author: Hill :

text:
    Harold G. Parker and May J. Parker, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90260.
    Promulgated February 10, 1939.

      W. A. Seifert, Esq.. Floyd F. Toomey, Esq., A. G. Woilerstedt,. Esq., and William H. Quealy, Esq., for the petitioners.

      Ralph E. Smith, Esq., and William £?, Ovillen, Esq., for the-respondent.
   OPINION.

Hill :

In determining the deficiency here in controversy respondent taxed all of the gain derived from the individual securities trading account of the petitioner, Harold G. Parker, and disallowed the deduction of any part of the loss sustained in the so-called joint account carried in the names of both petitioners. Respondent’s action was based upon the theory that the joint account constituted a joint venture which, for tax purposes, must be treated as a partnership, and that the deduction by an individual partner of his share of a partnership loss resulting from the sale of noncapital assets is prohibited by section 23 (r) (1) of the Revenue Act of 1932.

In Percy H. Johnston, 34 B. T. A. 276; aff'd., 86 Fed. (2d) 732; certiorari denied, 301 U. S. 683, we held that a partner entitled as such to a share of the profits of the partnership upon its sale of non-capital assets could not, in computing his individual taxable income, reduce such share of profits by the amount of his loss upon the sale of other similar assets owned by himself individually. We held to the same effect in Edward Klauber, 34 B. T. A. 998, and Harry H. Neuberger, 37 B. T. A. 223. In Robert C. Winmill, 35 B. T. A. 804; affirmed on this point, 93 Fed. (2d) 494, the taxpayer, who was a member of a partnership engaged in the stock brokerage business, operated three securities trading accounts as an individual and four accounts jointly with others. We held that the joint accounts there involved constituted joint ventures, and that the taxpayer’s gains from the joint accounts, as well as from the partnership, could not be offset against the loss sustained on his individual accounts.

All parties to this proceeding accept the principles enunciated in the decisions above cited as settled law, but petitioners contend that the so-called joint account hereinabove referred to was in fact not a joint venture but the property of petitioner Harold G. Parker, and that hence he is entitled under the quoted statute to apply the loss sustained in that account against the gains derived in his other individual trading account. Thus, the issue submitted is narrowed to the question of whether or not such joint account constituted a joint venture; if so, the deficiency determined by respondent must be approved; if not, there is no deficiency due.

The question presented involves substantially a state rule of property and, since petitioners reside in the State of New York, in resolving the question we are bound by the decisions of the courts of that state. Tyler v. United States, 281 U. S. 497, 501; Warburton v. White, 176 U. S. 484, 496. However, the rule recognized in New York does not appear to differ materially from that generally recognized in most jurisdictions.

In Rowley’s Modern Law of Partnership, yol. 1, ¶ 160, it is said:

A joint adventure is a commercial enterprise undertaken by several persons jointly. It is of a nature analogous to partnership and governed, in most respects by the same rules of law (citing inter alia Chester v. Dickerson, 54 N. Y. 1; Ross v. Willett, 27 N. Y. S. 785).

In Ross v. Willett, 27 N. Y. S. 785, the Supreme Court of New York said:

A joint adventure is a limited partnership; not limited in a statutory sense as to liability, but as to its scope and duration, and under our law joint adventures and partnerships are governed by the same rules. Hubbell v. Buhler, 43 Hun. 82-84.

The principal distinction between a partnership and a joint venture is that a joint venture relates to a single transaction and a partnership to a general business of some particular kind. Febbel v. Kahn, 51 N. Y. S. 435. There is no real distinction between a joint venture and what is termed a partnership for a single transaction. Garrison v. Bowman (Texas), 183 S. W. 70. See also 33 C. J. 841.

It would seem that the authorities cited clearly establish the principle that the elements generally recognized as essential to constitute a partnership must also be present to create a joint venture, which is said to be nothing more than a partnership limited in scope and duration.

What factors, then, are necessary to constitute a partnership? This question we considered at some length in Thomas M. McIntyre, 87 B. T. A. 812, and there reached the conclusion that notwithstanding the petitioner and his wife had executed a written instrument purporting to form a partnership for the conduct of an accounting business, no bona fide partnership was created by such instrument where the wife made no contribution of capital to the enterprise and did not render any services to it, and no accounting was made to the wife for any distributive share of the net earnings. We pointed out that:

One of the essential elements of a partnership is the contribution by each member of either property or services. See George M. Cohan, 11 B. T. A. 743, 757, and authorities cited. Petitioner’s wife contributed neither.

What are the facts in the instant case? The so-called joint trading account was established and operated with funds contributed entirely by petitioner Harold G. Parker. His wife contributed neither capital nor services to the enterprise; she did not participate in the conduct of the account; there was no understanding that she should share in the profits or losses, and no accounting was made to her therefor. No interest in the cash or securities contained in the account was given to her. She was merely accorded the right to withdraw money from the account, if occasion required, for the same purposes she was permitted to check on the joint bank account, namely, to pay household expenses. In addition, she acquired only the right of survivor-ship in case her husband should predecease her prior to termination of the account. In re Albrecht's Estate, 136 N. Y. 91; 32 N. E. 632; Moskowitz v. Marrow, 251 N. Y. 380; 167 N. E. 506; Wetherow v. Lord, 58 N. Y. S. 778, 782; In re Moran's Estate, 215 N. Y. 649.

In support of his argument that the joint account constituted a joint venture, respondent points to the language used in the two instruments executed by petitioners, which are set out in our findings of fact above. Those instruments obviously were for the protection and benefit of the brokers, and we think are not controlling here. Even if petitioners had entered into a formal contract of partnership, under the facts disclosed in this case it would not have created a bona fide partnership or joint venture, and, if gains instead of a loss had resulted from the account, such income would have been taxable to petitioner Harold G. Parker. Thomas M. McIntyre, supra.

For the reasons indicated, we hold that the so-called joint account was not a joint venture but in fact the individual trading account of petitioner Harold G. Parker, and that he is entitled to deduct the loss sustained in such account from the gains realized in his other account. Respondent’s action is reversed.

Decision will be entered for the petitioners.

       Sec. 1111. (a) (3) The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture or organization.

       Sec. 23. (r) Limitation on Stock Losses.— (1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    The Cleveland Trust Company, Trustee of the Trust Estate Known as Garfield Building Site Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88715.
    Promulgated February 14, 1939.

      David A. Gashill, Esq., and Earl P. Schneider, Esq., for the petitioner.

      Elmer L. Gorbin, Esq., for the respondent.
   OPINION.

Leech:

The Commissioner has determined the deficiency here by taxing the petitioner as an association under sections 13 and 801 of the Revenue Act of 1934. The only question submitted here is whether, upon the facts found, the petitioner was taxable as an association. The term “association” is not defined by statute. Regulations have been promulgated by the respondent, and much has been said by the courts and the Board about the pertinent meaning and application of the term. However, the Supreme Court, in the comparatively recent case of Morrissey v. Commissioner, 296 U. S. 344, laid down the criteria by which we are controlled.

Undoubtedly, though the question is factual, in examining the facts, it is important to note those upon which most emphasis must be placed. Thus, it now seems settled that the purpose for which the trust is set up is probably the most important single fact. This would follow from the discussion of Chief Justice Hughes in the Court’s opinion in the Morrissey case, supra. It was there said:

What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains— which may be regarded as making it analogous to a corporate organization?

And, in determining whether the purpose of a trust is the “carrying on of a business enterprise and sharing its gains,” the Board, on the authority of that case and its companions, has held that the powers granted the trustee in the trust instrument, rather than those activities in which the trust engaged during the particular tax years, shall be considered. Lee H. Marshall Heirs, 39 B. T. A. 101.

So here, the activities of the trust in which it actually engaged during the taxable year 1934 are not controlling. Nor is it decisive that the petitioner has not yet, in any year, actually carried on activities which would constitute it a business enterprise, although it may be doubted that the activities in which this trust actually engaged after the tax year did not characterize it so. The dominating fact here is that the trust, under the instrument creating it, had the power not only to collect and distribute the rent from the leased premises, but could also lease or dispose of these premises. And those powers were not merely incidental to the conservation of the trust property, as in Myers v. Commissioner, 89 Fed. (2d) 86, where the property was trusteed for the purpose of preserving it intact for a definite period to insure the payment of an obligation of the creators of the trust. In this case the converse is true. Here the property was to be conserved for the purpose of leasing and selling it for profit. Its conservation was incidental to the primary purpose of leasing and sale. The lease was renewable in perpetuity. The trust was, likewise, potentially perpetual. It was to terminate, only, upon the sale of the premises and the distribution of the net proceeds therefrom.

Although little financial risk was involved by investment in these certificates of beneficial ownership, it is nevertheless true that no repayment of nor return on that investment was obligatory at all events. Nor was the amount of any repayment or return limited except by the net rentals and net proceeds from the sale of property.

The reason the Cleveland Trust Co. created this trust was for the advantageous disposition of the banking premises for which it no longer had use. But the conclusion seems just as inescapable here that it was created with the powers to lease and sell for the purpose of affording investors therein a medium by which to carry on the business of leasing and selling such property and sharing in the profits of that business. The fact that its operations were limited to the original trust property does not change the picture. Swanson v. Commissioner, supra. We think that the petitioner was created and maintained as a medium for carrying on a business enterprise and sharing its gains. Title Insurance & Trust Co. v. Commissioner, 100 Fed. (2d) 482.

