text:
    Luman W. Goodenough, Executor and Trustee under the Will of Philip H. Gray, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32059.
    Promulgated October 31, 1933.

      Bussell A. McNair, Esq., for the petitioner.

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

Smith :

This is a, proceeding for the redetermination of a deficiency in estate tax in the amount of $27,659.45. Numerous allegations stated in the petition have either been waived by the petitioner or conceded by the respondent. By an answer to the amended petition as amended, filed with the Board on November 20, 1929, the respondent seeks to increase the deficiency determined. Allegation 6 (c) of the answer to the amended petition as amended has been withdrawn by the respondent. The points in issue for the determination of the Board are:

(1) Whether there should be included in the gross estate $27,500 representing the value at the date of the death, of the decedent of property held by the decedent and his wife in a tenancy by the entirety, which property was acquired by the decedent and his wife on July 27, 1915.

(2) Whether the gross estate should be increased by adding thereto $1,103.57 compensation insurance paid to the executors of the estate on account of the decedent’s last illness under an accident and health policy carried with the London Guarantee & Accident Co., Ltd.

(3) Whether there should be included in the gross estate $25,000, representing real estate designated in the estate tax return on Form 76 as lot #366 and west 10 feet of lot 365 Voigt Park Subdivision of E. W. Voigt and known as #658 Longfellow Avenue. This property was returned by the estate at a value of $25,000 and was erroneously excluded from the gross estate by the respondent in determining the deficiency involved in this proceeding.

By warranty deed dated July 27, 1915, recorded August 18, 1915, in Liber 1062 of Deeds, page 183, Wayne County, Michigan Records, Harry Stormfeltz conveyed lots 210, 211, 173, 174 and 175 to Philip H. Gray, and Almena S. Gray, his wife. No conveyance was made by Philip H. Gray and Almena S. Gray, his wife, or either of them, of any of said lots prior to the date of the death of the deceased, namely, November 25, 1922.

Where the parties named in a deed are husband and wife under a deed to both, they take as tenants by the entirety under the laws of Michigan. In re Appeal of Lewis, 85 Mich. 340; 48 N.W. 580; Midgley v. Walker, 101 Mich. 583; 60 N.W. 296; Naylor v. Minook, 96 Mich. 182; 55 N.W. 664; Bassett v. Budlong, 77 Mich. 348; 43 N.W. 984; Fisher v. Provin, 25 Mich. 347. Even though the deed does not designate them as husband and wife, the tenancy is one of entirety if they are in fact husband and wife. Auditor General v. Fisher, 84 Mich. 128; 47 N.W. 574.

Petitioner admits that, if this property had been acquired by the decedent and his wife subsequent to the effective date of the Revenue Act of 1916, the amount would constitute a part of the gross estate of the decedent. Phillips v. Dime Trust & Safe Deposit Co., 284 U.S. 160. It is also admitted, on the authority of Third Nat. Bank dt Trust Co. v. White, 45 Fed. (2d) 1085; aff'd., 287 U.S. 577, that if the decedent had died on or after June 2, 1924, the value of this property would have constituted a part of the gross estate by virtue of section 302 (h) of the Revenue Act of 1924, which provides :

(h) Subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

It is contended, however, that there is no corresponding provision of the Revenue Act of 1921, and that that act is not to be given such an interpretation as would include in the gross estate the value of the property held by a decedent and his wife as tenants by the entirety, which estate was acquired prior to the effective date of the Revenue Act of 1916, and where, as here, the decedent died prior to June 2, 1924, the effective date of the Revenue Act of 1924. In making this argument the petitioner relies principally upon Shwab v. Doyle, 258 U.S. 529, and Knox v. McElligott, 258 U.S. 546. In the first mentioned case the question in issue was whether the value of the property transferred by the decedent in 1915 should be included in the gross estate of one dying in 1916 after the effective date of the Revenue Act of 1916, on the ground that the transfer was made in contemplation of death. The evidence before the court showed that the transfer was made in contemplation of death. The Supreme Court held that the value of the transferred property was not includable in the gross estate. In the course of its opinion the Supreme Court stated:

Tbe initial admonition is that laws are not to be considered as applying to cases which arose before their passage unless that intention be clearly declared. * * * Story, Const. § 1398. The comment of Story is:
“ Retrospective laws are, indeed, generally unjust, and, as has been forcibly said, neither accord with sound legislation nor with the fundamental principles of the social compact.”
* * * * * # ⅞
The Act of September 8, 1916, is within the condemnation.
There is certainly in it no declaration of retroactivity, “ clear, strong, and imperative,” which is the condition expressed in United States v. Heth, 3 Cranch, 399, 413 * * *

The Court further stated:

* * * We need only say that we have given careful consideration to the opposing argument and cases, and a careful study of the text of the act of Congress, and have resolved that it should be not construed to apply to transactions completed when the act became a law. And this, we repeat, is in accord with principle and authority. It is the proclamation oí both that a statute should not be given a retrospective operation, unless its words make that imperative and this cannot be said of the words of the Act of September 8, 1916.

In Knox v. McElligott, supra, the facts were tliat certain bonds and mortgages had been conveyed to decedent and his wife in 1912. The decedent died in 1911. In the estate tax return the executor had included only one half of the jointly owned property and the respondent endeavored to include the whole value. The Supreme Court, after setting forth the facts in the case, as above, stated:

It will be observed, therefore, that this case involves the same question as that decided in Shwab v. Doyle, * * * and on the authority of that case the judgment of the Circuit Court of Appeals is reversed and the case remanded for further proceedings in accordance with this opinion.

The logic of the petitioner’s argument is that if the decedent in the case of Knox v. McElligott, supra, had died in 1922, the decision of the Supreme Court would have been the same; for there is no provision of the Revenue Act of 1921 corresponding to section 302 (h) of the Revenue Act of 1924 making the provisions of the 1921 law, as they relate to estates in joint tenancy, inclusive of such estates created prior to the effective date of the Revenue Act of 1916. It is further argued that estates by the entirety stand upon the same plane as estates in joint tenacy. The petitioner also directs attention to the case of Gwinn v. Commissioner, 287 U.S. 224, in which the court had under consideration the question of the taxability of the decedent’s half interest in joint (not entirety) property which had been acquired in 1915, the death occurring October 5, 1924. In that case the Supreme Court followed the rule laid down in Tyler v. United States, 281 U.S. 497, and held that the decedent’s half interest in the joint property was properly included in the gross estate. The Court stated:

The right to effect these changes in the estate was not terminated until the cotenant’s death. Cessation of this power after enactment of the Revenue Act of 192Jj. presented proper occasion for imposition of the tax. [Italics supplied.]

The significance of the clause in italics in the last citation indicates that the Supreme Court expressly reserved the question as to whether the decedent’s interest in the jointly owned property would be in-cludable in the gross estate if the death had occurred prior to the effective date of the Revenue Act of 1924. In Phillips v. Dime Trust & Safe Deposit Co., supra, the Court stated:

But it is urged that the tax imposed with respect to groups 2 and 3 is invalid. As the creation of the tenancies by the entirety antedated the taxing act, and the earlier corresponding sections had been repealed, it is insisted that the statute is given a retroactive operation, such as that condemned by this Court in Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 615; Coolidge v. Long, 282 U.S. 582, 51 S.Ct. 306, 75 L.Ed. 562. As section 302 (h) of the Act of 1924 (26 USCA § 1094 note) specifically makes the quoted provision of subdivision (e) applicable to estates created or existing before the passage of the statute, the question presented is not one of its construction or applicability, hut of the power of Congress to impose the tax. The government argues that the tax was laid on the devolution of rights upon the wife at the death of her husband after the passage of the act, and that therefore the statute was not applied retroactively, even though the estate was created before its enactment. Without foreclosing considei'ation of this contention at another time, we find it unnecessary noio, in view of the facts of the present case, to pass upon it. [Italics supplied.]

Upon principle it is difficult to see how the estate tax laws are being retroactively applied by including in the gross estate the value of a decedent’s interest in either jointly owned property or in entirety property where the death has occurred after the effective date of either the Revenue Act of 1916, the Revenue Act of 1918, or the Revenue Act of 1921. For, as was held in Tyler v. United States, supra, “ the death of one of the parties to the tenancy became the ‘ generating source ’ of important and definite accessions to the property rights of the other,” and warranted the imposition of the estate tax upon such property. How, therefore, can it be said that the law is being retroactively applied by including in the gross estate the value of a decedent’s interest in jointly owned property or in entirety property regardless of the date when such estates were created ? It was held, however, in Knox v. McElligott, supra, that, where an estate in joint tenancy was created prior to the effective date of the Revenue Act of 1916, the value of jointly owned property could not be taxed under the provisions of the Revenue Act of 1916. We think for reasons above stated that the same is true under the provisions of the Revenue Act of 1921, and that the same rule must apply to estates by the entirety. The opinion of the court in the Knox case has never been overruled or reversed. That decision is an insurmountable bar to the inclusion in the gross estate in the instant proceeding of the value of the entirety property acquired by the decedent and his spouse prior to the effective date of the Revenue Act of 1916. The contention of the petitioner upon this point is therefore sustained.

