author:
Matthews :

      Murdock,

text:
    Elkhorn Coal Company, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49064-49070.
    Promulgated July 30, 1936.

      John L. Steinbuqler, Esq., Leo H. Hoffman, Esq., and Robert W. Knox, Esq., for the petitioners.

      R. W. Wilson, Esq., and Arthwr Glo/rh, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: William C. Atwater, Jr.; David H. Atwater; John J. Atwater p Margaret A. Olds; Lena C. Hutchins; and Charles P. Hutchins.

   OPINION.

Matthews :

The division report and determination in the above-entitled case promulgated on January 28, 1936, and published at 33 B. T. A. 995, which was, on motion of respondent filed January 25, 1936, referred to the Board for review, was vacated on March 6, 1936, and the proceedings rereferred for further consideration.

It is the position of the petitioners that when the Elkhorn Coal & Coke Co., hereinafter referred to as Elkhorn, transferred a part of its assets to the Elkhorn Coal Co., hereinafter referred to as the new company, in exchange for over 80 percent of the new company’s stock, which was distributed to Elkhorn’s stockholders, there was a reorganization within the meaning of. clause (B) of section 203(h) (1) of the Revenue Act of 1926; that the subsequent transfer by Elkhorn of all the properties which it then owned to the Mill Creek Coal & Coke Co., hereinafter referred to as Mill Creek, for 1,000 shares of 25 percent of Mill Creek stock, constituted a reorganization within the meaning of clause (A), and that no taxable gain was realized by Elkhorn as a result of either of these transactions, under the provisions of section 203(b) (3). -

Petitioners also contend that Elkhorn Coal Co. alone is suoject to transferee liability, if any.

The respondent takes the position that there was one continuous plan which embraced all the steps taken and that before a single step was taken there had been formulated a single plan of reorganization or regrouping of corporate assets. He -lays great stress on the fact that meetings of the directors and stockholders of Elkhorn and of the new company, and a meeting of the directors of Mill Creek, were held at the same place upon the same day, December 17, 1925, and all within the space of a few hours, and were attended by the same individuals. He argues that, since Mill Creek did not intend to acquire substantially all of the property owned by Elk-horn at the inception of the plan, Mill Creek did not acquire “substantially all” of the property of Elkhorn on December 31,1925.

Respondent contends that in substance, and in fact, what occurred is this: Mill Creek acquired a portion of the assets of Elk-horn in exchange for 25 percent of the total outstanding stock of Mill Creek and the remaining assets of Elkhorn, having substantial value, were retained by a successor corporation to Elkhorn in such manner that the equitable interest therein of each stockholder of Elkhorn remained unchanged; that the retention of the remaining assets by the successor corporation was in all respects the equivalent of retention by Elkhorn itself; that the various steps taken, or transactions consummated, between Elkhorn and the new company, and thereafter between Elkhorn and Mill Creek, were nothing more nor less than an elaborate tax avoidance scheme to accomplish a result equivalent’ in all other respects to that which would have obtained if Elkhorn had transferred its mining properties directly to Mill Creek in exchange for 1,000 shares (25 percent) of' Mill Creek stock.

Respondent does not argue that each of the steps taken, if viewed separately and apart from all other steps, does not fall within certain of the tax-exempt provisions of the statute. He submits, however, that there is no justification for viewing these transactions separately and apart one from the other; that, since in cases involving the question of whether or not immediately after a transfer the transferor or its stockholders or both are in control of the transferee so as to bring the case within the exemption of section 203 neither the Board nor the courts have hesitated to consider the entire series of events after the transfer and to r,eject as not constituting control the momentary appearance of control where it was never intended, by equal reasoning the entire series of .events preceding a transfer must be considered in cases like the present to see whether or not substantially all the assets of one corporation have in effect been acquired by another or whether such was the appearance artificially given to a transaction through the maneuvering of events, wher.eas in reality the transaction did not meet the test.

