissents.


text:
    Moulton Green, Trustee of the Harriet M. Bryant Trust Estate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19309.
    Promulgated December 9, 1931.

      Bruce Barnett, Esg., for the petitioner.

      F. B. Schlosser, Esq., for the respondent.
   OPINION.

Lansdon:

The controversy involved in this appeal relates to a deficiency in income tax of $10,742.81, and penalty of $2,685.70, for failure to file a return, which the respondent asserted against the trust estate of Harriet M. Bryant, deceased, for the calendar year 1923.

During her lifetime, Harriet M. Bryant owned real and personal property located in Kansas City, Mo., valued in excess of $1,000,000. Included in such real estate holdings were two improved properties situated in the business center of Kansas City. One was located at the southwest corner of Eleventh and Main Streets; the other about one block north at 1016-1018 Main Street. In February, 1917, she and her husband, John Bryant, entered into a written lease with one Louis Oppenstein, whereby they leased to the said Oppenstein the property first above mentioned, for a period of fifty years, beginning July 1, 1917. The terms of this lease provided, among other things, that the lessee should, within certain limits of time and in accordance with building specifications otherwise provided for, remove a three-story building then on said property and build in its place and stead a new business building which should belong to and become a part of such real estate when completed. That the whole cost of the removal of the old and the building of said new building should, in the first instance, be paid by Oppenstein; but, that as to so much of the cost pf the new building as exceeded the sum of $30,000, the agreed value of the old building, said lessee should be entitled to reimbursement out of future rents due from him to lessor. These reimbursements were provided for in the lease by a stipulation which allowed the lessee to deduct each month from the rent to be paid by him an amount equal to one-twelfth of 5 per cent of the total amount of his reimbursable expenditures, with interest at the rate of 5 per cent per annum.

In accordance with his contract, Oppenstein completed the building provided for on September 1, 1918. On account of high prices of material and labor, due to the war which intervened, the cost of the building was greatly in excess of the amount contemplated by the parties and exceeded the value of the old building by $461,704.70. The result is that at no time since the completion of said building was monthly rental due under the lease equal to the amount which the lessee has, at all times, been entitled to withhold for repayment of his expenditures with interest; and no rent payments, except by way of credits, as aforesaid, have been made to the lessor since August, 1918.

Harriet M. Bryant died April 8, 1920, leaving a will, which, after disposing of all of her personal property, provided that any real estate of which she might die seized should be held in trust until 21 years after the death of the last of her children. Two terms of trusteeship were provided in the will. The first, which may be referred to as the preliminary period, was to begin at the death of the testator and continue for sixty days. During this time the trustees were to manage the estate, collect income, pay debts, and, after payment of a bequest of $1,000 to the husband, pay the remainder of all proceeds over to the administrator for distribution as personal property. Five trustees were named in the will to serve during this term, among whom were Carl Herbert Bryant, William H. Schütz and Gustave William Bachman of the present board of trustees.

In and for the term beginning sixty days after the testator’s death, the testator’s five children, who were beneficiaries of the trust created, were given the right to select the trustees who should succeed to the trust, and were also given a voice in its administration. The present petitioning trustees are successors in such trust and the duly qualified trustees of said estate.

Among the several powers given to the last named trustees under the will was the power, having first discharged all costs of operation, including repairs, taxes (both general and special) on the property, and all interest on indebtedness of the estate and insurance of all kinds, and costs of the execution of the trust, to distribute among designated beneficiaries the net income derived from rent, interest on loans and securities in the estate. They were also empowered, under certain conditions, to sell the trust real estate and to use the proceeds in payment of estate debts, or to reinvest it in other property. The provision relating to the disposition of such proceeds is found in paragraph 12 of the will and is as follows:

And all proceeds arising from the sale of any real estate of which X shall die seized or possessed * ⅜ * shall become and be a part of the principal of the trust estate and the same, or any part thereof, may be applied to the discharge of any indebtedness against my estate to the extent that the personal property of which I shall die seized shall not be sufficient to discharge such indebtedness or to discharge any mortgage or deed of trust upon any such real estate, or the same may be reinvested in enlarging or improving buildings * * ⅞ or in the purchase of other real estate or of bonds or obligations of the United States or of some state, county or municipality within the United States * * * and any money so arising, that .is from the sale of real estate or from money derived by means of any mortgage, deed of trust or other enoumbranee, may be reinvested by the trustee as above authorised a/nd not otherwise. [Italics supplied.]