The evidence shows that the decedent held a policy issued by the London Guarantee c% Accident Co., Ltd., under which his executor, after his death, received $1,103.57 to cover a personal illness which the decedent suffered prior to his death. As the amount was paid pursuant to a valid claim of the decedent arising prior to his death, the value of the claim at date of death is a part of his gross estate. Leopold Ackerman, Executor, 15 B.T.A. 635. The contention of the respondent upon this point is sustained.

The final issue relates to an alleged failure on the part of the respondent to include in the value of the gross estate $25,000 representing the value of certain property held by the decedent and his wife at the date of death. The failure of the respondent to include it in his computation was an error in the computation. The contention of the respondent upon this point is sustained.

Reviewed by the Board.

Judgment will he entered under Rule 50.

MokRis, SteRNHagen, and Muedock dissent.


source: Caselaw Access Project

author: Sternhagen:

license: Public Domain

text:
    Tecla M. Straub, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frederick Hertenstein, Petitioner, v. Commissioner of Internal Revenue, Respondent. Carolyn L. Moser, Petitioner, v. Commissioner of Internal Revenue, Respondent. Freda M. Hertenstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55935-55938.
    Promulgated October 31, 1933.

      Earl W. Shinn, Esq., and Warren W. Grimes, Esq., for the petitioners.

      Harold Allen, Esq., and L. H. Ruslibrooh, Esq., for the respondent.
   OPINION.

Sternhagen:

The petitioners assail the respondent’s determination that the amounts received by them in 1928 were taxable as ordinary dividends as defined in section 115 (a), Revenue Act of 1928 and contend, on the contrary, that they were distributions in liquidation within the provisions of subsection (c).1 If they are held to be, as petitioners contend, distributions in liquidation, the respondent raises the subalternate issue whether they are nevertheless taxable as dividends by virtue of subsection (g).1 If this contention fails, the fair market value of the petitioners’ shares when received on the several dates shown in the findings must be determined for the purpose of establishing the basis for gain or loss as prescribed in section 113.

1. The evidence, in our opinion, establishes that the distribution of 1928 was made in partial liquidation of the corporation’s capital stock. This is true notwithstanding the fact that the method was that of reducing the face value of each outstanding share and not that of reducing the number of outstanding shares. There is ample evidence that from 1924, when Moser and several of the experienced employees died, the business declined; that the stockholders were conscious of the decline and were directing the activities of the corporation toward winding up the business with a minimum loss; while the business continued in operation, its scope was steadily narrowed. That it was not immediately discontinued is not, as respondent contends, necessarily an indication that liquidation was not taking place. Gossett v. Commissioner, 59 Fed. (2d) 365. It is entirely consistent with a purpose to liquidate that the corporation and its management should continue the operation of the business as long as there was a reasonable justification for their judgment that this was the wisest course. It is entirely compatible that the resolution of December 17, 1928, should correctly designate the distribution as a “ liquidating dividend of 90 percent,” and at the same time recite that the $360,000 was not necessary in the operation of the business, for it is apparent that such business operations as were sought to be protected were those involved in most successfully winding it up. It is true that the statute, providing for a difference in treatment of dividends, on the one hand, and liquidation distributions, as thus defined, on the other, is likely to create an opportunity for avoiding surtax by reason of the subtle distinctions in the language of the section. This, however, is no ground for refusing to apply the liquidation provisions when the evidence shows that such a distribution has taken place.

2. We are of opinion that the distribution was not “ at such time and in such manner as to [be] * * * essentially equivalent to the distribution of a taxable dividend,” as provided in subsection (g). This section has already been sufficiently expounded in other decisions of the Board. Pearl B. Brown, Executrix, 26 B.T.A. 901; Robert R. Meyer, 27 B.T.A. 44; Annie Watts Hill, 27 B.T.A. 73; Henry B. Babson, 27 B.T.A. 859; Louis Rorimer, 27 B.T.A. 871. We think the evidence shows that the distribution of 1928 had no relation to the stock dividend of 1922, but that it was related to a later purpose to liquidate and discontinue the business, and that it was not within the reach of subsection (g).

3. Both parties seek the recognition of widely divergent values for the Moser stock from the evidence of the history and prospects of the corporation upon each of the basic dates, and more particularly the evidence of earnings of the corporation. Both appear to entrust the valuation question to the selection of a mathematical formula for the capitalization of earnings. While this has often been said to be an unsatisfactory foundation for determining value, it must be recognized that with a close corporation such as this there may be little else available. At- all events, it is necessary to make a determination of these values in accordance with the preponderance of evidence in the record. Giving all of the evidence full and careful consideration, we have reached the conclusions of value set forth in the findings.

Judgment will be entered under Rule SO.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      (a) Definition of dividend. — Tlie term “ dividend ” when used in this title (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
      *******
      (c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to tlie extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
      *******
      (g) Redemption of stock.- — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.


author: Goodeich::

text:
    James E. Wells, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62948.
    Promulgated October 31, 1933.

      John L. Kenefich, Esq., and Warren W. Grimes, Esq., for the petitioner.

      L. H. Rushbrooh, Esq., for the respondent.
   OPINION.

Goodeich::

The fundamental controversy here is whether petitioner sold his stock in the Marine Midland Corporation or exchanged it for stock in the Midland Equities, Inc. If he made a sale of it, as he contends he did, he may deduct from his income the loss claimed, no dispute being raised as to its amount. If he made an exchange of stocks, as respondent has determined he did, the loss claimed may not be recognized, for the transaction falls within the provisions of section 112 (b) (5) of the Revenue Act of 1928, as a transfer of property to a corporation solely in exchange for its stock. Consequently, we must determine upon the facts before us not what petitioner intended to do, not what he might have done, (see J. D. Bigger, 19 B.T.A. 797), but what he did. Ralph J. Chandler Shipbuilding Co., 22 B.T.A. 5. In our opinion, the agreed statement of facts (and we have no other evidence) shows indisputably that there was no exchange of stocks, as that term is used in the statute, but that petitioner sold one stock and bought another. The very wording of the stipulation forestalls any other conclusion. It states that petitioner “ subscribed for and acquired at a total cost of $3,212.50 in cash ” his Midland Equities stock. That language stipulates a purchase by him. The terms describing the disposition of his Marine Midland stock are equally unambiguous. It was “ purchased ” by Midland Equities, Inc., and he received from that company “ in payment of the purchase price thereof, the sum of $3,200.00.” That language stipulates a purchase by the corporation and, necessarily, a sale by petitioner. See Pinellas Ice & Cold Storage Co., 21 B.T.A. 425; affd., 287 U.S. 462, citing Williamson v. Berry, 8 How. 495, 543. These descriptions of the transactions are not recitals contained in corporate minutes, or other expressions of professed intentions of the parties, nor do they serve to delineate merely the form of the transaction, through which we may look to substance to determine what actually occurred. They are facts submitted to us by the parties, and we find nothing in the agreed statement to indicate that they are untrue or that, for other reason, the stipulation should be rejected. We conclude therefore, that there was no exchange of stocks, but that petitioner did just what he claims he did, namely, sold one stock and purchased another. J. Hampton Hoult, 24 B.T.A. 79 (petition for review dismissed, 59 Fed. (2d) 1055); Minnie C. Bracket, Administratrix, 19 B.T.A. 1154; affd., 57 Fed. (2d) 1072; Sarther Grocery Co., 63 Fed. (2d) 68; affirming 22 B.T.A. 1273; Katherine A. Spalding, 7 B.T.A. 588; B. F. Saul, 4 B.T.A. 639; E. H. Nielsen Co., 26 B.T.A. 223.

The arguments advanced by respondent upon brief urging us to a contrary conclusion tend mainly to suggest possible inferences casting doubt upon the bona fides of the sale. Of course, if the sale was not bona fide, petitioner would not be permitted to deduct the claimed loss from his income. Harold B. Clark, 2 B.T.A. 555; M. I. Stewart & Co., 2 B.T.A. 737; Harold F. Seymour, 27 B.T.A. 403; Oscar F. C. Kunau et al., Trustees, 27 B.T.A. 509. There is no evidence here that petitioner failed to part with his property definitely and without reservation, that he retained any control over it, or ownership in it, or that there was any prearrangement between him and the purchaser respecting its resale or recovery. True, petitioner became a stockholder in the corporation which purchased the stock from him, but he did not thereby retain the ownership and control of the stock which he had when it was in his hands for ownership of its assets by a corporation is not ownership by its stockholders. 1 Fletcher, Corporations 50; Regal Shoe Co., 1 B.T.A. 896; Evelyn F. Gregory, 27 B.T.A. 223; Burnet v. Clark, 287 U.S. 410. And even though the primary motive for his sale was to establish a loss, as respondent contends, that fact would not make the loss unallowable, Guarantee Title & Trust Co., 10 B.T.A. 599; Gray-Barkley Co., 11 B.T.A. 499; Andrew J. Peters, 28 B.T.A. 976; and cases there cited.