In addition to tins purpose of the trust, what are some of its other salient features bearing upon the question at issue? The title to the property embarked in this business enterprise was held by a trustee, as a continuing entity, during the existence of the trust which, by its terms, was perpetual; there was centralized management by the trustee, representing the beneficiaries; the death of beneficiaries neither terminated nor interrupted the continuity of the enterprise; means were provided for the transfer of beneficial interests and for the introduction of a large number of participants without affecting that continuity; and the personal liability of the participants was, at least partially, limited to the property embarked in the undertaking.

The determination of the respondent is affirmed.

Decision will he entered for the respondent.

       SEC. 13. TAX ON CORPORATIONS.
      (a) Rate op Tax. — There shall be levied, collected, and paid for each taxable year upon the net income of every corporation, a tax of 13% per centum of the amount of the net income in excess of the credit against net income provided in section 26.
      SEC. 801. DEFINITIONS.
      (a) When used in this Act—
      *******
      (2) The term “corporation” includes associations, joint-stock companies, and insurance companies.

       See also Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Helvering v. Combs, 296 U. S. 365; and Swanson v. Commissioner, 296 U. S. 362.


author: Tyson:

text:
    James L. Knight, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clara I. Knight, Petitioner, v. Commissioner of Internal Revenue, Respondent. John S. Knight, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91357, 91358, 91359.
    Promulgated February 14, 1939.

      Ralph S. Fowler, Esq., for the petitioners.

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

Tyson:

Petitioners contend that, while in form the 3,306 shares of Beacon stock owned by the decedent at the date of his death were transferred first to the heirs through distribution of decedent’s estate, and thereafter by the heirs to the trustee, in substance the creation of the trust on February 12, 1935, was a valid substitute for a long term administration of the decedent’s estate and the trustee became a de facto administrator of the estate; that consequently the decedent’s estate had not been settled and the income in question is taxable to the trustee under section 161 of the Eevenue Act of 1934; that the trust agreement gave the petitioners no present right in or to the corpus of the trust or the income derived therefrom until the entire indebtedness to Beacon had been fully liquidated; that sections 166 and 167 of the Revenue Act of 1934 are not applicable because the trust was irrevocable and the grantors derived no direct benefit from the income therefrom; and that there is no section of the 1934 Act which places upon the petitioners any tax liability for the income here in question.

The numerous cases cited in the petitioners’ brief and the excerpts quoted therefrom do not sustain the petitioners’ contentions. The respondent filed no brief and has cited no authorities.

The facts in the case at bar clearly establish that to avoid a sale of the 3,806 shares of Beacon stock and to close the decedent’s estate as quickly as possible, the heirs, in about June 1934, personally assumed the entire indebtedness as set out in the findings of fact to Beacon; that the administrator of the decedent’s estate was discharged on July 11, 1934, after approval of his final accounting; that the assets of decedent’s estate were distributed in kind; and that through such distribution and on August 21, 1934, new certificates were issued to each of the petitioners for one-third of the decedent’s 3,306 shares of Beacon stock. In substance as well as in form, each petitioner thereupon became the individual owner of such shares, which were then pledged by him as collateral security for his personal legal liability to Beacon. If such individual ownership had continued throughout the taxable year 1935 without the creation of the trust here involved, there would be no grounds for a contention that the dividends on such stock did not constitute income realized by petitioners.

In our opinion, the petitioners’ declaration of trust of February 12, 1935, made no substantive change in their right to the benefit of the income derived from the 3,306 shares of Beacon stock transferred by them, as the grantors of the trust, to the trustee to whom a new certificate for an identical number of like shares was issued on July 15, 1935. The trustee was directed in the declaration of trust to collect the dividends payable on such stock, to pay taxes and expenses, if any, and then “as it may be mutually a/nd umammously agreed by a/nd between said heirs, (the grantors in the trust and the petitioners herein) to pay and/or apply any part or all of the balance remaining on the indebtedness of said heirs to The Beacon Journal Company until said indebtedness is fully paid and discharged”, and thereafter, during the continuance of the trust, to pay the remaining balance in equal shares of one-third each to the petitioners or their legal representatives. (Italics supplied.) In Helvering v. Blumenthal, 296 U. S. 552, the Supreme Court, in reversing fer curiam, 76 Fed. (2d) 507, held that the grantor of a trust was taxable upon the trust income used under the terms of the trust indenture to liquidate the grantor’s indebtedness to a bank. That case was decided upon authority of Douglas v. Willcuts, 296 U. S. 1, and Helvering v. Schweitzer, 296 U. S. 551. In the Willcuts case the grantor of a trust was held taxable upon the trust income used to pay alimony to the grantor’s divorced wife because such payment was in discharge of a legal obligation of the grantor and the trust income stood substantially on the same footing as though the grantor had received it personally and had been required by a decree to make the payment directly to his divorced wife.

In its opinion the Conrt said:

We do not regard the provisions of the statutes as to the taxation of trusts, fiduciaries and beneficiaries (Revenue Act 1926, §§ 2, 219, 26 USOA §§ 1696 and note, 161-167 note; Revenue Act 1928, §§ 161, 162, 26 USOA §§ 161, 162) as intended to apply to cases where the income of the trust would otherwise remain, by virtue of the nature and purpose of the trust, attributable to the creator of the trust and accordingly taxable to him. These provisions have appropriate reference to cases where the income of the trust is no longer to be regarded as that of the settlor, and we find no warrant for a construction which would preclude the laying of the tax against the one who through the discharge of his obligation enjoys the benefit of the income as though he had personally received it.
The decision in Helvering v. Butterworth, 290 U. S. 365, 54 S. Ct. 221, 222, 78 L. Ed. 365, is not opposed. -There the trust was testamentary and the only question was with respect to the liability for the tax as between the trustee and the beneficiary. The Court observed that “the evident general purpose of the statute was to tax in some way the whole income of all trust estates.” The decision has no application to a case where the income is still taxable to the grantor. Nor are the provisions of the statutes (Revenue Act 1926, § 219 (h), 26 USOA § 167 note; Revenue Act 1928, § 167, 26 USOA § 167 note) defining instances in which the grantor remains taxable, as in case of certain reservations for his benefit or provisions for the payment of premiums upon policies of insurance on his life, to be regarded as excluding instances not specified, where in contemplation of law the income remains in substance that of the grantor. No such exclusion is expressed and we see no ground for implying it.

The sections of the prior acts referred to in the above quotation correspond to sections 161, 166, and 167 of the Revenue Act of 1934, supra. Upon authority of the above cited cases, we hold that the trust income here in question used in discharging the legal obligations to Beacon of each of the petitioners, the grantors of such trust, is taxable to each of the petitioners to the same extent and as though they each had personally received such income during the taxable year. See also, Helvering v. Schweitzer, supra, reversing 75 Fed. (2d) 702; Helvering v. Stokes, 296 U. S. 551, reversing 79 Fed. (2d) 256; and Helvering v. Coxey, 297 U. S. 694, reversing 79 Fed. (2d) 661, involving the use of trust incomes to satisfy legal obligations of the grantors of the trusts.

The instant proceedings have been presented upon the respondent’s theory that all of the net income of the trust in the amount of $38,100.52 should be included in the respective individual incomes of the petitioners in the proportion of one-third to each, and upon petitioners’ theory that no part thereof should be so included. Consequently, upon the stipulation of facts and for the purposes of this opinion we must assume that all of the dividend income received by the trustee during 1935 (which is not clearly established in contradistinction to such dividends as may have been received by petitioners during that year as individuals) was used in partially liquidating the petitioners’ legal obligation to the Beacon Journal Co.

However, if, to the contrary, only a portion of the dividend income received by the trustee was used in partial liquidation of the petitioners’ obligation to Beacon, “as mutually and unanimously agreed to by and between said heirs”, and the remaining balance of such income was distributed to the grantors or accumulated for future distribution to them, then, clearly, such income would be taxable to the petitioners within the express language of section 167 (a) (1) and (2), supra, since all such distributions or accumulations would have been made within the discretion of the grantors.

The determination of the respondent is approved.

Decision will be entered for the respondent.

       SEC. 161. IMPOSITION OB' TAX.
      (a) Application of Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any hind of property held in trust, including—
      (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
      (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
      (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
      (b) Computations and Paxmbnt. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). For return made by beneficiary, see section 142.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may bo, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question”.


author: SteRnhagen :

text:
    Bostonian National Shoe Stores, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. H. A. Meyer Shoe Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Bostonian Shoe Sales Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91259, 91260, 91261.
    Promulgated February 14, 1939.