During the years 1921, 1922 and 1923, the properties of the trust estate depreciated in the respective amounts of $17,974.50, $21,403 and $20,503. During these same years the trustees, after payment of all necessary expenses, distributed to the beneficiaries of the estate, in the order stated, $33,825, $36,755 and $34,295, which was the entire net income of the estate for these years, with the exception of the profit derived from the sale of real estate, hereinafter mentioned, in 1923. No income-tax return was filed or income tax paid in behalf of the estate for either of the three years above mentioned.

In 1923 the petitioner sold the property at 1016-1018 Main Street to Marcus Fetcheimer for $297,155.15, and the respondent determined that it derived a taxable profit of $114,590 from the transaction. In computing this profit the respondent fixed the value of the property on June 8,1920 (the date of decedent’s death), at $184,656.24, to which he added $608.90 for improvements made after that date. This cost total he reduced by $2,700 on account of depreciation sustained during the three years.

In the amended petition filed by these trustees some twenty-one pages are devoted to “ so-called ” assignments of error, which are separately grouped and alphabetically lettered from “A to W,” inclusive. These groups are further multiplied by innumerable subdivisions which convert the pleadings into an endless maze of baffling repetitions. At the hearing, however, the petitioner clarified its position through a verbal statement from its counsel and submitted its cause of action for decision upon the following proposals of law and facts.

First, petitioner claims that it is entitled to a deduction of $55,-598.54, from the profit of $114,590, realized in 1923 on the sale of the 1016-1018 Main Street property, because of a decree rendered in the Circuit Court of Jackson County, Missouri, in 1924, which compelled it to make distribution of that amount out of such cash proceeds to the beneficiaries of the trust in lieu of rent, otherwise distributable to them, but withheld by Oppenstein under the terms of his lease.

Second, that the respondent erred in using the date of the decedent’s death as the basic date for determination of the cost to it of the property sold; alleging that the true date of its acquisition of the property was the beginning of the second term of trusteeship — -sixty days after said death, at which date the property was of greater value than at the prior date used by respondent.

Third, that the net profit from said sale, as reduced by the adjustments above suggested to the sum of $48,444.44, was distributable income to the five beneficiaries of the trust, and, as such, not taxable to it.

Fourth, that by reason of the depreciation sustained by the trust property in prior years, as above set forth, it suffered net losses which, in the circumstances, it had a right to carry forward in reduction of its taxable income, by reason of which, considering further the depreciation suffered in 1923, in no event was it liable for income tax in said year.

In respect to the petitioner’s first contention, it would seem clear from a reading of the will that the profit from the sale of the real property in question constituted capital gain, which the testator intended-to be retained and added to the corpus of the trust estate. The only provisions in the will pertaining to the disposition of the proceeds arising from the sale of real estate are those hereinbefore quoted from paragraph 12, which direct in plain language that all such must be reinvested as directed. To requote, the exact language is that they “ may be reinvested by the trustees as above authorized and not otherwise.” This limitation upon the trustees clearly precludes them from treating the profit from the sale of trust real estate as distributable income, as contended by the petitioner. We must conclude then that it constituted capital gain to the estate and was taxable as such in the year received.