The case of Sylvester W. Labrot, 18 B.T.A. 332; affd., 57 Fed. (2d) 413, upon which respondent relies, is distinguishable from the case at bar. That case arose under the Revenue Act of 1921, and the decision was specifically rested on section 202 (c) (3) of that act, which differs from the controlling provisions of the 1928 Act in that under the former it was necessary only that the property be transferred to the corporation, whereas the later act requires that the property be transfered solely for stock or securities in such corporation, the requirements as to control of the corporation after the transfer being the same. Ralph L. Evans, 8 B.T.A. 543; Ethel Gary, 18 B.T.A. 1204. See also “ Notes on the Revenue Act of 1924,” Magill, 24 Columbia Law Review, 836, 843; and discussion pertaining to section 203 (b) of the Revenue Act of 1924 in Gregg Statement before the Senate Committee on Finance. Moreover, in the Labrot case, because of the wide divergence between the cost of the property and the price at which it was transferred to the corporation, the appellate court inferred that the sale was not bona fide.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Seawell and Adams dissent.

       No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and Immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.


author: Black :

text:
    Erskine M. Ross, Deceased, by Oscar Lawler and Robert E. Ross, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42593, 55656.
    Promulgated October 31, 1933.

      George M. Thompson, G.P.A., Charles D. Hamel, Esq., and Lee I. Park, Esq., for the petitioners.

      Alva 0. Baird, Esq., and Eugene Harpole, Esq., for the respondent.
   OPINION.

Black :

The issues which we have to decide in this proceeding are as follows:

(1) Does the agreement dated February 10, 1923, together with the declaration of trust dated March 22, 1923, detailed in our findings of fact, constitute an installment sale of the 703.2 acres of land described therein or does the agreement, together with the declaration of trust, constitute a mere option to purchase the 703.2 acres in parcels, such option to be exercised from time to time as to separate parcels by the recordation of plats thereof?

(2) Are the provisions of section 44 (d) of the Bevenue Act of 1928 constitutional and, if so, do they apply to any balance due on sales made prior to January 1, 1928, that remained unpaid on December 10, 1928, the date of death of Erskine M. Boss?

Issue No. 1.

Belative to the first issue, the respondent contends that the agreement and declaration of trust was an installment sale of the 703.2 acres, and that the decedent realized taxable income each year to the extent of the percentage of profit recognizable under the regulations applicable to installment sales. Petitioners contend that the agreement and declaration of trust was merely an option to purchase from time to time parcels of the 703.2 acres, granted by the decedent to the Haddock-Nibley Co., referred to as the buyer, and that no sales, installment or otherwise, occurred until the alleged option was exercised by the buyer by platting and recording certain particular parcels thereof. In other words, petitioners contend that instead of there being one installment sale of the entire 703.2 acres, as the respondent contends, there were, during the years in question, four separate sales upon which taxable income was realized, namely, an installment sale in 1923 of 132.253 acres, and two completed sales in 1926 of five acres and 17.591 acres, respectively, and one completed sale of 2 acres in 1927.

In deciding Issue No. 1 we have two lengthy documents to construe. These documents, though- executed a few days apart, were parts of the same transaction and must be construed together. In construing the documents, we must take them as a whole and not take mere isolated parts. If we were to judge the transaction by isolated parts of the documents, some of them are so contradictory that it would be difficult to judge what the parties really did mean to do. But the construction of a written instrument is not to be found in any name which the parties may have given to the instrument and not alone in any particular provisions it contains, disconnected from all others, but in the ruling intention of the parties, gathered from all the language they have used. It is the legal effect of the whole which is to be sought for, not a mere part. Heryford v. Davis, 102 U.S. 235.

Following this rule of construction, did the documents in question evidence an installment sale of the entire 703.2 acres described therein, or merely give the buyer an option to purchase all or any part of the entire tract under the terms and conditions set forth in great detail in the documents ? At this point it is well to note that installment sales may be either where the title completely passes to the buyer at the time of sale, or where it is contemplated that a conveyance is not to be made at the outset, but only after all or a substantial portion of the purchase price has been paid. Art. 44, Regulations 62, 65, 69; art. 352, Regulations 74. Of course a mere option is not a contract of sale and would not be treated as an installment sale under the statute and. the Commissioner’s applicable regulations.

Whether an agreement is a contract of sale or a mere option is a question that has been often litigated. The test usually applied is whether the agreement under consideration creates a “ mutual obligation ” on the part of the buyer to buy and the seller to sell. If it does, it is a sale; if it does not, it is an option. See Stelson v. Haigler, 63 Colo. 200; 165 Pac. 265, wherein the court said:

It may be laid down as an established rule of law that, unless the contract contains language which may reasonably be construed as an agreement on the part of the vendee to purchase the property, or to assume some obligation thereunder, it will be an option contract and not an agreement of sale and purchase. It is impossible to conceive of an agreement of sale and purchase without obligation on the part of the vendee to purchase. On the other hand, the absence of such obligation is the distinctive characteristic of an option contract. A contract of sale creates mutual obligations on the part of the seller to sell, and on the part of the purchaser to buy, while an option gives the right to purchase, within a limited time, without imposing any obligations to purchase. James on Option Oontraets, sec. 105, and authorities cited; Hessell v. Neal, 25 Colo. App. 300, 137 Pac. 72.

See also Brickell v. Atlas Assur. Co., 10 Cal. App. 17; 101 Pac. 16, wherein the court sets forth the distinction between the two kinds of contracts as follows:

* ⅜ * ■< QYfjg distinction between a contract to purchase or sell real estate and an option to purchase is that the contract to purchase or sell creates a mutual obligation on the one party to sell and on the other to purchase, while an option merely gives the right to purchase within a limited time without imposing any obligation to purchase.” 29 Am. & Eng. Ency. of Law (2d Ed.) 608; Menzel v. Primm, 6 Cal. App. 204, 91 Pac. 756. In other words, an option is a right “ acquired by contract to accept or reject a present offer within a limited or reasonable time in the future.” 21 Am. & Eng. Ency. of Law, 924.

Petitioners recognize that the rule is as stated in the two above mentioned decisions, which decisions petitioners cite along with others as supporting the rule, but contend that the buyer in the agreement of February 10, 1923, was not “ obligated ” to buy any part of the 703.2 acres until a parcel thereof had been platted and maps recorded with the seller’s approval, and that therefore the said agreement was nothing more than a mere option to buy. Whether an instrument or instruments constitute a sale or an option “ is answered by reading the instruments.” Gutierrez v. Graham, 227 U.S. 181.

A careful reading of the agreement in question impresses us that it was much more than an option. It was a contract of sale of the entire 703.2 acres in which certain optional features were granted to the buyer to plat and subdivide it into separate tracts. Under the agreement the buyer was obligated “to pay with the interest thereon from the date of delivery of deed to the Trust Company” a mortgage of $65,650 which seems to have existed on the entire tract; to make a down payment of $34,350; “ to survey and plat said property for subdivision in parcels ” subject “ to the approval of the Seller ”; “ to install all street work and utilities * * * at the sole cost and expense of the Buyer ”; “ to take such steps as may be necessary in the judgment of the Seller by giving bond or otherwise to protect the Seller and the Seller’s property from liens of workmen or persons furnishing materials to be used in the construction of such improvements ”; to pay the seller within two years after the property had been conveyed to the said trustee “ a total payment on account of the principal of not less than” $175,000; to pay the seller in each succeeding year thereafter not less than $175,000 “ on the principal of such purchase price, and any and all interest which may accrue * * * until the Seller shall have received in full from the Buyer the total purchase price of One Million Six Hundred Thousand Dollars ($1,600,000.00) and all interest which may have accrued ” it being understood, however, that the payment of the mortgage and the $34,350 above mentioned, “ may be treated as a balance of the purchase price ”; and to pay all taxes, assessments and governmental charges of every kind, except income and inheritance taxes, beginning with the fiscal year 1923-1924.