      Joseph K. Moyer, Esq., for the petitioners.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

SteRnhagen :

The Commissioner in determining the 1934 deficiencies of the petitioners reduced the January 1, 1934, opening inventory of each by a proportionate part of $47,261.71. The following statement was made in the deficiency notice to the Bostonian Shoe Stores, Inc.:

Article 113 (a) (ll)-l, Regulations 86, provides in part as follows:
—“The basis of property after a consolidated return period shall be the same as immediately prior to the close of such period. This rule is applicable, for instance, to the making of separate returns by the members of an affiliated group of corporations for taxable years beginning after December 31, 1933, due to the withdrawal under the law of the privilege of making consolidated returns. For example, if a corporation has been a member of an affiliated group which has made a consolidated return on the calendar year basis for the taxable year 1933 and is required to make a separate return for the taxable year 1934 and succeeding taxable years, the value of the opening inventory to be used in computing such corporation’s net income for the taxable year 1934 is the proper value of the closing inventory used in computing the consolidated net income for the preceding taxable year.”
In accordance with the above, since your company was a member of the consolidated group, consisting of Commonwealth Shoe & Leather Company (Parent), H. A. Meyer Shoe Company, Bostonian Shoe Sales Corporation and your company, which filed a consolidated return for the taxable year 1933, and since there was an adjustment made in that year for intercompany profit in inventories in the amount of $47,261.71, representing closing inventories for the year 1933; an adjustment is made herein on the same basis to your opening inventory for the taxable year for your proportionable part of the above amount, computed as follows:
Closing inventories for the year ended December 31, 1933:
(a) Bostonian National Shoe Stores, Inc_$225, 860.08
(b) Bostonian Shoe Sales Corporation_ 51,224.46
(c) H. A. Meyer Shoe Company- 17,398.49
Total_$294, 483.03
Intercompany profit deducted and allowed, 1933-Amount of intercompany profit applicable to eacb computed as follows: $47,261.71

In assailing this determination the petitioners contend that their opening inventories should properly reflect cost and that true cost is the amount paid to the seller regardless of the fact that for the purposes of the consolidated return of the previous year the elimination of intercompany profit of the affiliated seller has operated correla-tively to recognize an equally reduced cost to the affiliated buyer.

In our opinion, the opening inventory of each petitioner is properly to be adjusted to accord with the closing inventory of the affiliated group appearing on the return of the preceding year. This is what the statute seems to us clearly to contemplate and the regulations clearly and properly to provide. This legislative purpose we should be careful not to defeat by an attenuated exception involving the interrelation of the petitioners’ inventories and their affiliation. Both features are peculiarly subservient to the administrative control of the Commissioner because of their technical nature, and Congress has as to both bestowed upon the Commissioner extraordinary regulatory power to prescribe the terms of conformity to the statutory intent. Securities Allied Corporation, 36 B. T. A. 168, 174; aff'd., 95 Fed. (2d) 384; certiorari denied, 305 U. S. 617. The report of the Senate Finance Committee preceding the 1928 Act supports the Commissioner as well liere under the 1934 Act, for it is no less important that the basis of inventories should be carried along when it has served to exclude from tax a profit which would otherwise have been taxable.

The power of Congress is no longer debatable, Taft v. Bowers, 278 U. S. 470. The exercise of the power to project the basis from one era into another is found in section 113 and is specifically applied in a wide variety of cases. In subdivision (1) it is expressly applied to inventories, and in subdivision (11) it is applied to affiliated corporations and delegated to the Commissioner to administer by regulation. The Commissioner has expressly covered the subject in Regulations 86, article 113 (a) (11)-1, which appears in the notice of deficiency and is already quoted.

There is, in view of this clear history and purpose and in view also of the infinite variety of specific situations to be covered, no justification for meticulous application in accordance with a restrictive definition of each word found in the regulation. Thus the term “proper value” of the earlier closing inventory may not afford an argument for a refined meaning to defeat the general purport of the authorized regulation.

Many cases are cited by both counsel, but most of them have but a remote significance and serve more to confuse than to illumine. We refrain from discussing them because of the danger of clouding the general clear import of the statute. None we think is irreconcilable with the respondent’s determination.

The intercompany profit of $47,261.71 eliminated in the consolidated closing inventory of 1933 was comprised of 1933 profit of $14,929.27 and prior years’ profit of $32,332.44. The petitioners urge that only the $14,929.27 may be added to their 1934 opening inventories. This view must be rejected. The intercompany profit which served to reduce the closing inventory of 1933 was the entire amount of both the current year and the earlier years. Hence its continued omission from the 1934 opening inventories is in conformity with the statutory purpose.

In apportioning the $47,261.71 reduction, the Commissioner used the total inventory shown in each petitioner’s return as the factor of apportionment. The record contains evidence of the part of each petitioner’s inventory representing intercompany purchases from which the eliminated intercompany profits were derived. Such figures appear in the findings. In our opinion they constitute the proper factors for apportionment of the total $47,261.71, and upon that basis the correct inventory of each petitioner is set forth in the final finding of fact.

Decision will be entered wider Bule 50.

       SEC. 1X3 (a) (12). BASIS OF PROPERTY ACQUIRED DURING AFFILIATION.
      There is no provision in existing law prescribing rules for the determination of the basis after the period of affiliation of property acquired by a corporation from another corporation with which it is affiliated, during the period of affiliation. As a general rule, gain or loss has not been recognized on such intercompany transactions. It is highly important that in such cases the basis in the hands of the corporation after the affiliation should be the same as it would be if still in the hands of the corporation by which the property was brought into the affiliated group, in accordance with the present interpretation of the Treasury, except in those cases where a proper adjustment of the basis should be made. The transactions, however, are so varied and complex that it is impossible by statute to prescribe a definite rule of general application and consequently it is necessary to delegate to the commissioner power to prescribe regulations legislative in character under which the basis will be determined for the computation of gain or loss, and depletion and depreciation, laying down in the section the general standard to guide the commissioner that intercompany transactions should be disregarded if gain or loss was not recognized. The basis thus determined will be applicable in determining the basis in the case of inventories. The term ‘‘period of affiliation” is defined to include the period during which the filing of consolidated returns was mandatory, as well as the period during which under the 1921 and subsequent acts the corporations were affiliated and filed consolidated returns. It is provided by a committee amendment that in the case of property acquired during 1929 or subsequent taxable years during a period of affiliation for which a consolidated return is made, the basis shall be determined under tha laadslative regulations prescribed by the commissioner under section 141(b).


author: Sternhagen:

text:
    Portland Co-operative Labor Temple Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89276, 93304.
    Promulgated February 15, 1939.

      Ivan F. Phipps, Esq., for the petitioner.

      John EL. Pigg, Esq., for the respondent.
   OPINION.

Sternhagen:

The Revenue Act of 1984, like every revenue act since 1909, carries the following provision:

SEO. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.

Tie following organizations shall be exempt from taxation under this title—
(1) Labor, agricultural, or horticultural organizations.

The petitioner claims to be a “labor * * * organization” within the meaning of the statute.

The statutory term has never been defined and has never been put in issue. It was applied by the Solicitor of Internal Revenue in the latter part of 1924 to exempt a corporation engaged in publishing a labor paper the expenses of which were borne by “labor organizations.” S. M. 2558, III-2 C. B. 207. The rationale was that the “labor organizations” bearing the expense could have printed and distributed the paper themselves without impairing their exemption and hence the exemption was available to their corporate instrument which did no more.

The evidence here shows a similar situation. The labor unions and councils owned all petitioner’s capital stock, and its building was wholly devoted to their purposes and uses. That these unions and councils were themselves “labor organizations” intended to be covered by the exemption does not admit of any doubt; that they might themselves have owned and operated the labor temple building without forfeiting their exemptions is also plain, and hence there is reason to treat their separate corporate agency as an exempt “labor organization”, as long at least as it confines its circumstances and activities within such limits. The incidental use of the facilities of the building by casual guests to the negligible extent shown by the evidence does not militate against this opinion. Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578.

The term “labor * * * organization” is not easy to define either connotatively or denotatively. The word “organization” appears in application to three classes — labor, agricultural and horticultural, and is therefore not a technical word nor is it part of “labor organization” as a term of art. It has no such specific limitations as would a statutory definition like that appearing in section 2, subdivision (5), of the National Labor Relations Act, 49 Stat. 449. It is freely used in common speech. See American Steel Foundries v. Tri-City Central Trades Council, 257 U. S. 184, 195, 208; National Labor Relations Board v. Jones & Laughlin Steel Corporation, 301 U. S. 1; National Labor Relations Board v. Fruehauf Trailer Co., 301 U. S. 49; National Labor Relations Board v. Pennsylvania Greyhound Lines, Inc., 303 U. S. 261. The term has been used continuously for 30 years to bestow tax exemption, and it never has been found desirable by Congress to qualify it or by the administrator to give it a narrowing interpretation. There is no occasion to attempt a definition now. It bespeaks a liberal construction to embrace the common acceptation of the term, including labor unions and councils and the groups which are ordinarily organized to protect and promote the interests of labor. The petitioner, we think, was within such a category during the years 1934 and 1935, and was therefore exempt from tax.

Decision will he entered for the petitioner.


author: ARUndell:

text:
    Alaska Salmon Co. (Successor to Northern Fisheries, Inc.), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94528.
    Promulgated February 16, 1939.

      Chafee E. Hall, Esq., for the petitioner.

      William G. Ruymamn, Esq., for the respondent.
   OPINION.

ARUndell:

This proceeding is before us on the motion of counsel for the respondent to dismiss for want of jurisdiction on the ground that the petition is not filed by the taxpayer to whom the notice of deficiency was mailed or by the taxpayer against whom the Commissioner has determined a deficiency.