The proceedings in the Missouri courts a year later are in no way material to the- issue here. The court there found that during a fifty-month period from the death of Harriet M. Bryant to June 8, 1924, rents accrued under the Oppenstein lease in the amount of $105,458.33, and that under the terms of the will such accrual was income to the estate distributable to the beneficiaries. For reasons not material here the beneficiaries had asked for only $55,598.04, and this amount the court ordered should be distributed from any cash then in the corpus of the estate. The fact that the proceeds of the sale of another piece of real estate were the only funds available for distribution under the decree of the court in no way affects the taxability of the capital gain realized from that sale.

From and after the death of Flarriet M. Bryant the rentals due under the Oppenstein lease were income to the estate, even though not received in cash, and the District Court of Jackson County found that under the terms of the trust instrument such income was distributable to the beneficiaries. If returned by the trustee in gross income, it was a proper deduction therefrom to the extent that it was received in any taxable year, since, under section 219 (d) of the Revenue Act of 1921, the distributable income of a trust or estate, whether distributed or not, is taxable to the beneficiaries ratably to their shares therein. It is obvious, therefore, that there is no relation between the taxable capital gain not distributable and distributable income derived from rents. The entire deficiency asserted herein is based on the capital gain resulting from the sale of the property at 1016-1018 Main Street. The respondent’s determination with respect thereto is affirmed. From our findings in respect to this issue, it follows that the petitioner’s third contention must likewise be denied.

In respect to petitioner’s second contention, we are unable to find from the terms of the will that the testator intended to create two separate trusts, the second succeeding the first sixty days after death. Even if we should hold that the petitioner is correct in respect to such basic date for valuation, we would be unable to hold that the respondent erred in the value fixed by him, since the petitioner has not produced evidence to establish a greater value, or to overcome the presumption of the correctness of the respondent’s determination as, under the law, we are bound to indulge. Our decision, therefore, on this contention must be in favor of the respondent.

Petitioner’s fourth contention relates to its claim of right to accumulate and deduct from its 1923 income net losses sustained in 1921 and 1922. In connection with this issue we have only the stipulation of the parties, which shows that in each of these years the trust properties sustained depreciation in certain stated amounts; also, that it distributed income to the beneficiaries in the same periods. There is an absence of any proof to show a net loss in either of these years, but, in view of the distributions made, much to indicate that it had taxable gains in each. On this issue, for lack of proof, we must hold against the contentions of the petitioner.

The further question, respecting the 25 per cent penalty imposed by the respondent upon the petitioner for failure to file a return for 1923, remains to be considered. The situation in this case is governed by section 3116 of the Eevised Statutes, as amended by section 1003 of the Eevenue Act of 1921, which provides that:

* * * In case of any failure to make and file a return or list within the prescribed time prescribed by law * * * the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is Hied, after sueh time and it is shown that the failure to file it was due to reasonable cause and not willful neglect, no such addition shall be made to the tax. * * * [Italics supplied.]

It is noted that under this provision, where no return is filed, the imposition of the penalty is mandatory upon the Commissioner of Internal Eevenue, and that it is only “ when a return is filed after such time,” and it is shown that the default was clue to reasonable cause and not willful neglect, that an exception is made. In the case at bar no return whatever was filed for 1923, and the explanation by counsel at the hearing that the trustees “ fell into the rut ” of not regarding any of the trust income as taxable, could not avail were we ever so ready to accept it. It is obvious that the action of the respondent in imposing these penalties must be approved. John B. Nordholt, 4 B. T. A. 509; Cheney D. Washburn, 7 B. T. A. 483; John T. Sline, 9 B. T. A. 1222; Edwin T. Foreman, 10 B. T. A. 981; Southern Ice & Fuel Co., 10 B. T. A. 1213; and Beam v. Hamilton, 289 Fed. 9.

Decision will be entered for the resfondent.


author: Aeundell:

text:
    Mont S. Echols, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. J. Echols, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. W. J. Echols, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fannie Echols, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elizabeth E. Cravens, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45231-45235.
    Promulgated December 9, 1931.

      Fadjo Cravens, Esq., for the petitioners.