It will be noted from the language quoted above that the buyer was obligated to pay not less than $175,000 on the principal during the first two years and $175,000 annually thereafter until the contract price was fully paid. There seems to be nothing conditional or contingent about these promised payments. The obligation which they represent is inconsistent with the idea that the contract of sale of February 10, 1923, was a mere option giving the buyer option to buy whatever parcels of land he should decide to plat but binding him to purchase none. It is true that in none of the taxable years before us did the buyer make a payment as large as that called for by the provisions of the contract. The reason for this is not explained by the stipulation which has been filed. Doubtless it was due to an agreeable arrangement between the buyer and the seller which has not been explained to us, but, be that as it may, there is nothing to show that petitioners’ decedent ever regarded the buyer’s obligation to pay this $175,000 the first two years and $175,000 annually thereafter as anything other than a straight-out contractual obligation to pay.

It seems to us that this fact is conclusively shown by the letter which decedent wrote to the trustee on November 21, 1927. In this letter decedent called attention to the fact that the buyer would owe payments of $175,000 each on March 23, 1928, March 23, 1929, and March 23, 1930, and that the trustee was authorized, on account of the existing depression, to reduce these payments to $100,000 on each of the above respective dates, “ instead of the $175,000 as is specifically required in and by our trust agreement.”

Counsel for petitioners in their brief lay a good deal of stress on the fact that it is the duty of the Board to give the written documents a construction which will accord with the interpretation which the parties themselves put upon the documents in their dealings with each other. Certainly the action of decedent in instructing the trustee to require only payments of $100,000 annually for three years instead of annual payments of $175,000 and referring to the $175,000 annual payments as being “ specifically required in and by our trust agreement”, does not accord with petitioners’ contention that the documents in question granted a mere option to purchase.

In Suburban Imp. Co. v. Scott Lumber Co., 59 Fed. (2d) 711; certiorari denied, 287 U.S. 660, the court construed a certain agreement to be a sale rather than an option, upon facts somewhat similar to those in the instant proceedings. In that case the complainant was the owner of a suburban real estate development near the city of Wheeling, West Virginia, which it had divided and platted into approximately 100 residential lots. In 1928 it entered into a contract with the defendant whereby it agreed “ to sell any one or all ” of the lots at prices set forth in the contract “ at any time while this contract remains in force.” The defendant agreed that it would:

* * * within the calendar year 1928, purchase and pay for a number of said lots, aggregating in price at the least twenty thousand dollars ($20,000.00), and that it will, within each and every calendar year thereafter, during the life of this contract, purchase and pay for a number of said lots aggregating in price at the least twenty thousand dollars ($20,000.00). It is mutually covenanted and agreed that failure or default on the part of the party of the second part [the defendant] to comply with the provisions of this paragraph shall cause a forfeiture of its right under this contract.

Paragraph 11 of the contract there involved provided, in part:

It is understood and agreed that this contract constitutes an option, which divests the party of the first part [the complainant] of its right to make sale to any other party of any of the lots included herein, during the life of this contract * * ⅜.

„ After 1928 the defendant refused to buy and pay for any more lots, contending that its contract with the complainant was nothing more than a mere option under which it was under no obligation to buy. The court held against that contention and upheld complainant’s bill. In its opinion the court cited in support of its holding the case of Berry v. Humphreys, 76 W.Va. 668; 86 S.E. 568, in which it was held:

A contract granting to the party of the second part an exclusive right and option to purchase certain lots of land, and in express terms binding him to pay, in installments, a stipulated amount of purchase money, binding the parties of the first part to sell and convey the lots to him, and giving them an option to annuli the unperformed part of the contract, in case of default in payment, and treat the payments as money paid for the option and right of purchase, and retain it, but not specifically extending to the party of the second part any right to withdraw or cease to make payments, is a contract of sale and purchase, not one of mere option to purchase.

Cf. Jefferson Gas Coal Co., 16 B.T.A. 1135; affd., 52 Fed. (2d) 120; A. B. Watson, 24 B.T.A. 466; aff'd., 62 Fed. (2d) 35; Charles J. Derbes, 24 B.T.A. 276, and cases there cited; C. A. Cochran, 23 B.T.A. 616.

On Issue No. 1 we hold in favor of respondent.

Issue No. 2.

The second issue presents an entirely new question that has never been passed upon by either the Board or the courts — at least we have been cited to no decision construing the section of the statute in question. It is, whether, under section 44 (d) of the ftevenue Act of 1928, there should be reported in the final income tax return of a decedent dying after the effective date of that act, either a gain or a loss on the outstanding installment sales obligations of his vendees, the profit from which sales he had been reporting on the installment basis, and as to which outstanding obligations no profit therein had been previously reported. The statute provides:

(d) Gain or loss upon disposition of installment obligations. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be tlie excess of tbe face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.

The respondent determined that under the provisions of the above statute, as interpreted by him in I.T. 2515 (IX-1 C.B. 125), there should be included in decedent’s income for the period January 1 to December 10, 1928, a gain in the amount of $551,981.78. The respondent now concedes, as we interpret the stipulated facts, that the gain, if any, is the amount of $181,118.07.

The respondent in his ruling in I.T. 2515, sufra, cites Committee on Finance Report No. 960, 70th Cong., 1st sess., p. 24, as supporting the interpretation he has placed upon section 44 (d), supra. This part of the Committee’s report is as follows:

Subsection (d) contains new provisions of law to prevent evasion of taxes in connection with the transmission of installment obligations upon death, their distribution by way of liquidating or other dividends, or their disposition by way of gift, or in connection with similar transactions. The situations above specified ordinarily do not give rise to gain and yet at the same time it is urged that they permit the recipient to obtain a greatly increased basis in his hands for the property received, except in case of gifts. It therefore seems desirable to clarify the matter. The installment basis accords the taxpayer the privilege of deferring the reporting at the time of sale of the gain realized, until such time as the deferred cash payments are made. To prevent the evasion the subsection terminates the privilege of longer deferring the profit if the seller at any time transmits, distributes, or disposes of the installment obligations and compels the seller at that time to report the deferred profits. The sub-section also modifies the general rule provided in sub-section (a) for the ascertainment of the percentage of profit in the deferred payments, in those cases in which the obligations are satisfied at other than their face value or are sold or exchanged. The modification permits a compensating reduction in the percentage of profit in case the obligations are satisfied at less than their face value, or are sold or exchanged at less than face value.

Petitioners contend that section 44 (d), as construed by the respondent, is unconstitutional, in that it proposes to tax as “ income ” that which is not “ income ” within the Sixteenth Amendment, and that, in any event, it cannot apply to sales made prior to January 1, 1928. The term “ income ” has often been defined, Eisner v. Macomber, 252 U.S. 189, and need not be repeated here. As used in the Sixteenth Amendment, “ income ” includes gains derived by a taxpayer from an exchange of property, as well as gains realized in money, and the provisions in the revenue acts providing for the taxation of such gains are constitutional. Atkins’ Estate v. Lucas, 36 Fed. (2d) 611.

We have already held in deciding the first issue that the agreement of February 10, 1923, constituted a contract of sale. The gain from such contract of sale comes within the Supreme Court’s definition of income. The parties have stipulated that the maximum gross profit that could be realized from the agreement of sale when and as executed, was $712,536.79, which is 47.502 percent of the agreed sales price. Sections 212 (d) and 1208 of the Revenue Act of 1926 granted the decedent the “ privilege ” of returning this gain on the installment basis, that is, on the basis that 47.502 percent of each payment of the sale,s price was income. On this basis, approximately $251,800 of the $712,536.79 was returnable as income up to the date of decedent’s death. Congress intended by section 44 (d), supra, to terminate the “ privilege of longer deferring the profit,” but provided, however, that the deferred profit should be recomputed on the basis of the difference between the fair market value of the installment obligations remaining unpaid at the decedent’s death and the “ basis ” of such obligations provided by law. The effect of .section 44 (d) in the instant proceedings is to reduce the remaining deferred profit from approximately $460,700 ($712,536.79 minus $251,800) to $181,118.07. Since the latter amount is merely a part of the original gain, taxation on which was deferred because of the installment method of rendering income granted by the Government to the taxpayer as a privilege and not as a right, it follows that section 44 (d) cannot be held unconstitutional on the ground that the realization of gain provided for therein is not income within the Sixteenth Amendment. The gain involved in the,se proceedings would have all been taxable in the year 1923, assuming that the agreed deferred payments had a readily realizable fair market value, but for the fact that Congress has enacted legislation which permits the installment plan of returning income for taxation. Cf. B. B. Todd, Inc., 1 B.T.A. 762; Hoover-Bond Co. v. Denman, 58 Fed. (2d) 909; Willcuts v. Grodwohl, 58 Fed. (2d) 587.

It remains only for us to consider petitioner’s remaining contention that, in any event, section 44 (d) cannot apply to sales made prior to January 1, 1928, the effective date of Title I, which includes section 44 (d). See secs. 1 and 65, Revenue Act of 1928.