In support of the motion filed by respondent for reference of the division report promulgated on January 28, 1936, to the Board for review, respondent submits that it was encumbent upon the petitioners to show affirmatively that the transfer to Mill Creek was so completely separate, distinct, and disassociated from the transfer by Elkhorn of other assets at the same time that it can fairly be said that the transfer to Mill Creek was an acquisition by Mill Creek of substantially all. of Elkhorn’s properties. He lays great stress on the fact that there is no testimony by anyone on behalf of petitioners that the two acquisitions were disconnected. He again lays stress on the coincidence of personnel, time of meetings, and control of all three corporations by the same individuals, and states that on the very day that the first transfer was made, December 18, 1925, the second transfer wap as good as made and that it was a practical certainty that it would be made. He again submits that both transfers were part and .parcel of a larger plan in which a substantial portion of Elkhorn’^ assets were transferred to the new company and its other assets were transferred to Mill Creek, and insists that on the facts we should treat the two transfers as having been made at substantially the same time or that the transfer to the new company was equivalent to a retention by Elkhorn of the assets transferred. He cites the cases of Alice V. St. Onge, 31 B. T. A. 295, and Arctic Ice Machine Co., 23 B. T. A. 1223, as supporting his contention.

Respondent also contends that each of the petitioners is a transferee, either directly or indirectly, of the assets of Elkhorn, and that each petitioner was in receipt of an amount in excess of the tax liability asserted against the taxpayer.

The applicable provisions of the Revenue Act of 1926 are set out in the margin.

We agreed with, respondent that the whole series of events preceding a transaction claimed to be a tax-free reorganization, under the terms of clause (A) of section 203 (h) (1), should be considered in determining whether or not substantially all the assets of one corporation have in fact been acquired by another. We also think that events subsequent to such a transaction should be taken into consideration.

We do not doubt that before a single step was taken a plan had been formulated for regrouping the corporate assets. We do not question the fact that Mill Creek was on December 17, 1925, aware of the steps which were subsequently to be taken by Elkhorn and the new company, since three of the directors of each corporation, which constituted a majority of the directors of each corporation, were the same individuals and since Elkhorn and its stockholders owned or controlled a majority of the stock of Mill Creek. And it is clear that after all the steps had been taken the individuals who had been stockholders of Elkhorn had the same economic interest in the assets transferred to the new corporation and to Mill Creek as they formerly had in such assets.

We do not agree, however, with respondent’s contention that the transfer of a large part of the assets of Elkhorn to the new company on December 18 was equivalent to the retention by Elkhorn itself of these assets. Such conclusion is not justified by the stipulated facts. Neither do the facts justify the respondent’s contention that the transfer to the new corporation should be treated as having been made at the same time as the transfer to Mill Creek.

In the instant case the same group of individuals controlled all the corporations involved. Neither this group of individuals nor Elkhorn was enriched by the transactions. The group of individuals owned or controlled the same interest in the assets after, December 31 and after January 22 as they did before December 9, when the new corporation was organized. Each of the several transfers was the shifting of assets from one corporation to another for stock. None of the transfers bears the semblance of a sale.

The reason for transferring the mining property located at May-beury, West Virginia, from Elkhorn to Mill Creek was to operate the two mines as one and thus reduce the cost of operation. Such transfer was germane to the business of both corporations, which was the mining of coal.

The stipulated facts justify the inference that one of the motives which the stockholders of Elkhorn had in organizing the new corporation and causing the three corporations to adopt the several steps or plans of reorganization which were adopted and carried out, was to make the transfer of the mining properties from Elkhorn to Mill Creek without resulting tax liability to Elkhorn or to themselves. The facts do not justify the inference that this was the only motive of the stockholders; but even if it were, we could not, on the facts of this case, refuse to' regard what was actually done and to give effect thereto.

Elkhorn and its stockholders are separate taxable entities and we have before us the tax liability of Elkhorn. By the first transfer there was a modification of the corporate structure of Elkhorn. A large part of its assets were transferred to the new company for over 80 percent of that corporation’s stock, which was immediately distributed by Elkhorn to its stockholders. The new corporation was organized under the laws of another state and has been engaged in mining coal on the tract of coal lands which was transferred to it, and it is still in existence. By this transfer and the distribution of the stock received, Elkhorn completely divested itself of all right, title, and interest in and to the assets transferred and the stock received in exchange. In so far as Elkhorn was concerned, it was in exactly the same position after the transfer of December 18 as it would have been if it had distributed these assets to its stockholders in kind instead of distributing to them the stock which it received upon their transfer.