      Maxwell Mahany, Esq., and E. L. TJ'pdihe, Esq., for the respondent.
   OPINION.

Aeundell:

Each of these five petitioners sustained in 1927 losses by reason of stock of the Pine Mountain Coal Company which they had owned for more than 2 years becoming worthless, due to the bankruptcy of that company, all of its assets being distributed to its creditors. In that same year each petitioner realized, on sales of stockholdings in other corporations, capital gains in excess of the loss sustained on Pine Mountain Coal Company stock. Each petitioner for that year exereised the option provided by section 208(b) of the Revenue Act of 1926 to return “ capital net gain ” for tax at the statutory rate of 12½ per cent, and computed such net gain by deducting from the capital gains realized the losses sustained on Pine Mountain Coal Company stock. Respondent has adjusted net income by treating the latter loss as an “ ordinary deduction.”

Petitioners contend that these several losses on Pine Mountain Coal Company stock are capital losses within the purview of section 208(a) (2) of the Revenue Act of 1926. It is their insistence that these losses resulted from the liquidation of that corporation and that consequently they stand in the same position, with the same character of loss and possessed of the same rights as a stockholder of a liquidated corporation who has been in receipt of a liquidating dividend equal to a portion of the cost of his stock. They contend that the only difference is in the extent of the loss, not in its character, and that it falls within the purview of section 201 (c) of the Revenue Act of 1926, providing that “Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock.”

It is petitioners5 contention that, in view of the above quoted section, the losses in question must, for all purposes of the taxing statute, be deemed to have resulted from an “ exchange55 of the stock and consequently to be capital losses as coming within the definition of section 208 (a) (2) of the Revenue Act of 1926, of “ deductible losses resulting from the sale or exchange of capital assets.”

Respondent admits that if these losses come within the purview of section 201 (c) they must be held to have been sustained upon an exchange ” of the stock and consequently to be “ capital losses,” but insists that such section deals exclusively with a situation in which the stock has been surrendered and a distribution of assets received in exchange.

Losses resulting from shares of stock becoming worthless have uniformly been treated by respondent as deductible only as ordinary losses under section 214 and not as capital losses under section 208. Art. 144, Regulations 65; IT 2149, C. B. IY, p. 36. With this interpretation placed upon section 201 (c) of the 1924 Act by respondent, Congress reenacted such section in the 1926 and 1928 Acts without change affecting the question here presented. We must consider this as an indication that the construction placed upon this section correctly interpreted the legislative intent. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110; Brewster v. Gage, 280 U. S. 327.

An examination of section 201 (c) reveals nothing ambiguous. Its terms are clear and direct and we can not find in the language used an indication of meaning extending its application to liquidation where no distribution is made to stockholders. We can discern no purpose in its enactment other than to subject liquidating gains to normal tax as well as surtax. On the other hand, we can not find' in the capital gain and loss provisions of the Act, nor in the legislative history of their enactment, an intent to include, in capital losses, losses sustained by capital assets merely becoming worthless. The intention there is clearly to allow as capital losses only those accruing from a sale or exchange ” of capital assets, losses due to such assets becoming worthless being covered by the ordinary loss provisions allowing their deductions from income other than that represented by capital gain.

Even were section 201 (c) considered of doubtful meaning, the rule of Gould v. Gould, 245 U. S. 151, that in such case the interpretation most favorable to the taxpayer must be accepted, would not help us. While in the instant case the construction we have given works to the injury of the taxpayer, on slightly different facts it would work to his benefit.

The conditions pointed to by these petitioners as evidencing an intent by Congress in the enactment of section 201 (c) to include in the same class a loss in liquidation where no distribution to stockholders was made and one realized by surrender of the stock in return for a distribution thereon, appears to us, upon analysis, to tend merely to support an argument that conditions in the two cases are substantially similar from an economic standpoint and should therefore be similarly treated. However, that is a question for Congress in its enactment of legislation. We may only construe and apply the statute as enacted, without extension beyond the legislative intent. United States v. Merriam, 203 U. S. 179; Lynch v. Alworth-Stephens Co., 267 U. S. 364.