The decedent died on December 10, 1928, which was subsequent to the effective date of the statute here involved. On the date of his death he owned installment obligations of the fair market value of $666,213.30 (face value $957,026.94), as to which no profit had been reported. True, these obligations were from a sale made in the year 1923. But the statute does not require that the installment obligation which is transmitted by death be one resulting from a sale made subsequent to January 1, 1928. It plainly says: “ If an installment obligation is * * * transmitted * * * gain or loss shall result * * The petitioners’ contention on this point is denied.

Reviewed by the Board.

Decision will be entered under Rule 50.

Trammell and Adams dissent.


author: TRAmmell :

text:
    Mary C. Marshall Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56358.
    Promulgated October 31, 1933.

      Abraham Lowenhauft, Esq., and Stanley S. Waite, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

TRAmmell :

This proceeding is for the redetermination of a deficiency in income tax of $8,371.02 for 1927. The only matter in controversy is the correctness of the respondent’s action in including in taxable income the amount of $59,596.91 as representing profit realized from the sale of real estate.

The petitioner is a Missouri corporation, organized in 1907, and has its office at St. Louis. Although empowered by its charter to engage in the real estate business generally, it was organized primarily to hold and manage the real estate belonging to the estate of Mary C. Marshall, who had died in 1905. From time to time the petitioner sold some of the real estate which had been transferred to it from the estate. It never bought or dealt in other real estate nor held any in connection with any other person. The corporation was regarded as a family affair and its business was conducted very informally. No stockholders’ or directors’ meetings were held between April 15, 1918, and April 16, 1927.

The capital stock of the petitioner consisting of 500 shares was neld as follows during the year 1927:

Shares
John D. Marshall_125
Merritt H. Marshall_125
Cora B. Pullis-125
Collier M. Berry_ 62½
Leslie W. Berry- 62½

During 1927 and until his death in 1928 John D. Marshall was president of the petitioner. Collier M. Berry was elected treasurer in 1927. Merritt H. Marshall was secretary in 1927 and had held that office since 1907.

For a number of years John D. Marshall was the stockholder most active in the management of the corporation’s business. The other stockholders permitted him to negotiate sales and to confer with them separately and informally respecting their consent thereto. After Collier M. Berry was elected treasurer in 1927 he began to take an active interest in the sale of certain of the corporation’s property.

About October 1926 John D. Marshall, president of the petitioner, advised William M. Stites, a real estate agent through whom the petitioner had previously sold several pieces of property, that certain property of the petitioner known as the Marshall Building, situated in Maplewood, Missouri, was for sale and asked Stites to obtain an offer from a purchaser. In April 1927 Stites obtained such an offer from one Aufrichtig, representing the Lesser Goldman Cotton Co., to purchase the building for $132,500 cash. A contract of sale combined with a receipt for $10,000 earnest money made out in the name of the petitioner was submitted to John D. Marshall. This receipt was returned to Stites on June 24, 1927, approved and signed by John D. Marshall, as president, and C. M. Berry, as treasurer, for the petitioner. Between August 1914 and January 1927 Stites had acted for the corporation in making all its sales and had sold several pieces of real estate. When the contract and receipt for earnest money was signed on June 24, 1927, he believed he was acting for the petitioner. On all previous sales the documents had been signed by John D. Marshall as president and Merritt H. Marshall as secretary of the petitioner.

On the same date the contract of sale and receipt for earnest money was executed a statement of rentals and expenditures with respect to the Marshall Building was executed in the name of the petitioner, John D. Marshall signing as president and C. M. Berry as treasurer. Also on the same date John D. Marshall, signing as president of the petitioner, and C. M. Berry, as treasurer, executed an instrument with Aufrichtig whereby Aufrichtig granted to the petitioner an easement in one of the walls of the Marshall Building for the benefit of an adjoining building owned by petitioner.

Some time between June 24, 1927, and August 1, 1927, Collier M. Berry consulted one Wilson, an attorney, “ to see that this thing was put through in a proper manner ” and to see if the transaction might be handled in some manner so as to save the petitioner taxes. Wilson advised him that this could be done by having the petitioner distribute the property in question to the stockholders as a dividend in kind, then place the property in the hands of a trustee, who then could pass title to the purchaser. Acting upon the advice of Wilson a special joint meeting of the stockholders and directors, who were the same persons, was held on August 1, 1927, at which time a resolution was adopted purporting to distribute to the stockholders the Marshall Building, subject to a first and a second trust, and as a dividend in kind, their interests therein to be in proportion to their stockholdings in the petitioner. Upon request of the stockholders the petitioner on August 1, 1927, executed a deed to the Marshall Building to Collier M. Berry, who on the same date executed with respect thereto a declaration of trust in favor of the respective stockholders and an agreement with them whereby they empowered him to sell and convey the property for $132,500 within 90 days from date.

The dividend was recorded in the petitioner’s journal by the following entry:

1927
Aug. 3. Surplus---$20,476.14
Bills Pay #41_ 5, 000.00
Bills Pay #46- 23, 000. 00
Bills Pay #53_ 10, 000.00
Bills Pay #56_ 11, 386.43
Bills Pay #57- 5,211.43
To Maplewood Beal Estate_$75,074.00
To record dividend in kind of this date.

The attorney for the Lesser Goldman Cotton Co., in making his examination of the title to the Marshall Building, found it to be in the name of Gollier M. Berry, who held it for the benefit of himself and the other stockholders of the petitioner as their respective interests might appear. The attorney also found that the east wall of the building was seven or eight inches over on property still held by the petitioner and which was not included in the deed to Collier M. Berry. Under these circumstances the attorney refused to approve the title unless the petitioner gave the purchaser an easement in the other property with respect to the wall and unless all the stockholders and their respective husbands or wives joined in the deed. A special joint meeting of the stockholders and directors of the petitioner was held on August 5, 192T, at which time the officers of the petitioner were empowered to join with the stockholders in the execution of a general warranty deed conveying the Marshall Building to the purchaser and granting the easement desired. Thereupon on the same date the stockholders of the petitioner and their respective spouses and the petitioner, by its president and secretary, executed a general warranty deed to the Marshall Building, together with the easement referred to above. While Collier M. Berry signed the deed, he did not purport to do so in his capacity as trustee for the other stockholders, nor was the deed signed by anyone as trustee.

The earnest money receipt having provided that the amount paid in connection therewith should constitute a part of the purchase money, a cashier’s check dated August 10, 1927, for $121,239.84 and drawn to the order of the attorney for the purchaser was endorsed by him over to the order of Collier M. Berry, who in turn endorsed it and delivered it to the Stites Bealty Co., which used part of the proceeds thereof for the payment of certain deeds of trust or mortgages outstanding on the Marshall Building and in payment of certain expenses and turned the balance back to Berry. Berry thereupon opened an account in a bank in Maplewood in his name as trustee and issued checks against it 'to each of the stockholders for the amount finally ascertained to be due them. This brought the transaction to a close. Certain expenses paid by the purchaser, plus the earnest money and the amount of the cashier’s check, all totaling $132,500, constituted the consideration paid by the purchaser for the property.

In its income tax return for 1921 the petitioner made no reference to the sale of the Marshall Building with the exception that the balance sheet at the end of the year showed building and land at $81,316.25 less than at the beginning of the year.

In determining the deficiency here involved the respondent included in the petitioner’s taxable income the amount of $59,596.91 as a profit realized by it on the sale of the Marshall Building.

The petitioner contends that the earnest money receipt and contract of sale executed by its president and treasurer on June 24, 1927, was a nullity so far as the petitioner was concerned because it was neither authorized nor approved by petitioner’s directors or stockholders; that the fact that it joined in the deed with the stockholders and their wives does not establish a sale of the property by the petitioner; that the petitioner’s action in conveying the property to a trustee for its stockholders pursuant to the resolution adopted at the special joint meeting of the stockholders and directors on August 1,1927, effectually transferred from the petitioner any title or interest in the property and therefore it could not have derived any profit from the sale of the property. The respondent contends that the sale negotiated on behalf of the petitioner by its president and treasurer, as evidenced by the earnest money receipt and contract of sale executed on June 24, 1927, was carried out in accordance with its original terms and was consummated by the execution of a deed by the corporation and stockholders on August 5, 1927; that the intermediate transaction conveying the property to C. M. Berry as trustee was merely a device or subterfuge indulged in in an attempt to avoid taxation and did not affect the terms and conditions of the original contract of sale and that the sale was in effect one by the petitioner, which is subject to tax on the profits therefrom. There is no controversy between the parties as to the correctness of the amount of the profit from the transaction as computed by the respondent, the controversy being only as to whether the petitioner is taxable on such profit.