The notice of deficiency upon which this proceeding is based is dated April 9, 1938, and addressed to Northern Fisheries, Inc., 141 Clay Street, San Francisco, California. The petition bears the caption “Alaska Salmon Co. (Successor to Northern Fisheries, Inc.), Petitioner.” According to the facts alleged in the petition, Northern Fisheries, Inc., was incorporated in 1917 under the laws of the State of Washington. On December 31,1937, Northern Fisheries, Inc., and three California corporations merged into a single corporation, the Bristol Bay Packing Co., pursuant to the laws of the States of California and Washington. On the same date the name of Bristol Bay Packing Co. was changed to Alaska Salmon Co. The petition is verified by C. E. Cocks, president of the Alaska Salmon Co.

The petitioner opposes the motion to dismiss, citing among other cases, Bowman Hotel Corporation, 24 B. T. A. 1193, and Trahern Pump Co., 27 B. T. A. 363. In each of the cited eases the corporation filing the petition with the Board was a consolidated corporate successor to the taxpayer organized under state statutes which made the consolidated corporation primarily liable for the debts of its constituent corporations. We said in the Bowman Hotel case that under the New York statute there involved the consolidated successor “is obligated and birthmarked by statute with all primary liability of its components — an obligation which is not measured or proven by its obligation as transferee of property under section 280 of the Bevenue Act of 1926, but is determined by the primary debt or obligation of the component.” In consequence of the direct liability imposed by state statute upon the consolidated successor we held that the tax liabilities of the constituent corporate taxpayers “became the tax liabilities of” the consolidated corporation and that a petition filed by the consolidated corporation was within our jurisdiction as a petition filed by a taxpayer. Other cases arising under the New York statutes, in which we reached the same conclusion, are Oswego Falls Corporation, 26 B. T. A. 60; Skaneateles Paper Co., 29 B. T. A. 150. Similar facts and a similar consolidation statute of Illinois were before us in the Trahern Pump Co. case. We held:

Since the Trahern Corporation [to which notice of deficiency was addressed] was not simply dissolved, but was, with others, consolidated under the Illinois consolidation statute to form the Roper Corporation [which filed the petition for redetermination], the Board has jurisdiction of a proceeding instituted in the name of either, and a fortiori one instituted in the name of both * * *.

In this case the corporation to which the notice of deficiency was addressed, Northern Fisheries, Inc., was a Washington corporation. The successor corporation, into which the Washington corporation merged, and which filed the petition for redetermination, is a California corporation, and, therefore, a corporation foreign to the State of Washington.

The State of Washington had adopted as a part of its statutory law the Uniform Business Corporation Act. Washington Laws 1933, ch. 185; 9 U. L. A. (1938 Supp. 29). The provisions of this act, as contained in section 3803 of Remington's Revised Statutes of Washington, provide among other things, that domestic corporations may be merged into a foreign corporation if the laws of the foreign government authorize such merger or consolidation. Sec. 3803-42. The effect of a merger is stated in section 3803-46 as follows:

Upon the consummation of the merger or consolidation * * *, the effect of such merger or consolidation shall be:
1. That the several parties to the joint agreement shall be one corporation, which shall be
a. In the ease of merger, that one of the constituent corporations into which it has been agreed the others shall be merged and which shall survive the merger for that purpose,
* * * # * * *
4. All the property, real, personal and mixed, of each of the constituent corporations, and all debts due on whatever account to any of them, including subscriptions for shares and other ehoses in action belonging to any of them shall be taken and be deemed to be transferred to and invested in such surviving or new corporation, as the case may be, without further act or deed;
5. The Surviving or new corporation shall be responsible for all the liabilities and obligations of each of the corporations merged or consolidated, in the same manner as if such surviving or new corporation had itself incurred such liabilities or obligations; but the liabilities of such constituent corporations or of their shareholders, directors or officers shall not be affected, nor shall the rights of the creditors thereof, or of any persons dealing with such corporations be impaired by such merger or consolidation, and any claim existing or action or proceeding pending by or against any of such constituent corporations may be prosecuted to judgment as if such merger or consolidation had not taken place, or the surviving or new corporation may be proceeded against or substituted in its place.

The laws of California, § 361b, Civil Code (Deering Supp. 1929), provide:

Any two or more corporations may be: (a) merged into one of such constituent corporations, which is here designated as the surviving corporation * * *. * * * * ❖ * *
7. Upon the merger or consolidation, as provided herein, the separate existence of the constituent corporations shall cease, except that of the surviving corporation in case of merger, and the consolidated or surviving corporation shall succeed, without other transfer, to all the rights and property of each of the constituent corporations, and shall be subject to all the debts, and liabilities of each, in the same manner as if the surviving or consolidated corporation had itself incurred them.

The above statutes of the States of Washington and California, as we read them, provide that in a case like this, where a Washington corporation merges into a California corporation, the effect is that the surviving California corporation becomes primarily liable for the debts of the Washington corporation. The effect is thus exactly like that under the consolidation statutes of New York considered in the Bowman Hotel case and under the Illinois statutes in the Trahern Pump Co. case. The tax liabilities of the Washington corporation became the liabilities of the California corporation, and a petition filed by the California corporation for redetermination of a deficiency determined against the Washington corporation is within our jurisdiction.

Cases like Carnation Milk Products Co., 20 B. T. A. 627, are not in point. They do not involve mergers, nor were they shown to be governed by statutes fixing upon a successor the consequences shown here to follow a merger.

We accordingly hold that the petition is within our jurisdiction and that the respondent’s motion to dismiss should be denied.

Order denying motion to dismiss will be entered.


author: Van Fossan:

text:
    Harry M. Runkle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83949.
    Promulgated February 17, 1939.

      F. J. 'Wright, Esg.,: for the petitioner. •

      Charles P. Reilly, Esq., for the respondent.
   OPINION.

Van Fossan:

The primary question to be determined is the cost basis of the new company class A stock which petitioner transferred to Frantz on the cancellation of his note for $100,000 held by Frantz. This stock had been acquired in the statutory reorganization whereby the International Derrick & Equipment Co., the old company, merged with the Stacey Engineering Co., forming the International-Stacey Corporation, the new company.

The Commissioner, in the notice of deficiency, based the deficiency on the application of the “first in, first out” rule. Before the hearing in the present case he changed his ground, and seeks to justify a deficiency by applying the “average cost” rule, he now contending that the basis of gain or loss on stock acquired under a nontaxable reorganization is the total cost of the old shares divided by the total number of new shares.

As authority to substantiate his contention respondent cites Christian W. Von Cunten, 28 B. T. A. 702; aff'd., 76 Fed. (2d) 670 (C. C. A., 6th Cir.); Helvering v. Stifel, 75 Fed. (2d) 583, affirming memorandum opinion of the Board; Olive Hume Oliver, 30 B. T. A. 1381; aff'd., 78 Fed. (2d) 561 (C. C. A., 3d Cir.); Commissioner v. Bolender, 82 Fed. (2d) 591, affirming memorandum^opinion of the Board; P. L. Wheeler, 32 B. T. A. 917; Lewis K. Walker, 35 B. T. A. 640; Jacob Epstein, 36 B. T. A. 109.

To meet this line of authority petitioner attempts to distinguish the present action by reason of the fact, so he asserts, that the shares transferred to Frantz were actually identified with specific shares given in exchange on the reorganization. We are unable to agree. Despite the elaborate procedure pursued by petitioner in exchanging his stock in the old company for that in the new company, further complicated by petitioner’s relationship as a debtor to the bank and to Frantz, we can not find that there was proper identification of shares and consequently believe the rule of the Von Gunten and other cases to the same effect applies. The farthest we can go on the record is to find that in exchange for 4,900 shares of preferred and 700 shares of common petitioner received 31,500 shares of class A stock.

The rule of the cited cases is based on the concept that, if identification of shares is not definitely established, stock acquired in a reorganization is acquired in a single transaction and for a single consideration. It was said in Helvering v. Stifel, supra, that “there is no practicable way of determining the cost of the shares received in exchange” other than that adopted by the Board in the Von Gwnten case. In the Stifel case stock of two corporations acquired at different times was exchanged for stock in the new corporation at varying ratios. Here we have two classes of stock of one corporation exchanged for two classes of stock in the new corporation. Identification of shares exchanged was not sufficiently proved.

There is nothing in the records of the transfer agent to show that any particular old shares were identifiable with particular new shares, and the instructions issued by petitioner as president of the new company contemplated no such procedure. Neither petitioner’s secretary nor the representative of the transfer agent, who handled the actual exchanges and might have testified to what actually occurred, appeared as a witness.

We are of the opinion and hold that the correct cost basis for the class A shares sold by petitioner in the taxable year is to be found by dividing the total cost of the old shares, both preferred and common, $840,000, by 153,500, the total number of new shares of class A stock, it being conceded by respondent that the class B shares had no value when received.

There remains for consideration the question of how much of the gain is to be taxed at capital rates and how much at ordinary rates, the 6,000 common shares having been held by petitioner more than two years and the 4,900 preferred shares less than two years.

There is no specific statutory provision governing the question, nor has the Commissioner promulgated any appropriate regulation. Likewise, there is no decision of the Board in point, the matter being referred to but not ruled on in Jacob Epstein, supra.