■ Reviewed by the Board.

Judgment will be entered for the respondent.


author: Teammell:

text:
    Charles J. Thatcher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36646, 46445.
    Promulgated December 9, 1931.

      John F. McGarron, Esq., for the petitioner.

      L. W. Greason, Fsg., for the respondent.
   OPINION.

Teammell:

Respondent has determined deficiencies for the calendar years 1925 and 1926 of $234.71 and $224.94, respectively, and petitioner assigns as error respondent’s action in disallowing, in each of said years, a deduction taken in the return filed as representing exhaustion of a patent based upon a value thereof of $86,000 as of January 1, 1920, and in failing to allow as a deduction for the year 1925, a reasonable amount of depreciation on a dwelling rented by him to a tenant for that year.

Petitioner is a resident of New York City and has spent many years in experimenting and developing and perfecting various devices and processes. Several patents have been granted to him.

On March 22, 1915, petitioner applied for letters patent upon a type of diaphragm separator designed for use in separating two liquids or chemicals in electrolytic processes. Letters Patent No. 1,291, 253 covering this device and process were granted to petitioner on January 14, 1919.

On April 9, 1915, petitioner granted to the General Filtration Company, Inc., a license under the aforesaid application and any letters patent which might be granted thereon for a minimum royalty of $500 per annum, and on February 16, 1920, granted to the Thatcher Process Company, Inc., a license to manufacture and sell “ anthraquinone ” under Patent No. 1,291,253, and also under four applications for patents recently filed by him and relating to the devices and processes of manufacture of anthraquinone.

The Thatcher Process Company agreed to pay petitioner a royalty of 5 per cent of its total sales, to be not less than $1,250 for each of the first four quarters and not less than $2,500 for each succeeding quarter year for the term of the contract.

For the years from 1917 to 1925, inclusive, petitioner reported royalties received totaling $63,891.84 and on his returns for the years 1922 and 1923 he took deductions for exhaustion of patents based on a valuation thereof of $93,500. For the years 1924, 1925 and 1926 he took similar deductions based on a valuation of $86,000. Such valuations were computed upon a base of probable future earnings from the patents. For the years 1925 and 1926, here involved, respondent has disallowed the deduction taken in the amount of $5,058.82 for each year.

Petitioner attempts to sustain the deduction taken for each year upon the basis of a valuation of $86,000 as of January 1, 1920, in respect to Patent No. 1,291,253. The proof adduced has been wholly upon the question of the value of this patent and we are left in ignorance as to its cost to petitioner.

By section 214 (a) of the Revenue Act of 1926, a taxpayer is granted a reasonable allowance for the exhaustion, wear and tear of property used in trade or business, including a reasonable allowance for obsolescence, and by sections 204 (a) and (c) of that act the basis upon which such allowance is to be computed in respect of any property acquired subsequent to March 1, 1913, is provided to be the cost thereof, except in respect to mines and oil and gas wells, these being specific exceptions in respect to which the depletion is allowable, based under certain conditions upon discovery value.

Petitioner contends that he is entitled to exhaustion of this patent upon the basis of its value as a discovery, but the act in question makes no such allowance in respect to patents, and we must hold that the basis for any depreciation of this asset is the cost thereof to him.

Charles H. Thompson et al., 2 B. T. A. 285; Niagara Searchlight Co., 10 B. T. A. 922; Rome Iron Mills, Inc., 10 B. T. A. 1202; St. Louis Tin & Sheet Metal Working Co., 12 B. T. A. 723; D. O. James Manufacturing Co., 17 B. T. A. 205; H. H. Miller Industries Co., 17 B. T. A. 248.

There is no evidence in the record either of the full cost of this patent to petitioner, or of any item representing such cost, and accordingly in respect to this issue .respondent’s determination must be sustained.