The burden of a great deal of the petitioner’s argument, as well as some of its evidence, is to the effect that under its bylaws neither its president nor its treasurer had any authority to execute the earnest money receipt and contract of sale executed by them on June 24, 1927; that when they (the president and treasurer) discovered that a large income tax would result from the sale of the property by the petitioner they conferred with counsel and sought a means of avoiding such tax and, without letting the other stockholders know that the instrument of June 24, 1927, had been executed and the earnest money paid pursuant thereto, they permitted the adoption of the resolution of August 1, 1927, distributing the property to the stockholders in kind; that this action and resolution were bona fide in every respect and that the property in question was on that date effectively transferred from the petitioner to the stockholders. The petitioner further urges that the stockholders never ratified or approved the action of its president and treasurer in executing the instrument of June 24, 1927.

While three of the stockholders, Merritt H. Marshall, Cora B. Pullis and Leslie W. Berry, testified as to having no knowledge prior to or on August 1, 1927, of the contract of sale, the payment of the earnest money and the earnest money receipt executed on June 24, 1927, they testified as to knowing prior to August 1 that a sale was pending with respect to the property and that the purpose of the meeting was to consider matters relating thereto. There is some other testimony indicating that Leslie W. Berry was aware of all that had been done. Cora B. Pullis testified that Merritt H. Marshall, secretary of the petitioner, in advising her that the meeting was to be held, informed her that the object of it was to declare the property as a dividend to the stockholders. The record also shows that attorneys were present at the meeting and explained to the stockholders and directors that if the transaction were handled as originally planned — that is, by the petitioner making the sale and deed directly to- the purchaser or its agent — there would be an income tax to be paid by petitioner, but that if the property were first distributed as a dividend and the sale and deed not made directly by the petitioner, there would be no tax to it. The record also clearly shows that the stockholders all knew that the meeting on August 1, 1927, was for the purpose of attempting to handle the property in such a way as to reduce the taxes to the petitioner. Most, if not all, of the stockholders knew prior to August 1 that the selling price of $132,500 for the property had been agreed upon. The purchaser through its agent acquired title to the property upon final payment of the consideration agreed upon in the instrument of June 24, 1927. While none of the stockholders and directors other than John D. Marshall and Collier M. Berry may have known on August 1 or August 5, 1927, of the execution of the instrument of June 24 and the payment of the earnest money, there is nothing in the record to indicate that when they did learn of these facts they took any steps to repudiate the agreement or to have the execution of the deed to the property set aside or that they in any wise proceeded against John D. Marshall and Collier M. Berry for failing to disclose such information to them prior to the execution of the deed. Considering the foregoing and the other facts in the case in connection with the fact that the purchaser acquired title to the property within the time, and for the consideration specified in the contract of sale and receipt for purchase money of June 24, 1927, we are unable to conclude that the roundabout method selected for transferring title to the purchaser operated to relieve petitioner of the tax on the income from the sale of the property. The petitioner lays much stress on the action taken at the joint meeting of the stockholders! and directors on August 1, 1927, in distributing the property to the stockholders and thereby divesting petitioner of all interest therein. While the resolution purporting to declare the distribution indicates that such distribution was to be from the petitioner’s surplus, there is nothing to indicate that the stockholders of petitioner considered or treated such distribution as a part of their income. So far as the record discloses the matter was handled by them as if they were a mere conduit, as contended by respondent, through which the title passed from the petitioner to the purchaser. The record is clear that the only purpose for which the property was transferred out of the petitioner’s name was to start it on its way to the purchaser or its agent. Had the instrument of June 24, 1927, not been executed, there is nothing in the record to indicate that any attempt to distribute the property to the stockholders would have been made either in 1927 or at any other time. The purported distribution of the property was, in our opinion nothing but an attempt on the part of the stockholders and directors, a majority of whom were no doubt fully acquainted with the situation, to avoid the consequence of the acts of its president and treasurer in entering into the contract of sale and accepting the earnest money in connection therewith. The respondent has included the profit from the sale of the property in the taxable income of the petitioner. From the facts before us we are unable to hold that he erred in so doing. Cf. James Duggan, 18 B.T.A. 608; Nace Realty Co., 28 B.T.A. 467; Liberty Service Corp., 28 B.T.A. 1066.

Judgment taill be entered, for the respondent,


author: Arundell :

text:
    Thomas J. McLaughlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59788.
    Promulgated October 31, 1933.

      Robert W. Smith, Esq., and. J. M. Horn, Esq., for the petitioner.

      O. H. Gurl, Esq., for the respondent.
   OPINION.

Arundell :

Petitioner denies fraud, but the main attack upon the assertion of the penalties is that the penalties imposed by section 275 (b) of the Revenue Act of 1926 and section 29'3 (b) of the Revenue Act of 1928 are an integral part of the deficiency in tax and there is no authority in law for the assertion of such penalties after the basic tax and delinquency penalties have been assessed and collected.

The portions of the revenue acts applicable here are alike and provide as follows:

ADDITIONS TO THE TAX IN CASE Off DEffICIENCT
Sec. 275. (a) If any part of any deficiency is due to negligence, or intentional disregard of rules and regulations but without intent to defraud, five per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in the same manner as if it were a deficiency * ⅜ *.
(b) If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

These provisions, on their face, contain nothing that would require respondent to enforce penalties simultaneously with the assertion of a tax liability or forever after prevent him from asserting a penalty liability. The statute treats the penalties as “ additions to the tax ” and the only requirement as to enforcement proceedings is that they shall be “ assessed, collected, and paid, in the sanne manner ” as if they were deficiencies. We have no occasion here to question the statement in Ely & Walker Dry Goods Co. v. United States, 34 Fed. (2d) 429, that:

The normal tax and the [50 per cent] penalty were constitutent parts of the whole deficiency tax, which under the statute constituted a single liability and not an aggregation of separate items of iiability.

Undoubtedly income tax liability for any year constitutes a “ single liability ”, yet if the taxpayer reports only a portion of it the respondent not only may, but is required by law, to proceed to collect the balance. This is the usual situation giving rise to a deficiency. True, the respondent is prohibited from asserting a deficiency piecemeal, with certain exceptions (sec. 272 (f), Revenue Act of 1928), but that is not involved here, as the only amount claimed is that determined to be due in excess of the amounts “previously assessed (or collected without assessment).” Sec. 273, Revenue Act of 1926; sec. 271, Revenue Act of 1928. So in the present case, if, as contended, the taxes and penalties constitute a “ single liability ”, the respondent was entirely within his statutory rights in proceeding, through the sending of a deficiency notice, to collect the unpaid portion of the liability.

The question of the sufficiency of respondent’s proof — he having the burden — is raised, though not seriously pressed. This consisted solely of an exemplified copy of the record of the United States District Court, showing the indictment of petitioner, his plea of guilty, sentence of the court, and commitment. The record of a plea of guilty in a criminal case and the conviction thereon may be received in evidence in a civil suit arising out of the same matter. Such evidence is not conclusive in the civil proceedings, but is receivable as an admission to be given weight according to the circumstances. Like other admissions, they may be explained and the circumstances given under which they were made, in order to throw light upon the force that should be given to them. Swan v. Philleo, 190 N. W. 406; Russ v. Good (Vt.), 102 Atl. 481; Oregon-Washington R. & Nav. Co., 78 Ore. 355; 153 Pac. 470.

In this case petitioner made no attempt to explain in any way the circumstances surrounding his plea and his conviction in the criminal proceeding against him. As this was the only evidence offered, we are constrained to accept it as establishing, sufficiently to support the respondent’s burden, the elements necessary to prove “ fraud with intent to evade tax.”

As stated in the findings of fact, petitioner was indicted for all the years from 1924 to 1929. Counsel for respondent states in his brief that the plea of guilty went to the years 1927,1928 and 1929, although this does not appear elsewhere in the record. Respondent contends that this is “ presumptive evidence ” of petitioner’s guilt for the earlier years in which income was not reported. Whatever the presumption may be, proof of fraud for one year will not sustain the respondent’s burden of proving fraud in another year. We accordingly sustain the fraud penalty only for the years 1927, 1928 and 1929.

The respondent, by appropriate pleading, asks that the 5 percent penalty be asserted in the event that the Board does not sustain the charge of fraud but finds that there was negligence or intentional disregard of rules and regulations. The record contains nothing to support the assertion of a negligence penalty for the years prior to 1927, which are the only years to which this penalty could apply under the pleadings and our holding as to the other years. While petitioner was delinquent in filing returns for the earlier years there is no evidence of the reason for the delinquency. The burden of proof on this point is on the respondent and he has not sustained it.

Decision will be entered, for the petitioner for the years 1924., 1925 and 1926, and for the respondent for the years 1927, 1928 and 1929.


author: Sterni-iagen:

text:
    Solomon Beringer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68868.
    Promulgated October 31, 1933.