The petitioner does not discuss the question in his brief. Bespond-ent, however, suggests that “since under section 113 (a) (6) of the Revenue Act of 1928, the basis of the class A shares received on the exchange is the same as the collective basis of the shares exchanged, it follows, under the provisions of section 101 (c) (8) of the statute and subparagraph (A) thereunder, that the class A shares sold were in part capital assets and in part non-capital assets.” He further suggests that in this situation it is not logical to tax the gain entirely as capital gain or entirely as ordinary gain and advances as a possible solution the following:

The basis of the old common shares was §350,000.00, and the basis of the old preferred shares was $490,000.00, a total basis for the two classes of shares of
$840,000.00. The fraction or A measures the extent to which the
Class A shares are capital assets, and the fraction 490,000 or A measures 840,000
the extent to which the Class A shares are non-capital assets. The profit on the sale should be taxed in the same proportion, A as capital gain and A as ordinary income.

The above suggested answer has the merit of simplicity and would seem to be both reasonable and equitable. No better solution occurs to us. It is, therefore, held that the tax, if any be due on the disposition of the 10,000 shares of class A stock, should be computed in accordance with the above formula.

Reviewed by the Board.

Decision will be entered wider Rule 50.


text:
    Fred S. Markham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91300.
    Promulgated February 21, 1939.

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

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Van Fossan:

Alternative contentions are urged by petitioner to sustain the deduction in controversy. The first position is that the $11,961.17 which he expended in the taxable year was expended in protecting his income-producing capital from various threats made by Sutton and was deductible as an ordinary and necessary business expense. The second position is that a portion of the $11,981.17, i. e., $4,581.61, is deductible as a contribution for the use of the United States. It is our opinion that petitioner can not prevail on either premise.

Respondent apparently concedes that petitioner, in managing his property and investments, was engaged in business. With this we agree. See Kales v. Commissioner, 101 Fed. (2d) 35 (C. C. A., 6th Cir.); Foss v. Commissioner, 75 Fed. (2d) 326 (C. C. A., 1st Cir.); and Cornelia W. Roebling, 37 B. T. A. 82. The statute, however, requires that an expenditure to be deductible must be an ordinary and necessary business expense, and specifically provides that no deduction shall be allowed in respect of personal or family-expenses.

As we view it, the expenditure of the $11,961.17 was primarily if not purely a personal expense connected with the well being and protection of petitioner’s family.

Counsel’s argument that the extortion letter and the threat of suit were attacks on the capital of petitioner and that the expenses were entailed in defense thereof, we believe to be without substantial merit. Petitioner’s testimony that “of course the danger to my family was part of it [his reason for employing Helpling] and I wanted to put myself on record by carrying this case to a conclusion to warn other people away from attacking either my family or my capital”, is almost, if not quite, conclusive. To be deductible the expense must be “directly connected with” or “proximately resulting from the business.” Kornhauser v. United States, 276 U. S. 145. See cases cited below. In the case at bar the expenditure, made because of the extortion letter, was directly connected with and proximately resulted from personal or family considerations rather than any business in which petitioner was engaged.

Were we to hold, contrary to the above conclusion, that the expenditures were made primarily by reason of the fear of an impending suit by Sutton for damages for false arrest, the answer would be the same. Applying petitioner’s reasoning, expenses incurred in prosecuting or defending almost any civil action would be deductible, however remote from taxpayer’s business. Such is not the law.

An argument similar to that made here was presented in David G. Joyce, 3 B. T. A. 393. It was there said:

* * * It is argued on behalf of the taxpayer that be is engaged in the business of managing, investing, and preserving bis estate, and that the attack, or threatened attack, by his wife on the postnuptial agreement was an attack upon or a claim against his property. It is not asserted that the expense of every litigation which might result in diminishing the taxpayer’s estate would be a business expense. The contention is that the agreement related to his property, and, since the property was the “subject matter” of his business, the agreement had the effect of giving him greater freedom in managing his “business property”; therefore, the expense of defending and maintaining this agreement is a business expense. This reasoning is ingenious, but we do not think it is sound. We pass the question of whether this taxpayer was carrying on any trade or business, because its answer is unnecessary to a decision of the case. We think the expenditure, in any event, was not a business expense within the meaning of the statute.
The effect of the agreement may have been all that the taxpayer claims, but that does not determine the character of the agreement or of the claims for its modification. Also, his purpose in entering into the agreement, or in resisting the attacks upon it, is not determinative of the nature of the expense. Any kind of liability to which he might have been subjected, however remote from the carrying on of his business, would have the same results to his estate. The taxpayer’s argument ignores the genesis of the rights which he attempted to settle and limit by the postnuptial agreement. Whatever rights the wife had arose out of the marriage relationship, and her claims subsequent to the post-nuptial agreement were certainly of the same origin. It is this fact which must determine the nature of the expense of opposing or adjusting those claims. To say that it was an ordinary and necessary expense incurred “in carrying on any trade or business” would be to broaden the scope of this language beyond any reasonable interpretation of it.
It is hardly necessary to allude to the fact that marriage is a personal relationship, except for the purpose of pointing out that the legal rights and obligations annexed to the relationship are also personal, and the expenses connected therewith would, we think, come within the classification of personal or family expenses. The Revenue Act expressly provides that personal and family expenses may not be deducted from gross income.

The parallelism between the arguments urged in that case and those urged in the present one is striking, and here, as there, our conclusion is that the sum involved is not deductible as an ordinary and necessary business expense. Incidentally, it may be observed that, assuming the expense was deductible in part as a business expense, in defense of his capital, there is absolutely no way on the record of determining such an amount.

We have already indicated that our opinion is that petitioner’s alternative contention relative to the deductibility of the allowable portion of the sum expended as a contribution for the use of the United States is without merit.

With reference to this it should first be noted that the provision of the statute allowing for the deduction of “charitable and other contributions” states that the contribution or gift must be “for exclusively public purposes.” The present case does not meet this requirement. Petitioner was not motivated by a philanthropic impulse nor did he intend to make a contribution to the United States. He was seeking to bring to account a person he thought to be responsible for writing an extortion letter threatening harm to his children. In addition, petitioner was in a position where he felt he had to substantiate his accusations or be open to a suit by Sutton for false arrest. These considerations were peculiarly personal to taxpayer.

Although it may be said that the United States was benefited in some degree by the expenditure on the part of petitioner, this benefit is not such as to bring the payments within the contemplation of the statutory provision. The mere fact that an act or expenditure on the part of the taxpayer indirectly, and in some unascertainable amount, may inure to the benefit of the Government does not entitle the taxpayer to a deduction therefor.

No useful purpose would be served to review here the few cases pertaining to this type of a claim for deduction. It is sufficient to say that the case at bar presents an obviously different situation from the donation of a dam and park to a political subdivision of a state, or similar direct donations.

We, therefore, conclude that petitioner is not entitled to a deduction on account of the expenditures in question either as a business expense or as a contribution for the use of the United States.

Decision, toill 1)6 entered for the respondent.

       Sec. 23 (a), Revenue Act of 1934.

       Sec. 24 (a), id.

       Cases wherein the expense was held to; he “directly connected with” or “proximately resulting from” the business: Kornhauser v. United States, 276 U. S. 145; Commissioner v. People’s Pittsburgh Trust Co., 60 Fed. (2d) 187 (C. C. A., 3d Cir.), affirming 21 B. T. A. 588; Commissioner v. Continental Screen Co., 58 Fed. (2d) 625, affirming 19 B. T. A. 1095; Hal Price Headley, 37 B. T. A. 738; Citron-Byer Co., 21 B. T. A. 308.
      Cases where action was purely personal and not directly connected with taxpayer’s business or proximately resulting therefrom: Pantages Theatre Co. v. Welch, 71 Fed. (2d) 68 (C. C. A., 9th Cir.); Frank G. Robins, 8 B. T. A. 523; George L. Rickard, 12 B. T. A. 836.

       Sec. 23 (o) (1), Revenue Act of 1934.

        Wolfe v. McCaughn, 5 Fed. Supp. 407; cf. Koehler v. Lewellyn, 44 Fed. (2d) 654 (D. C.); Johnson v. United States, 8 Fed. Supp. 842.


author: Mellott:

text:
    Norfolk Southern Bus Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91118.
    Promulgated February 21, 1939.

      O. R. Folsom-Jones, Esq., for the petitioner.

      F. 8. Gettle, Esq., for the respondent.
   OPINION.

Mellott:

Section 141 of the Revenue Act of 1934 is applicable. It provides that an affiliated group of corporations shall, subject to the provisions of the section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. An “affiliated group” is defined as “one or more chains of corporations connected through stock ownership with a common parent corporation” if three conditions are present. The parties agree that the requirements of (1) and (2) are met, all of the outstanding stock of petitioner being owned by the railroad company, so the sole issue is whether or not the conditions of (3) (A) or (B) exist. No claim is made under (B), so the issue is narrowed to the question “Was petitioner, during the taxable year, a corporation whose principal business was that of a common carrier by railroad?” If so, then it was entitled to file a consolidated return with its parent and there is no deficiency in tax; if not, then it is taxable upon its net income of $16,619.92 and the deficiency determined by the respondent should be approved.

Petitioner has asked us to find as a fact that its principal business was that of a common carrier by railroad. We have declined to make such finding, preferring to set out the facts shown by the evidence, and from them to determine, as a question of law, the issue raised. That, we think, is the proper approach to the question.