Prior to 1925 petitioner purchased a dwelling in New York City for $38,000. During the year 1925 petitioner and his family were absent in Europe and for that year he rented the dwelling to a tenant, reporting in his return for that year a rental received in the sum of $2,940.43, less repairs of $353.86 and other expenses of $150, or a net profit of $2,436.57. Petitioner took no deduction on his return for depreciation on this dwelling.

Conceding that residential property may be converted into business property by rental (Heiner v. Tindle, 276 U. S. 582), and that depreciation might be allowable when rented, we have no basis opon which to determine the amount thereof. When residential property is converted into business property, it is the fair market value of the property at the time of conversion which represents the cost of the business property. Even conceding for the sake of argument that the rental for one year constituted such a conversion, there is no evidence of its then market value, and thus no evidence of the proper basis upon which depreciation should be allowed.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Murdock concurs in the result only.


author: Smith:

text:
    San Carlos Milling Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39025.
    Promulgated December 11, 1931.

      George E. Gleary, Esq., and George S. Herr, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

Smith:

In so far as material hereto, section 262 of the Revenue Act of 1921 provides:

(a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States—
(1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and
(2) If, in the case of such corporation, 50 per centum or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States; or
⅜ ⅝ ⅜ # ⅜: * *
(b) Notwithstanding the provisions of subdivision (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States.

The petitioner contends that the sugar received by it under its milling contracts was received in payment for services rendered in manufacturing the planters’ cane into sugar, and that the sugar so received constituted income received in a possession of the United States, to the extent of the fair market value of the sugar at the time of its receipt. The respondent contends that the transaction between the planters and the petitioner amounted to a sale of the cane to the petitioner and that the cost of the sugar was the expense of operating its mill; that the petitioner did not realize income in the Philippines upon production of the sugar, but that income was realized only upon sale of the sugar.

On brief, the petitioner argues that the transaction amounted to a bailment, and the respondent argues that it “ amounted to a purchase of cane by petitioner,” or a sale. In Sturm v. Boker, 150 U. S. 312, 329 (cited by both parties) the Supreme Court stated that:

* * * The recognized distinction between bailment and sale is that when the identical article is to be returned in the same or in some altered form, the contract is one of bailment, and the title to the property is not changed. On the other hand, when there is no obligation to return the specific article, and the receiver is at liberty to return another thing of value, he becomes a debtor to make the return, and the title to the property is changed; the transaction Is a sale. * * *

The milling contract provided that the cane was to be manufactured into sugar and 60 per cent of the product (that is, the cane in an altered form) returned to the planter. There is nothing in the contract to show that the petitioner was K at liberty to return another thing of value,” and the record indicates that the planter’s sugar, less the petitioner’s commission, was returned to him; at no time did the petitioner sell for its own account the sugar so produced and pay the planter money instead of returning to him his share of the sugar.

In Sturm v. Boker, supra, and other cases involving the question of bailment or sale, the courts have sought to effectuate the intent of the parties as expressed in their agreements. See Powder Co. v. Burkhardt, 97 U. S. 110; Arnold v. Hatch, 177 U. S. 276; Ludvigh v. American Woolen Co., 231 U. S. 522; In re Taylor, 46 Fed. (2d) 326; In re Renfro-Wadenstein, 47 Fed. (2d) 238.

In Arnold v. Hatch, supra, tbe Supreme Court said:

We do not know that it is necessary to fix an exact definition to the relations between these parties, or to determine whether the law of master and servant, landlord and tenant, or bailor and bailee, governed the transaction. The main object is to ascertain the intent of the parties with respect to the ownership of the property. * ⅜ *
*******
It is very evident * * * that no sale of the * * * property was intended. There was no purchase price agreed upon, no time fixed for the payment. * * *

The milling contracts provided that the petitioner “will charge and accept as full compensation for the services rendered and agreed to be rendered hereunder 40% of the sugar ” and that the planter “ will allow the mill [petitioner], and it may and shall retain, as its share or proportion of the sugar, and as full compensation for its services rendered hereunder * ⅛ * forty per cent. (40%) of all the sugar * * * produced.”