As was stated above, we think that consideration should be given to the whole series of events, both before and after a transaction, claimed to be a tax-free reorganization, in determining whether the transaction is in fact what it appears to be in form. But where, as here, the main object to be accomplished is a legitimate business purpose, effect must be given to what was done. Upon every exchange, gain or. loss is realized and is recognized for tax purposes unless it falls within one of the exceptions in the statute. The time when such exchange takes place is a question of fact, and if the facts show that an exchange made at a particular time was for a legitimate business purpose and was intended to be a permanent exchange and not merely a temporary holding of title to obscure the real transaction, effect must be given thereto. The transfer of December 18 was not a device to hide the real nature of the later transfer, but was a bona fide business move under which Elkhorn intended to, and did, effectively and permanently dispose of the assets transferred on that date for a controlling interest in the corporation to which they were transferred. This transaction meets the definition of reorganization contained in clause (B) of section 203(h)(1). After December 19, when the stock received on the exchange was distributed to its stockholders without the surrender of their Elkhorn stock, Elkhorn was possessed only of the mining properties located at Maybeury, West Virginia.

After December 19 the stockholders had shares in two corporations which evidenced their interest in the assets which had formerly been held by one corporation, but Elkhorn had only the mine and mining properties located at Maybeury, West Virginia. On December 31 these properties were transferred to Mill Creek for 1,000 shares (25 percent) of Mill Creek’s stock. By this exchange, Mill Creek acquired all the properties of another corporation, which constitutes a reorganization within the definition contained in clause (A) of section 203(h)(1). Under the provisions of section 203(b)(3) no gain or loss is recognized where a corporation, a party to a reorganization, exchanges property, in pursuance to the plan of reorganization, solely for stock or securities in another corporation, a party to the reorganization.

Since the decisions of the Supreme Court in Gregory v. Helvering, 293 U. S. 465; Helvering v. Minnesota Tea Co., 296 U. S. 378; Helvering v. Watts, 296 U. S. 387, and Nelson Co. v. Helvering, 296 U. S. 374, it is clear that where a transfer made pursuant to a plan of reorganization meets the terms of the statute, and such transfer is not merely a device to obscure the real transaction, effect must be given thereto. See also Helvering v. Winston Brothers Co., 76 Fed. (2d) 381; Western Industries Co. v. Helvering, 82 Fed. (2d) 461; Chisholm v. Commissioner, 79 Fed. (2d) 14, and Bremer v. White, 10 Fed. Supp. 9.

The respondent would have us substitute, by construction, a fictitious transaction which would have had a similar economic effect, in so far as the stockholders of Elkhorn are concerned, for the transactions which were actually made. There is nothing in the record which would justify such disregard of what actually occurred. There was no duty on the part of Elkhorn, or its stockholders, so to fit the transfers into the revenue act as to produce a tax. Gregory v. Helvering, supra.

In our opinion, the facts show affirmatively that the transfer to Mill Creek was completely separate and distinct from the earlier transfer by Elkhorn to the new corporation. The transfer made on December 18 was complete within itself, regardless of what Elk-horn planned to do later, or did subsequently, do. It was not a sham or a device intended to obscure the character of the transaction of December 31. The stipulated facts do not suggest other than a bona fide business move.

The transfer made on December 31 was also complete within itself, and was made for reasons germane to the business of both corporations. This transfer falls within the terms of clause (A) of section 203(h)(1), whether or not Elkhorn was dissolved. Helvering v. Minnesota Tea Co., supra. Therefore, the transaction of December 31 was no sale, but a reorganization. The transferor received an interest in the transferee which represented a material part of the value of the transferred assets and within a short time the trans-feror was dissolved.

Giving heed to what in law was done, rather than to its economic equivalent, the transfer of December 31 was made pursuant to a plan of reorganization, and, under the provisions of section 203 (b) (3), the gain to Elkhorn upon the transfer is not recognized.

The case of Alice B. St. Onge, supra, was decided before the Supreme Court rendered its decisions in Helvering v. Minnesota Tea Co., Helvering v. Watts, and Nelson Co. v. Helvering, supra, and is now on appeal to the Circuit Court of Appeals for the First Circuit. Whether we would have reached any different decision if we had had the benefit of the Supreme Court decisions, it is not now necessary to decide. The St. Onge case is distinguishable on its facts from the instant case. In that case the plan adopted and carried out was described and called a plan of sale under which the assets and business of a state bank (of which the taxpayer was a stockholder) were purchased by a national bank for cash, and the stock of the national bank was purchased by the stockholders of the state bank for cash. We held that the transaction was what the parties called it — a sale for cash by the state bank and the purchase of stock of the national bank for cash by the stockholders of the state bank. In the instant case the transactions of December 18, 1925, and of December 31, 1925, were both made pursuant to plans of reorganization, whereby assets of one corporation were exchanged for stock of another corporation.