Petitioner contends that inasmuch as its operation of busses and trucks was intended to, and did, protect, supplement, feed, and coordinate the railroad service, this fact establishes that its principal business was that of a common carrier by railroad. Respondent concedes that petitioner was organized for the purpose of protecting, supplementing, and feeding the business of tbe railroad and that the two are closely coordinated in service, policy, management, and personnel. He denies, however, that these facts bring it within section 141 (d) (3) (A), supra.

Petitioner’s certificate of incorporation empowers it to engage “in the business of a common carrier of passengers and freight by motor bus vehicle or vehicles * * * on or over the public highways of the State of Virginia.” It further provides that petitioner “shall have all other powers * * * conferred upon public service corporations, other than railroad corporations.” Any attempt by petitioner to engage in the business of a common carrier by railroad or any other business not specifically conferred upon it by its articles of incorporation would probably be beyond the sphere of its corporate powers and ultra vires. Central Transportation Co. v. Pullman's Palace Car Co., 139 U. S. 24. But we do not choose to decide the issue merely on this ground; for, as petitioner points out, the statute merely requires that the affiliating corporation be “a corporation whose principal business is that of a common carrier by railroad.” It may be, therefore — though we refrain from making any such holding — that it is more important to consider the powers actually exercised and the business actually conducted than it is to scrutinize too carefully the powers conferred by the certificate of incorporation.

Petitioner argues that if Congress had meant that only railroad corporations could be affiliated it would have said so in simple and direct language; that in any event it comes within the wording of the statute because its business was essentially that of a common carrier by railroad; and that if any doubt exists as to whether or not it is such a corporation as Congress intended to include in the legislation, such doubt may be and is dispelled when the legislative history and Congressional debates are considered in connection with the enactment of the section under consideration. It cites the language of the Supreme Court in Wabash Railroad Co. v. Pearce, 192 U. S. 179, 186, that “In order to fully understand the force and scope of any statute or body of statutes we must have regard to the conditions and circumstances for which the legislation was intended and under which it is to become operative”, and other cases applying the same principle of law.

It is doubtful that there is such ambiguity in the language of the statute under consideration that the legislative history in connection with its enactment should be considered; for “Unless the contrary appears, statutory words are presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them.” DeGanay v. Lederer, 250 U. S. 376. Cf. Crooks v. Harrelson, 282 U. S. 55, and cases cited. But notwithstanding the doubt which we have, careful consideration has been given to such history. It will be referred to briefly.

When the Revenue Act of 1934 was reported out by the House Ways and Means Committee the provision generally for affiliated companies to file consolidated returns was retained. In its report the Committee stated that if consolidated returns were abolished it “would be especially burdensome to many corporations such as the railroads which are frequently obliged to maintain separate corporate structures in the several states in which they operate, although for all ordinary business and accounting purposes the subsidiaries form a single operating system.” The Senate Finance Committee, in its report, concurred in the conclusions of the House Committee with regard to consolidated returns. On the floor of the Senate an amendment was offered and adopted to strike out section 141 because of the unfair advantage which certain large holding companies had obtained in the past from the filing of consolidated returns. The act was submitted to the Conference Committee, where consolidated returns in general were abolished and the present section 141 inserted, providing for the filing of consolidated returns by corporations “whose principal business is that of a common carrier by railroad.”

This, in brief, is the legislative history relied upon by petitioner as supporting its contention that Congress intended to permit a bus or truck company to file a consolidated return of income with a railroad company owning 95 per centum of its stock; but we are unable to spell out of it any such intention on the part of Congress. Apparently Congress only intended to retain so much of the law permitting the use of consolidated returns as would enable a railroad company to consolidate its income with a subsidiary engaged in the same business. The use of the word “each” suggests the interpretation “each * * * is a corporation whose principal business is that of a common carrier by railroad.” It would be an anomaly to say that a bus company, incorporated under the laws of the state as “a common carrier of passengers and freight by motor bus” was a “common carrier by railroad”, and we decline to make any such holding. If Congress had intended to include a bus or truck company we think it would have done so in unequivocal language.

Petitioner cites Scott Brothers, Inc., Collection and, Delivery Service, I. C. C., M. C. 2744, as authority for holding that a bus or truck company may be classified as “a common carrier by railroad.” In that proceeding the Interstate Commerce Commission held, under the facts before it, that the applicant, which was organized for the purpose of operating a collection and delivery service for the Pennsylvania and Long Island Pailroads in the boroughs of Manhattan, Queens, Brooklyn, Bronx and Jersey City, New Jersey, was subject to part I of the Interstate Commerce Act because the business conducted by it was essentially that of a common carrier by railroad. This conclusion was reached by the majority of the Commission (three of the members dissenting) because the act defined “railroad” as including “all bridges, car floats, lighters, and ferries used by or operated in connection with any railroad” and also “terminal facilities of every kind used or necessary in the transportation of the persons and property designated” therein. Assuming for the purposes of this case that the decision of the majority is correct, it furnishes but slight aid to us in determining the question at issue.

No case has been cited by either party, and we know of none, in which the precise question involved herein has been passed upon by a court or judicial tribunal. However, in Wells Fargo & Co. v. Taylor, 254 U. S. 175, 187, the Supreme Court, in construing the language of the Employers Liability Act providing that “every common carrier by railroad” shall be liable in damages for the injury or death of its employees under the circumstances specified in the act, said:

In our opinion tlie words “common carrier by railroad,” as used in the act, mean one who operates a railroad as a means of carrying for the public, — that is to say, a railroad company acting as a common carrier.

Whether a similar construction of the language of section 141 (d) (3) (A), supra, should be made need not presently be determined. We are of the opinion, and hold, that the respondent did not err in determining that petitioner’s tax liability should be determined on the basis of a separate return of income.

Judgment will be entered under Bule 50.

       SEC. 141. CONSOLIDATED RETURNS OF RAILROAD CORPORATIONS.
      *******
      (d) Definition of “Affiliated Gkodp”. — As used in this section an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
      (1) At least 95 per centum of the stock of each of the corporations, (except the common parent corporation) is owned directly hy one or more of the other corporations; and
      (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations; and
      (3) Each of the corporations is either (A) a corporation whose principal business is that of a common carrier by railroad or (B) a corporation the assets of which consist principally of stock in such corporations and which does not itself operate a business other than that of a common carrier by railroad. For the purpose of determining whether the principal business of a corporation is that of a common carrier by railroad, if a common carrier by railroad has leased its railroad properties and such properties are operated as such hy another common carrier by railroad, the business of receiving rents for such railroad properties shall be considered as the business of a common carrier by railroad.

       The Revenue Act of 1934 (H. R. 7835, Rept No. 558).

       Report of the House Ways ana Means Committee, 733 Cong., 23 sess., Rept. No. 704, at page 17.

       Report of the Senate Committee on Finance, 733 Cong., 23 sess., Rept. No. 558.

       On April 12, 1934, in the Senate, Senator Borah move3 to strike out section 141 of the hill because in his opinion Consolidated returns giving the advantage to the large holding companies was a great disadvantage to all independent corporations' paying taxes and pointed out that it puts many independent corporations under a handicap which in some instances makes it impossible to continue in business. (Congressional Record, Voi. 78, Apr. 12, 1934, page 6666.) He pointed out the advantage that the aviation holding companies and public utility holding companies had by virtue of the consolidated returns and saw no reason in justice and practice why these corporations should not make separate returns and then all corporations would be on the same basis and each dealt with upon a fair principle. Senator Harrison at page 6667, pointed out that the Committee thought that it was necessary in some cases that consolidated returns be filed and stated:
      * * * It was pointed out by the railroads, for instance, that it was necessary for them to file consolidated returns, and it must not be forgotten by the Senate that certain states have laws respecting the doing of business by corporations, which make it necessary that a corporation doing business in a State must organize under its laws.
      Senator Couzens (at page 6667) agreed that there were some reasons for a consolidated return in the cases referred to by Senator Harrison but that the bill in its then form permitted the filing of consolidated returns for other than allied industries and thereby promoted an unfair competitive condition and stated that if Senator Borah’s amendment was agreed to a provision could be drafted in conference which would exempt those corporations which were engaged in noncompetitive business and which are required by the statutes of the states to take out separate articles of incorporation. On the second day of the debate on Senator Borah’s amendment (while the Senate had under consideration Senator Hasting’s motion to reconsider the vote by which the Borah amendment had been adopted), Senator Gore cited the example of the Southern Pacific Railroad as the type of case for which special provision permitting consolidated returns should be made, the reason being the requirement of State laws that the Southern Pacific incorporate separately in many States. Senator Gore stated (at page 6761, Congressional Record, Vol. 78, Apr. 13, 1934) as follows:
      * * * I agree with the Senator about the vertical, integrated concerns where one is pyramided upon the other. I think they ought to be disintegrated so far as taxation is concerned. On the other hand, it does seem to me that the railroad situation might constitute an exception.
      Sen. Borah agreed that the matter should go to conference and expressed himself as not opposed to certain exceptions to the abolition of consolidated returns, (page 6762)

       House Kept. No. 1385, 73d Cong., 2d sess.


author: Leech: VAN FossaN

text:
    John D. Biggers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary I. Biggers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89465, 89466.
    Promulgated February 24, 1939.