The record supports the intent of the parties, as expressed in the contract, to compensate the petitioner for milling the cane into sugar by allowing the petitioner to retain 40 per cent of the sugar produced. During all of the years with which we are concerned the petitioner and the planters so construed their contracts and acted accordingly. As the petitioner points out on brief, “ It is significant that nowhere in the contracts are the terms sale,’£ purchase,’ selling price ’ or 4 purchase price ’ used, and that many of the provisions are inconsistent with an agreement of sale ” of the cane to the petitioner as contended by the respondent. The provisions for weighing and crushing the planter’s cane, the computation and delivery of the percentage of sugar manufactured from his cane, and the storage of such sugar at the planter’s risk, all negative the idea of a sale of the cane to the petitioner. The plain language of the contracts and the action of the parties show that these were milling contracts for the manufacture of sugar by the petitioner from the planter’s cane and that the petitioner was to have a toll or share of the sugar manufactured as compensation for its services. Such provisions would have been wholly unnecessary had the parties to those contracts contemplated a sale of the cane to the petitioner.

Although we do not consider it necessary to decide the legal relationship between the petitioner and the planters, we believe that the transaction contained elements of bailment and lacked elements of sale. See In re Renfro-Wadenstein, supra. The respondent makes much of the fact that the juices from each planter’s cane were commingled with other juices, and that the sugar produced was in a common mass. Such facts, in some circumstances, might support a sale of tlie raw material or the goods commingled, but where the commingling was by the consent of the owner, as in the instant case, such owner “ becomes the owner as tenant in common of an interest in the mass proportionate to his contribution.” Intermingled Cotton Cases, 92 U. S. 651, 653. See also Williston on Sales, vol. 1, secs. 153 and 154, wherein the commingling of grain in the Elevator Cases is discussed.

The manner in which the planters or their representatives followed the processes through which the petitioner produced the sugar from the planters’ cane, the handling of the manufactured sugar in the petitioner’s warehouse, the issuance of warehouse receipts for the planters’ share of the sugar, and the fact that petitioner always had on hand sufficient sugar to cover outstanding warehouse receipts, show that title to the cane and its produce remained in the planters. By agreement the planters consented to the commingling of the juices from their cane — a necessary incident to the commercial milling of sugar, and further consented to the storage of the manufactured sugar en masse in the petitioner’s warehouse, their ownership of their proportionate share thereof being evidenced by warehouse receipts. As pointed out above, this commingling was not fatal to the planters’ ownership of a proportionate part of the sugar. Thus, the practical interpretation of the agreement by the parties thereto, as evidenced by their actions thereunder, supports the petitioner’s contention that the sugar it received was compensation for its milling services rendered in the Phillippine Islands, a possession of the United States. The petitioner realized income at the time and place the sugar was received to the extent of its fair market value. (Section 213 (a) of the Revenue Act of 1921 and article 33 of Regulations 62.)

The amount of sugar received by the petitioner being stipulated, there remains the question of its fair market value on the several dates when received. There was an established market for 96-degree centrifugal sugar in the Philippine Islands and the record shows that petitioner sold some of its sugar there. We have before us quotations of prices on actual sales of sugar on or about the dates that petitioner received the sugar for its milling services. In the circumstances, we hold that the average quoted price on a given date is the fair market value of the sugar received by the petitioner on or about that date. Cf. Ralph Andrew Applegate, Executor, 10 B. T. A. 705; Western Bank & Trust Co., 19 B. T. A. 401.