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

Sterni-iagen:

The Commissioner made the following determinations in respect of the liability of petitioning taxpayer:

1920 Deficiency-$2,154. 05
Penalty of 25 percent for failure to file a return_ 538. 51
Penalty of 50 percent for fraud_ 1, 077.03
1927 Deficiency_ 1, 909, 54
Penalty of 25 percent for failure to file a return_ 477.39
Penalty of 50 percent for fraud_ 954.77
1928 Deficiency_ 1, 565.76
Penalty of 50 percent for fraud_ 782.88

Notice thereof was duly mailed to the petitioner on October 18, 1932, and the petitioner filed his petition with the Board on December 17, 1932. In the petition errors are assigned in respect of several items involved in the computation of the deficiency and also in the determination of the fraud penalty. The respondent, on February 7, 1933, filed an answer denying the allegations of the petition and affirmatively alleging fraudulent acts. No reply was filed by the petitioner, as required by Rule 15, and the respondent now moves for judgment on the pleadings in the full amount of the deficiencies and penalties. This motion, after proper service, has come on for hearing. The proceeding has not yet reached its place on the trial calendar, and no notice of trial has yet been given.

The motion for judgment in the full amount must be denied. While Eule 19, cited by respondent, provides that the material allegations of his answer are admitted in the absence of a required reply, it also provides that they are denied if no reply is required. By Eule 15 it is only as to affirmative relief and matters upon which the burden is by statute placed upon the respondent that the petitioner must reply. If the answer merely reiterates affirmatively matters already covered by his notice of deficiency and assailed by the petition, there is no requirement that the petitioner shall as to those matters file a reply, and his failure to do so is not prejudicial. Thus in this case the items which go to make up the deficiency, as distinguished from the penalty, are still in contest in so far as they are properly pleaded in the petition, even though the facts constituting fraud are under the rule to be taken as admitted because of the failure of a reply.

The case is manifestly different from F. O. Statler, 21 B.T.A. 342, upon which respondent relies, for in that case the petitioner did not contest the deficiency, but attacked only the fraud penalty. Thus by his failure to file a reply he was in the position of admitting both the deficiency and the penalty and leaving nothing for contest. Judgment for the full amount was therefore in order. Here, however, for all that appears, the petitioner, when the proceeding comes on for trial, may by his proof succeed in diminishing the deficiency and thus proportionately reducing the amount of the penalties.

The respondent’s motion for judgment will therefore be denied.


author: GoodRicpi:

text:
    Albert Leon & Son, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53440.
    Promulgated October 31, 1933.

      Samuel Klein, Esq., for the petitioner.

      John I). Kiley, Esq., for the respondent.
   OPINION.

GoodRicpi:

It is agreed that during 1926 and 1927 all the stock of Albert Leon & Son, Inc., Perth Amboy, and Albert Leon & Son, Plainfield, New Jersey, was owned by the same interests. Therefore, these two corporations were affiliated within the meaning of section 240 of the Eevenue Act of 1926, but they elected to file separate returns for 1926 and 1927. They were included in the new affiliated group formed in 1928. Eesponclent maintains that they had no election to file a consolidated return for 1928, under section 142 of the Eevenue Act of 1928, and could not do so without first obtaining from him permission to change the basis. It is admitted that such permission was neither requested nor granted.

The applicable statute, section 142 (a) of the Eevenue Act of 1928, has provided a limitation on the right of election for 1928 where an affiliation existed and an election was made in the prior year. Under earlier revenue acts (in which the applicable sections of the statute are practically identical with the one before us) it has been held that where an election has been made and separate returns filed by affiliated corporations, the addition to the affiliated group of one or more corporations in a succeeding year does not entitle the several companies to make a new election to file a consolidated return without the consent of the Commissioner. Bowie Lumber Co., Ltd., 20 B.T.A. 342; B. Mifflin Rood Brick Co., 19 B.T.A. 785; Imperial Assurance Co., 19 B.T.A. 1068; Swift & Co. v. United States, 38 Fed. (2d) 365. And in those cases where affiliation existed during the prior year and a consolidated return had been filed, the corporations thereafter coming into the group had no right of election to file a separate return because it was required that a consolidated return include the entire group. Southern Power Co., 17 B.T.A. 962; affd., Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; certiorari denied, 282 U.S. 903; Park Avernue Corp., 20 B.T.A. 288; Fontana Union Water Co., 24 B.T.A. 1045. Seemingly, the 1928 Act, together with Regulations 74, article 731 et seq., promulgated thereunder, requires no change in the rules laid by these decisions with respect to returns of affiliated corporations for the taxable year 1928, but, as we see it, we have in the case at bar not the addition of new members to a continuing affiliated group, but a dissolution of the group previously existing and the creation of a new group.

During 1927 all the stock of the Perth Amboy and Plainfield companies was owned by Albert and Marcus Leon, and these two corporations were affiliated. Under the agreement of December 30, 1927, the Leons disposed of about 22 percent of their stock in Perth Am-boy and their entire holdings in Plainfield. The disposal of this stock terminated the affiliation which had resulted from its ownership. Remington-Rand, Inc. v. Commissioner, 33 Fed. (2d) 77; certiorari denied, 280 U.S. 591; Obenchain-Boyer Co., 18 B.T.A. 293. Cf. Carey Salt Co., 26 B.T.A. 675; Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568; affd., Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544; American Printing Co. v. United States, 53 Fed. (2d) 98; Riggs Nat. Bank, 17 B.T.A. 615; affd., 57 Fed. (2d) 980.

After the execution of the agreement as of January 1, 1928, the Perth Amboy Co., the petitioner here, owned all the stock of Albert Leon & Son companies of Plainfield, New Brunswick, and Flizabeth, and of the Green Furniture Co. and Regina Realty Co. Thus a new group was formed. Upon the incorporation of the Bound Brook company, in March 1928, petitioner acquired more than 95 percent of its stock and thus it became affiliated with the group. All these subsidiaries were thereafter managed and controlled by petitioner, the parent corporation, and the affiliation continued throughout the taxable year 1928. But it was not the same affiliated group which existed in 1927; that affiliation had been dissolved. The new group was comprised of seven corporations and was a distinctly different unit, affiliated through petitioner’s ownership of more than 95 percent of the stock of the six subsidiaries. For that reason, we are of opinion that the corporations comprising the affiliated group in 1928 were not bound by the election made by the 1927 affiliated group, but that they themselves had an election and might file a consolidated return for 1928 without the consent of the Commissioner. Cf. Stonega Coal & Coke Co. v. Commissioner, 57 Fed (2d) 1030; Marvel Equipment Co., 67 Fed. (2d) 354, reversing 26 B.T.A. 515.

The remaining question is whether net losses sustained by the Plainfield and Elizabeth companies in 1926 and 1927 may be deducted from consolidated net income in 1928.

Net losses are personal to the taxpayer and may be applied only against net income of the taxpayer in a succeeding taxable year. Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436; Bowman Hotel Corp., 24 B.T.A. 1193.

It follows that the application of the net loss of Albert Leon & Son, Plainfield, New Jersey, is limited to the net income of that corporation in the taxable year 1928, which is in the amount of $2,522.94. Albert Leon & Son, Elizabeth, New Jersey, had no net income in 1928 against which its net loss may be applied. Cf. Burnet v. Moore Cotton Mills Co., 49 Fed. (2d) 59; Woolford Realty Co. v. Rose, 286 U.S. 319; Planters Cotton Oil Co. v. Hopkins, 286 U.S. 332; Delaware & Hudson Co., 26 B.T.A. 520; Riley Stoker Corp., 26 B.T.A. 749.

Reviewed by the Board.

Judgment will Toe entered wider Rule 50.

      (a) Consolidated, returns permitted.- — Corporations which are affiliated within the meaning of this section may, for the taxable year 1928, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner.


author: Arundell:

text:
    Sarah Briarly, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Cunningham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68677, 68678.
    Promulgated October 31, 1933.

      Arnold Market, G-P-A., for the petitioners.

      Philip A. Bayer, Esq., for the respondent.
   OPINION.

Arundell:

These proceedings, consolidated on motion of petitioners, involve deficiencies in income taxes and penalties for the year 1928 as follows: Sarah Briarly, tax, $386.10; penalty, $96.52; and Mary Cunningham, tax, $478.60; penalty, $119.65.

The single error alleged in each case is the respondent’s refusal to allow the petitioners to report income from the sale of real estate on the installment basis. The stipulation of facts is incorporated herein by reference as our findings of fact.

Each of the petitioners in 1928 owned an undivided one-third interest in real estate in New York City. The property was sold that year for $63,500, the terms of sale being:

Cash_$20, 000
First mortgage assumed_ 8, 000
Interest bearing bond of vendee secured by second mortgage on the property_ 35,500
Total_ 63, 500

The bond of the vendee, secured by a second mortgage on the property, was payable 18 months after November 28, 1928, the date of sale, and was due in a lump sum and contained no provision for partial or installment payments. It was paid in full by the vendee on the due date, May 28, 1930. The depreciated cost of the property to petitioners was $17,545, and selling expenses amounted to $1,952.75. Total profit from the sale of the property was $44,002.25, computed as follows:

Selling price-$63, 500.00
Less expenses of sale- 1,952.75
61, 547. 25
Depreciated cost_ 17, 545.00
Profit_ 44,002.25

The share of this profit accruing to each of the petitioners was $14,667.41.