      John S. Broohes, Jr., Esq., and A. Stuard Yoimg, Esq., for tbe petitioners.

      F. S. Oettle, Esq., for the respondent.
   OPINION.

Leech:

The question is whether respondent properly denied petitioners’ request to file amended returns upon a separate basis.

Under section 51 of the Revenue Act of 1934, petitioners had the right to elect whether to file joint or separate income tax returns.

Article 53-4, Regulations 86, defines the due date as follows:

Due date of return. — The due date is the date on or before which a return is required to be filed in accordance with the provisions of the Act or the last day of the period covered by an extension of time granted by the Commissioner or a collector. When the due date falls on Sunday or a legal holiday, the due date for filing returns will be the day following such Sunday or legal holiday.

Undoubtedly, as petitioners concede, where a right of election of alternative forms of return exists and that right has been exercised, after, if not before, the due date of the return, either the respondent has no authority to accept amended returns, or such acceptance is discretionary with respondent and its refusal is not subject to review here. Thus, our inquiry is whether petitioners, under the law, did elect to file a joint return for 1934.

Ordinarily, certainly, the filing of a joint return by husband and wife constitutes an election of that form of return. Petitioners’ position is that they did not elect, under the law, to file a joint return. They argue that the filing of a tentative joint return did not constitute an election and that the filing of a final joint return, in the present circumstances, did not do so either because, when filed, they did not know their legal rights in the premises, in that a change in those legal rights had been effected by Regulations 86, article 117-5 construing the Revenue Act of 1934, with the knowledge of the contents of which they could not be charged because such regulations were not promulgated until March 2, 1935; or, in effect, that respondent is estopped from claiming their filing of a final joint return was an election on this record.

The tentative return is a form of report of income not specifically authorized by statute. It came into existence in 1919 by reason of the power delegated to the Commissioner to “grant a reasonable extension of time for filing returns whenever, in his judgment, good cause exists” (section 227 (a), Revenue Act of 1918). Section 250 (a) of that act provided that “where an extension of time for filing a return is granted the time for payment of the first installment shall be postponed until the date of the expiration of the period of the extension.” Consequently, in order to meet the needs of the Government for immediate revenue the “tentative” return was invented. As a condition of being granted the privilege of its use, the taxpayer was required to pay one-fourth of his estimated taxes with the filing of such return.

We agree that petitioners’ filing of the tentative joint return did not constitute the exercise of their right of election. But, after being properly granted an extension of time within which to file a final return, the taxpayers on May 15,1935, formally filed a final joint return within the period so extended. It is true that Regulations 86, article 117-5, notice of which first appeared January 21,1935, in T. D. 4511, C. B. XIV-1, pp. 107 — 110, and published in the regulations on March 2 of the same year, is a new regulation in the sense that, and only that, its detail is not contained in any prior regulation. In no event, of course, can a regulation change the law. But it does not here even attempt to do that. It is true it bears the caption “Application of Section 117 in the case of Husband and Wife.” But it then proceeds merely to show the specific application of section 117 of the Revenue Act of 1934 to the joint or separate returns of a husband and wife where the limitation on the allowance of losses from sales or exchanges of capital assets, contained in subsection (d) of section 117, becomes effective. It does contain the statement that whether a husband and wife make joint or separate returns, they are considered separate taxpayers, but that is merely a statement of what has long been the law. Eegulations 86, article 117-5, merely construed, and, we think, properly, the application of section 117 (d) in the light of that law. Article 381 of Eegulations 77 provides that where a single joint return is filed by husband and wife “the tax is imposed on the aggregate income and all deductions and credits to which either is entitled shall be taken from such aggregate income. * * *” (Emphasis supplied.) Thus that article would limit these same deductions of a husband and wife under section 117 (d) of the Eevenue Act of 1934, as does article 117-5 of Eegulations 86, supra, which superseded the earlier regulation.

It follows that, since husband and wife had theretofore been determined to be separate taxpayers, the rights of the petitioners, as such, under the Eevenue Act of 1934, section 117 (d), were fixed by the effective date of that act, which was May 10, 1934. That was just a year prior to the date upon which the petitioners filed their final joint return.

It is elementary that every one is presumed to know the law and that ignorance of a taxpayer’s right thereunder does not vitiate such an election of a taxpayer. Moreover, since the Board is a creature of statute, its jurisdiction is fixed by statute which does not include equitable jurisdiction. It thus has none. This limitation has been recognized in many cases in which the so-called equities were, in our judgment, not weaker than those here. But, assuming it had such jurisdiction, we know of no authority under which it would be said that the equities in this situation warranted a holding that the taxpayers should not be charged with knowledge of the law as it existed when they filed their final joint return. Particularly is this so, since the petitioners, before filing their final joint return, actually knew of a change in the law affecting their rights.

However, is respondent estopped from taking tbe position that tbe filing of tbe final joint return by tbe petitioners was an election here? Before filing their final joint return, petitioner’s secretary bad telephoned tbe person in the local office of tbe collector of internal revenue at Cleveland, Ohio, who bad checked bis returns for the preceding several years, and had asked him whether the petitioners could file final separate returns. This person, after consulting with his associates in that office, advised that, in his opinion, such returns could not be made. Aside from the general rule that estoppel can not apply against the Government, we know of no precedent which would support its application here. Neither the official status of the person advising petitioner, nor that of his consultants, is disclosed. And that person purported to give petitioner’s secretary only his opinion and that of those associates. A mere opinion does not support an estoppel.

Moreover, in any event, the great weight of authority is that representations made by revenue agents or collectors are not binding on the Government.

We conclude the filing of a final joint return by the petitioners was a valid, binding election to return their income for 1934 in that form, and that respondent was right in his denial of their later request to file amended separate returns.

Reviewed by the Board.

Decisions will he entered under Bule 50.

VAN FossaN

(dissenting): I am unable to agree with the ruling of the majority that the petitioners made a free or binding election to file the so-called “final return.” The joint return was filed under the compulsion incident to the refusal of the office of the collector to permit a change to separate returns. Thus the petitioners were deprived of the freedom of choice essential to an election. “* * * if the right [of election] be granted, opportunity for fairly exercising it should not be cut off or disparaged, especially when ignorance, mis-advice or what would ordinarily be recognized as excusable error, has entered into its exercise.” McIntosh v. Wilkinson, 36 Fed. (2d) 807. It would have availed taxpayers nothing to have tendered separate returns. They would not have been accepted. Garland G. Kent, 27 B. T. A. 1055; United States v. Pettigrew, 81 Fed. (2d) 666.

In Detroit Gear Machine. Co. v. Helvering, 75 Fed. (2d) 660, the court observed:

* * * where there is a complete reversal of policy on the part of the Treasury Department and, scant opportunity of notice to those affected, it would he doth arbitrary mid unreasonable to deprive the taxpayer of rights given him by the Revenue Acts or to hold him, as in this case, to am election made without knowledge of his rights. In saying this, we do not mean to intimate that the taxpayer is not bound by his misinterpretation or misconstruction of the law, or that he should be relieved because of his failure to know the law, but we are speaking entirely to the matter of an election between two inconsistent rights, either of which may be availed of by the taxpayer under the tax laws. In such a case knowledge, actual or imputed, is essential to constitute an election. [Italics supplied.]

In the present case the office of the collector advised that the filing of the tentative return precluded a change to separate returns. That this was error, even the prevailing opinion concedes. This misadvice by the collector’s office is solely responsible for the present proceedings. Had the collector advised correctly, taxpayers would have filed separate returns and these cases would never have been filed.

Although I readily agree that the Board has no general equitable jurisdiction, I do not agree that, in determining the question here present as to the exercise of an election granted by statute, equitable considerations arising frota, the facts may not be entertained. See McIntosh v. Wilkinson, supra; Detroit Gear Machine Co. v. Helvering, supra. The doctrine of election depends not on technical rules but on principles of equity and justice and actual intention. To be binding an election must be free, advised, and deliberate. Standard Oil Co. v. Hawkins, 74 Fed. (2d) 395. Here the taxpayers made no such election.

I believe the respondent should be reversed.

Arundell agrees with this dissent.

       SEC. 51. individual REXURNS.

      (b) Husband and Wife. — If a husband and wife living together have an aggregate net income for the taxable year of .$2,500 or over, or an aggregate gross income for such year of $5,000 or over—
      (1) Each shall make such a return, or
      (2) The income of each shall be included in a single Joint return, in which case the tax shall be computed on the aggregate income.

        O’Rourke v. Commissioner, 81 Fed. (2d) 668; United States v. Pettigrew, 81 Fed. (2d) 666; Buttolph v. Commissioner, 29 Fed. (2d) 695; J. M. Moore, 15 B. T. A. 1037.

        William A. Webster Co., 37 B. T. A. 800; Haggar Co., 38 B. T. A. 141; A. J. Crowhurst & Sons, Inc., 38 B. T. A. 1072.