Upon the sale of sugar in the United States the petitioner received income from sources within the United States, even though the sugar was manufactured in the Philippine Islands. See Porto Rico Consolidated Fruit Co., 16 B. T. A. 778, and cases there cited. The amount of that income is the gain derived upon the sale, and not the total amount of the sale price received for the sugar. The cost basis of the sugar received as compensation for services rendered in the Philippine Islands and sold within the United States is the fair market value of that sugar at the time received (cf. W. R. Jacques, 5 B. T. A. 56; J. Heninger, 9 B. T. A. 1318; William T. Bivin, 21 B. T. A. 1051), to which should be added the expenses incurred by the petitioner in forwarding the sugar to the United States, since the sales were made upon the basis of a price in the United States.

In order to satisfy the requirements of section 262, the petitioner must show, first, that 80 per cent or more of its gross income for the three-year period immediately preceding the close of the taxable year was derived from sources within a possession of the United States; and, second, that 50 per cent of its gross income for such period was derived from the active conduct of a trade or business within a possession of the United States. See John W. Haussermann, 23 B. T. A. 378. The petitioner actively conducted the trade or business of manufacturing and selling sugar and operating a general merchandise store or commissary in the Philippine Islands, a possession of the United States, during the period prescribed by the statute. The parties have stipulated the figures necessary to a computation of petitioner’s gross income, from which, and in accordance with our holdings above, we make the following summary of the petitioner’s gross income:

Por cent of gross income received from sources within the Philippine Islands'- 85.2
Per cent of gross income received from the active conduct of a trade or business in the Philippine Islands_ 80. 9

The petitioner fully meets the requirements of the statute and is entitled to the benefit of section 262 in computing its income for the taxable year 1923.

The second issue makes it necessary to determine whether petitioner sustained a net loss for the taxable year 1921, a portion of which it seeks to deduct from its net income for the taxable year 1923 under section 204'(b) of the Revenue Act of 1921. A summarized computation of petitioner’s gross income (based on the stipulated figures) for the three-year period immediately preceding the close of the taxable year 19.21, shows that it meets the requirements of section 262 for that taxable year. The computation follows:

Per cent of gross income received from sources within the Philippine Islands_95. 6
Per cent of gross income received from the active conduct of a trade or business in the Philippine Islands_89

As defined in section 262 (a), the petitioner’s gross income for the taxable year 1921 “means only gross income from sources within the United States.” The amount of its gross income for that taxable year from such sources (exclusive of sales of sugar) is $15,461.41. Its net income, if any, for that year is determined in accordance with sections 282, 234 (b), and 217 of the Revenue Act of 1921. From the stipulated facts and figures we find that the petitioner sustained a loss of $695,387.53 upon its sugar sales within the United States and that its expenses incident to its business within the United States amounted to $43,543.63, making total allowable deductions of $738,-931.16 for the taxable year 1921. It is obvious that the petitioner sustained a net loss of $723,469.75 from the operation of its trade or business regularly carried on within the United States in the taxable year 1921 (section 204 (a), Revenue Act of 1921) and that under section 204 (b) the amount of this net loss is deductible from petitioner’s net income for the taxable years 1922 and 1923. Since the sum of petitioner’s gross income from sources within the United States for these years (1922 and 1923) is less than the amount of its net loss for 1921, it is apparent that the petitioner had no taxable net income for the taxable year 1923.

Since we have decided that the petitioner is entitled to the benefit of section 262 and that it sustained a net loss in 1921, a portion of which extinguishes its taxable net income for 1923, it is unnecessary to discuss the third issue.

From the above it is apparent that the petitioner had no tax liability for the taxable year 1923. From the record it appears that for this year an income tax in the amount of $5,628.25 was assessed by the respondent and paid by the petitioner prior to the determination of the asserted deficiency. The petitioner’s claim for the refund of this amount having been rejected by the respondent, the same should now be credited or refunded to the petitioner in accordance with section 284 (e) of the Revenue Act of 1926, as amended by section 507 of the Revenue Act of 1928.

Judgment will be entered of no deficiency for 1983 and of an overpayment in income tax for im of $5,68835.