No income tax return was filed by either of the petitioners for 1928. A return for each of the petitioners was prepared by the collector on August 3, 1931, under section 3176 of the Revised Statutes, in which returns there was shown as income of each petitioner the amount of $14,667.51, being the portion of each of the profit on the sale of the New York property. The returns so prepared were approved by the Commissioner.

Neither of the petitioners has reported profit from the sale of the New York property in any year. It is stipulated that even if the sale of the property be considered an installment sale and tax computed on that basis, both petitioners would still have income subject to tax in both 1928 and 1930.

Petitioners contend for two points. First, that the sale was an installment sale, and, second, that they are entitled to report their shares of the profit on the installment basis. The respondent opposes both contentions. His position is that the sale was not an installment sale, but that even if it were, the petitioners by failing to file returns have forfeited their right of election to have income computed on that basis.

It is our opinion that the petitioners may not now elect the basis on which they will report income and have their tax computed. Assuming, without deciding, that the sale was an installment sale, petitioners of course would have had the right to elect in timely returns to report on either the installment or completed contract basis. When they failed to make any return the collector prepared returns for them under his statutory powers. The question here is governed by the principle announced in Joe Goldberg, 14 B.T.A. 465; petition for review dismissed, C.C.A., 5th Cir., Feb. 16, 1932. There the taxpayer had the optional right to file either a separate return or a joint return including the income of his wife. Neither he nor his wife filed returns for the years 1923 and 1924, and the Commissioner for those years prepared joint returns under section 3176 of the Kevised Statutes, and proposed to assess against the taxpayer the full amount of the tax computed on the basis of the joint return. The taxpayer sought to have the income divided between himself and his wife and the tax assessed separately on his proportion of the income. We held that the intent of Congress in enacting section 3176 of the Kevised Statutes was “ that a return so filed should answer the same purposes as if filed by the parties,” and denied the taxpayer’s claim on authority of a number of cases in which, after election was made, taxpayers were refused permission to change the basis. See cases cited therein; also Gilbert W. Lee, 6 B.T.A. 135; affd., 41 Fed. (2d) 1004; Alameda Investment Co. v. McLaughlin, 33 Fed. (2d) 120; James C. Ellis, 16 B.T.A. 1225; Morgan Rundel, 21 B.T.A. 1019.

Even if, for some reason that does not now occur to us, it may be considered that a return prepared under section 3176 of the Kevised Statutes is not “ the return ” required by statute, as held in the Goldberg case, we are nevertheless of the opinion that the petitioners may not at this late date make an election. The installment sales provisions of the revenue acts are optional and taxpayers may elect to take advantage of them or not as they see fit. J. B. Bradford Piano Co., 15 B.T.A. 1045; Morgan Rundel, supra. The purpose of the installment sales provisions, first sanctioned by statute in the Kevenue Act of 1926, was to alleviate the hardship attendant upon the reporting as income in a single year all the profit on transactions the receipts from which were spread over two or more years, by permitting the vendor to distribute the profit through the years during which the purchase money was actually received. Burnet v. S. & L. Building Corp., 288 U.S. 406. These provisions bestowed a benefit on taxpayers that had not theretofore had statutory approval. Where benefits are sought by taxpayers, meticulous compliance with all named conditions is required. Lucas v. Pilliod Lumber Co., 281 U.S. 245. The statute here involved provides that in the case of an installment sale of real estate “the income may * * * be returned ” on the installment basis. This, in our opinion, requires both timely and affirmative action on the part of those seeking to take advantage of the benefits conferred by the statute. As pointed out above, taxpayers voluntarily filing returns and making timely election are bound by their choice. To allow a choice where the taxpayer sits supinely by until by the diligence of the Government it is discovered that a tax is due would put a premium on inertia that certainly is not within the spirit of our system of taxation. If any class of taxpayers is entitled to claim a preference, it consists of those who have complied with the statute. Cf. Florsheim Bros. Dry Goods Co. v. United States, 280 U.S. 453.

We accordingly hold that petitioners may not now elect the basis on which to have their profit reported and income taxed, and the determination of the respondent is sustained.

Decision will be entered for the respondent in each of these proceedings.


text:
    Charles W. Jaynes, Albert L. Pope and Henry O. Cushman, Trustees u/w of Charles P. Jaynes, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62503.
    Promulgated October 31, 1933.

      Charles M. Rogerson, Esq., for the petitioners.

      E. L. Corbin, Esq., for the respondent.
   OPINION.

Arundell :

Under the provisions of the testamentary trust administered by these petitioners, the income was to be paid to the decedent’s two children for life, and upon the death of both the trust was to terminate and $25,000 of the corpus to be paid to each grandchild of the decedent, and the balance to specified charitable organizations. At the time of decedent’s death the value of the trust corpus was $391,940.82, and in the taxable year, 1929, it was $465,334.99.

The theory of petitioners is that only $50,000 of the corpus will ever be needed to pay the individual beneficiaries, hence the gain derived in 1929, being added to corpus, must eventually go to charity and should be treated as permanently set aside for charitable purposes. The applicable statute, section 162 of the Revenue Act of 1928, permits the deduction from gross income of trusts of the part thereof that is “ paid or permanently set aside for ” charitable and similar organizations.

At the time of decedent’s death there were but two grandchildren, none-have been born since, and those two are still living. In the taxable year 1929, decedent’s son Charles, and the wife of Charles, were both 51 years of age. They were the parents of decedent’s two grandchildren. Decedent’s other child, Harriet, was married but has never had any children. In 1929 she was 53 years of age.

The parties have stipulated that in order that the principal shall be exhausted by payments [to the grandchildren] of $25,000 each, there must be sixteen more grandchildren ” of the decedent. Petitioners rely on Boston Safe Deposit & Trust Co. et al, Executors, 20 B.T.A. 1159, to sustain their claim. That was an estate tax case where the testator provided for annuities, during the life of his three daughters, for every grandchild of his that might be born after his death, with remainder over to charity. The executors of the estate, for the purpose of computing the value of the net estate, claimed deduction of a minimum amount which was certain to go to the charitable organizations. In calculating such amount recognition was given to the presumption of possibility of issue, regardless of age. Evidence was offered to show that there was no probability of additional grandchildren of the testator, but the executors nevertheless assumed the possibility of five being born as a safe maximum. On this basis and taking into account other factors that might by any possibility reduce the charitable remainder, they arrived at an amount which they said would not be impaired even though grandchildren of the testator were “ born with incredible rapidity and in improbable numbers,” and which would, with reasonable certainty, go to charity. In our opinion in that case we alluded to the presumption in favor of possibility of issue and said that “ if we had to determine just how many might possibly have been born, our problem would be too difficult for human judgment and knowledge.” The petitioners here are asking us to solve the problem which in the cited case we confessed was beyond our abilities. We are bound by the presumption of possibility of issue, cf. George E. Farrington et al., Executors, 13 B.T.A. 274; affd., 30 Fed. (2d) 915; Guaranty Trust Co. et al, Executors, 27 B.T.A. 550, and we cannot say to what extent this should be carried, in point of number, to determine the portion of income for the taxable year that can be ascertained with reasonable certainty will remain for charitable purposes. Any attempt to determine the extent to which the trust fund may be depleted by the birth of additional children must necessarily depend entirely on a guess as to the number, and this would lead from the proper office of the presumption into the realm of pure speculation. The statute does not require any such venture. Cf. Humes v. United States, 276 U.S. 487.

In Boston Safe Deposit & Trust Co. et al, Executors, 26 B.T.A. 486, we had the income tax sequel of the estate tax case reported under the same name at 20 B.T.A. 1159. In the income tax case, which has been affirmed on appeal, 66 Fed. (2d) 179, the executors claimed a deduction of at least the earnings of the amount of the fund which we determined in the estate tax proceeding to be the minimum deductible value for the remainder left to charity. We denied the deduction, saying in part:

The appraisal of an apparently stable and liquid fund of securities for estate-tax purposes is a far different matter from that of gauging the recurring yearly-return from such a fund, from the viewpoint of the income tax thereon.

The same thing may be said here, with full recognition of the possibility in that case of the invasion of corpus to pay annuities. We know not to what extent the corpus may be depleted by the contingencies ever present in the management of property. We are accordingly unable to find that any part of the income was “ permanently set aside ” for charitable uses within the meaning of the statute and the respondent’s refusal to permit the deduction sought is affirmed.

Decision will he entered for the respondent.