         Alameda Investment Co. v. McLaughlin, 33 Fed. (2d) 120; George Freese’s Sons, 18 B. T. A. 416, cited with approval in Baird Machine Co., 19 B. T. A. 801; 550 Park Avenue Corporation, 20 B. T. A. 288; Pine Ridge Coal Co., 23 B. T. A. 489; Dr. Pepper Bottling Co., 25 B. T. A. 1323; Smith Paper Co., 31 B. T. A. 28; Fletcher American Rational Bank, 33 B. T. A. 453; C. H. Mead Coal Co., 38 B. T. A. 1163.

        Alameda Investment Co., supra; Smith Paper Co., supra; Fletcher American National Bank, supra; Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718; Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984; Safety Electric Products Co. v. Helvering, 70 Fed. (2d) 439; United States v. Pettigrew, supra; O’Rourke v. Commissioner, supra; Buttolph v. Commissioner, supra; Rose v. Grant, 39 Fed. (2d) 340; Morris v. Commissioner, 40 Fed. (2d) 504; J. M. Moore, supra.

        O’Rourke v. Commissioner, supra; United States v. Pettigrew, supra; Buttolph v. Commissioner, supra; J. M. Moore, supra; Morris v. Commissioner, supra; Rose v. Grant, supra.

        Oklahoma Contracting Corporation, 35 B. T. A. 232; Regulations 75, art. 10, par. 10 (b). See also Florsheim Bros. Dry Goods Co., Ltd. v. United States, 280 U. S. 453.

       SEC. 53. TIME AND PLACE FOR FILING RETURNS.
      *******
      (2) Extension of Time. — The Commissioner may grant a reasonable extension of time for filing returns, under such rules and regulations as he shall prescribe with the approval of the Secretary. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months.

      This return bore no indication that petitioners claimed the right to file separate returns or have their income so taxed. See Binder v. Welch, - Fed. Supp. - (U. S. Dist. Ct., S. Dist. Cal., Nov. 17, 1937.)

       Art. 117-5. Application of section 111 in the case of hushand and wife. — In the application of section 117, a husband and wife, regardless of whether a joint return or separate returns are made, are considered to be separate taxpayers. Accordingly, the limitation under section 117 (d) on the allowance of losses of one spouse from sales or exchanges of capital assets is in all cases to be computed without regard to gains and losses of the other spouse upon sales or exchanges of capital assets.

        Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129.

        Frank B. Gummey, 26 B. T. A. 894; Joseph B. Uihlein, 30 B. T. A. 399; Frank M. Arguimbau, 31 B. T. A. 604.

        Walter C. Janney, 39 B. T. A. 240.

        United States v. Pettigrew, supra; O’Rourke v. Commissioner, supra; Buttolph v. Commissioner, supra; Rose v. Grant, supra; Morris v. Commissioner, supra; J. M. Moore, supra; Smith Paper Co., supra; Fletcher American Rational Bank, supra; C. H. Mead Coal Co., supra; Dorothy Glenn Coal Mining Co., 38 B. T. A. 1164; William A. Webster, supra; Bagger Co., supra; A. J. Crowhwrst & Sons, supra.

        Northport Shores, Inc., 31 B. T. A. 1013.

        C. H. Mead Coal Co., supra; Dorothy Glenn Coal Mining Co., supra; William A. Webster, supra; Eaggar Co., supra; A. J. Crowhurst & Sons, supra; J. M. Moore, supra

        Wilder National Bank v. United States, 294 U. S. 120.

        May Rogers, 31 B. T. A. 994, and cases cited therein.

        Sutton v. United States, 256 U. S. 575; Utah Power & Light Co. v. United States, 243 U. S. 389; Wilber National Bank v. United States, supra; Darling v. Commissioner, 49 Fed. (2d) 111; certiorari denied, 283 U. S. 866; Searles Real Estate Trust, 25 B. T. A. 1115; Binder v. Welch, supra.


author: Harron:

text:
    Nina Cornelia Prime, Executrix of the Estate of William A. Prime, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83019.
    Promulgated February 24, 1939.

      Mitchell Salem, Fisher, Esq., and Henry Varay, G. P. A., for the petitioner.

      S. L. Young, Esq., for the respondent.
   OPINION.

Harron:

The statutory provision under which the deduction is claimed allows a taxpayer on a cash basis deduction from gross income of interest paid in the taxable year on an indebtedness. Petitioner’s decedent made his income tax return on the cash receipts and disbursements basis. Petitioner contends that the addition of interest accrued and unpaid to the amount of indebtedness and the giving of new notes constituted “payment” of interest within section 23 (b). Petitioner makes a further contention that there was a constructive payment of interest by the decedent. Respondent concedes that decedent was “indebted” to the insurance companies on account of the policy loans and raises no question on this point.

The facts are stipulated. They show that in 1933 petitioner’s decedent gave new notes to several insurances companies “to cover the amount of the previous loan with interest thereon”, and in some instances to cover “further loans”, meaning further advancements and not interest. The notes are not in evidence. There is no evidence relating to what entries or treatment the various insurance companies made on their books in their reserve accounts in 1933 with respect to the taking of new notes for interest due and unpaid. Only the policies purchased from the American insurance companies are in evidence. It is assumed that all the policy loans were made upon the terms that appear in the evidence. It is noted that, under the loan provisions of the insurance contracts, interest not paid when accrued was to be added to the amount of the principal of the loan and reckoned as part thereof.

The same question was before this Board in John C. Hermann, 27 B. T. A. 409. The facts in that case are, in several respects, different from the facts in this proceeding. But there was involved there, nevertheless, the question whether the giving of a new note in an amount including accrued interest constitutes such payment of interest in the taxable year as the statute contemplates in providing for an income tax deduction. Subsequent to the decision in the Hermann case, this Board reviewed the question of whether interest is paid by the giving of a new note to cover interest accrued and unpaid, in S. E. Thomason, 33 B. T. A. 576. The Board held that the giving of a new note represents another “promise to pay” and does not satisfy the provisions of the statute allowing a deduction for “interest paid.” The Thomason case overruled the Hermann case and is controlling in the determination of the question in this proceeding. See also, Blair v. First Trust & Savings Bank, 39 Fed. (2d) 462; Helvering v. Martin-Stubblefield, Inc., 71 Fed. (2d) 944; San Jacinto Life Insurance Co., 34 B. T. A. 186; T. Harvey Ferris, 38 B. T. A. 312; Hart v. Commissioner, 54 Fed. (2d) 848, on the point that the stamping “paid” on a bill for interest does not establish a payment entitling the taxpayer to a deduction for interest paid where his return is on a cash basis; Schlemmer v. United States, 94 Fed. (2d) 77; Mellinger v. United States, 21 Fed.Supp. 964; Salomon v. State Tax Commission, 278 U. S. 484, on the point that the depositing of collateral out of which a sum may be paid in the future does not constitute a payment for purposes of an income tax deduction. Cf. Estate of Benjamin Piller, 29 B. T. A. 799; Arthur T. Galt, 31 B. T. A. 930.

Petitioner’s argument goes to a theory that a constructive payment of interest accrued is accomplished by the addition of the unpaid interest to the principal of a policy loan and the giving of a new note. The constructive payment theory has seldom been approved in claims of a taxpayer on a cash basis for a deduction which presupposes an expenditure by the taxpayer. See the Barto Co., 21 B. T. A. 1197. The distinction between the accrual and receipts and disbursements methods of accounting is made controlling in the revenue statutes. Massachusetts Mutual Life Insurance Co. v. United States, 59 Fed. (2d) 116, 120; aff'd., 288 U. S. 269. See also, section 43 of the Revenue Act of 1932. The significance of this distinction is stated by the Supreme Court in its opinion affirming the lower court in Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269, as follows:

It is settled beyond cavil that taxpayers other than insurance companies may not accrue receipts and treat expenditures on a cash basis, or vice versa. Nor may they accrue a portion of income and deal with the remainder on a cash basis, nor take deductions partly on one and partly on the other basis.

In this proceeding, petitioner’s decedent, who was on a cash basis, made no cash disbursement on account of the various accrued interest charges. Nor does the record disclose any facts upon which it could be convincingly argued that he made a constructive payment. The adding of the accrued interest charges to the principal of the loans effected a compounding of the interest for future years. (See dictionary definitions of compound interest.) But the liability to pay the interest charges was not extinguished any more than in the ordinary loan situation which was considered in the Thomason case. It must be concluded that there are no factors present in this proceeding which justify either departing from the rule adopted in the Thomason case, or applying a constructive payment theory in the face of views expressed by the Supreme Court in the Massachusetts Mutual Life Insurance Co. case.

The case cited by petitioner, Maryland Casualty Co. v. United States, 251 U. S. 342, is not in point.

It is held that there was no payment of interest on indebtedness in the taxable year within the provisions of section 23 (b). Respondent is sustained.

It should be pointed out that there is failure of proof as to the deduction claimed for interest owed to the London Life Association, Ltd. The amount of £1,375.5.3 represented accrued interest and £476.9.7 was due for premiums and revival charges. In the taxable year decedent paid by a check of C. T. Bowring & Co., Ltd., £196.14.10. That was less than the amount due for premiums and revival charges and there is no evidence that any of that amount was paid upon accrued interest.

Decision will he entered fot• the respondent.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be aUowed as deductions:
      ***•*•#
      (b) Interest. — All interest paid or accrued within the taxable year on indebtedness * * *. [Revenue Act oí 1932.]

       SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
      The deductions and credits provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.