Since there were other adjustments about which the parties are not in dispute, it is necessary to determine whether all of the petitioners are transferees of Elkhorn. The stipulated facts show that the individual petitioners are not transferees of Elkhorn. Inasmuch as the Elkhorn Coal Co. acquired all of the assets of Elkhorn in liquidation on January 22, 1926, it is the only transferee of Elkhorn, within the meaning of the statute.

Reviewed by the Board.

Judgment of no deficiency will he entered in Docket Nos. 49065, 49066, 49067, 49068, 49069, and J¡9070. Judgment wider Rule 50 will he entered in Docket No. 49064.

Murdock,

dissenting: I do not think there was a statutory reorganization within the definition of section 112 (i) (1) (A) of the Revenue Act of 1928. The question is whether there was an acquisition by one corporation of “substantially all of the properties of another corporation.” The transferor corporation in this case first divested itself of a part of its assets; then the acquiring corporation acquired all of the assets which remained. These two steps were both parts of one plan. They were both essential to the completion of the two alleged statutory reorganizations involved in that single plan. See Liquidating Co., 33 B. T. A. 1173. I think that plan must be looked at as a whole, and if the acquiring corporation does not, in the end, have substantially all of the properties which the transferring corporation had when the first step in the plan was taken, then the express terms of the statute have not been complied with. Alice V. St. Onge, 31 B. T. A. 295. See also Arctic Ice Machine Co., 23 B. T. A. 1223; David Gross, 34 B. T. A. 395. The Board has consistently followed these cases and no higher authority has ever said they were wrong.

Leech, Turner, Mellott, and ARNOLD agree with this dissent.

       This decision was prepared during Miss Matthews’ term of office.

       RECOGNITION OF GAIN OR LOSS FROM SALES AND EXCHANGES.
      Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
      * ***** *
      (b) (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      *******
      (h) As used in this section and sections 201 and 204. — •
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Guitar Trust Estate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 35102, 51432, 56931, 64535, 69665, 75823.
    Promulgated August 4, 1936.

      J. 8. T. Ivins, Esq., and Richard B. Barker, Esq., for the petitioner.

      F. R. Shearer, Esq., and Irving M. Tuttar, Esq., for the respondent.
   OPINION.

Black:

Before considering any of the other assignments of error, we will rule upon a contention made by petitioner which, if valid, would dispose of the proceedings in favor of petitioner without further consideration. Petitioner states the contention as follows:

The respondent has not met the burden of proof required of him to assert any deficiency in tax against the petitioner on the basis that the petitioner is taxable as a trust.

Petitioner calls our attention to the differences in the respective revenue acts between the computation of an individual’s income and of the income of a corporation, and argues, since the respondent has determined petitioner’s income on the ground that it was an association taxable as a corporation and since it is now settled that petitioner is a trust the net income of which, with certain specified ■exceptions, shall be computed in the same manner and on the same ■basis as in the case of an individual, that the respondent’s original determination of net income in each proceeding is not entitled to be considered as being prima facie correct; that the burden was upon the respondent to establish de novo the correct net income of petitioner as a trust rather than as an association; and that, the respondent having made no attempt to assume such a burden, the Board should enter an order of no deficiency for all of the years involved.

The respondent contends that the net income as determined by him in the deficiency notices should be considered as being prima facie correct as a starting point, and that the burden is upon the party who alleges that such net income should either be increased or decreased.

In Crocker v. Malley, 249 U. S. 223, Alvah Crocker and four others, who were trustees under a certain declaration of trust, commenced an action in the District Court of the United States for the District of Massachusetts against John F. Malley, internal revenue collector, to recover the full $10,875.40 paid by plaintiffs as income taxes for 1913, 1914, and 1915, which had been collected by the Government upon the ground that plaintiffs were taxable at rates applicable to associations rather than at rates applicable to trusts. If the tax liability had been determined upon the latter ground, it would have amounted to only $1,321.33 instead of $10,875.40. The District Court, in an unreported opinion, agreed with the plaintiffs to the extent that the Government had erred in taxing them as an association, but refused to render plaintiffs a judgment for more than $9,554.07 on the ground that plaintiffs were taxable as a trust and were therefore not entitled to recover the $1,321.33 tax liability computed upon that basis. Both litigants took a writ of error to the First Circuit Court of Appeals. In his writ the collector claimed that the allowance of any recovery was error, while the trustees in their cross writ asserted that they were entitled to recover the full amount of $10,875.40 stated in their declaration. The Circuit Court (250 Fed. 817) reversed the judgment of the District Court and said that such a conclusion rendered it unnecessary to pass upon the question involved in the cross writ brought by the trustees. The Supreme Court granted a writ of certiorari, and, after holding that the trustees were not taxable as an association, said:

Our view upon the main question opens a second one upon which the Circuit Court of Appeals did not have to pass. The District Court while it found for the plaintiffs, rules that the defendant was entitled to retain out of the sum received by him the amount of the tax that should have been paid as trustees. To this the plaintiffs took a cross writ of error to the Circuit Court of Appeals. There can be no question that although the plaintiffs escape the larger liability, there was probable cause for the defendant’s act. The Commissioner of Internal Revenue rejected the plaintiff’s claim, and the statute does not leave the matter clear. The recovery therefore will be from the United States. Rev. St. sec. 989 (Comp. St. sec. 1635). The plaintiffs, as they themselves alleged in their claim, were the persons tamed, whether they were called an association or trustees. They were taxed too much. If the United States retains from the amount received by it the amount that it should have received, it cannot recover that sum in a subsequent suit.
Judgment of the Circuit Court of Appeals reversed.
Judgment of the District Court affirmed. [Italics supplied.)

It is our opinion that petitioner in the instant proceedings remains in law the same “taxpayer” whether it be taxed at rates applicable to associations or at rates applicable to trusts. It is a separate taxable entity and the law determines the rates to be applied to its net taxable income. The law also provides how that net taxable income shall be determined, depending upon whether it is classed as a trust or classed as an association. Crocker v. Malley, supra. See also sections 2 (1) and (9), Revenue Act of 1921; 2 (a) (1) and (a) (9), Revenue Acts of 1924 and 1926; and 101 (a) (1) and (a) (13), Revenue Act of 1928. In other words, it is our opinion that the determination of whether petitioner is an association or a trust is simply one of the many elements that may be involved in the determination of the tax liability of a “taxpayer”, like the determination of what constitutes income, allowable deductions, etc., and that the determination that petitioner is a trust rather than an association, or vice versa, does not have the legal effect of canceling the respondent’s entire determination to such an extent as would compel him to proceed de novo. True, petitioner’s net income as a trust may be different from its net income as an association. But it is also true that there are many items of income and deductions which would remain the same whether petitioner be taxed as a trust or as an association.

We hold therefore, that the net income as determined by the respondent in his several deficiency notices for the respective taxable years should be used as a starting point, and that the burden of proof is upon the party who alleges that such net income should either be increased or decreased. Petitioner’s contentions to the contrary are denied.

The main issue, previously stated, will now be considered.

The original deed of trust, executed on December BO, 1921, provided in part as follows:

The said trustees shall make an accounting with the beneficiaries herein once each year during the term of this trust, and the trustees shall, at their option declare a dividend out of any profits that may have accrued to said estate, which may be paid to each of the beneficiaries herein named, or retained in the business as the trustees may determine.

There can be no question but that this original trust was a discretionary trust as to the distribution of income.

On January 10, 1923, the grantors of the original deed of trust attempted to cancel the above provision by the so-called supplement set out in full in our original report, 25 B. T. A. at page 1218. Although this so-called supplement is dated January 10, 1922, it was actually executed on January 10, 1923, and we so held in a memorandum opinion entered October 29, 1932, following a rehearing and the receipt of additional evidence on that point.

Prior to the court review, our final holding was that the rights and obligations of the parties must be determined by the. original trust deed for 1922 and by the so-called supplement for all years subsequent to 1922. The Circuit Court, however, held that the grantors did not have the power to execute the so-called supplement, and, in its opinion, said:

* * * The supplementary deed of itself accomplished nothing unless to express a consent on the part of its signers to the annual distribution therein described. That there was any contract or transaction which was effectual as between the trustees and the beneficiaries to alter the trust so as to require an annual distribution of income by the trustees nowhere appears in the record. So far as the present evidence shows, the trust continued to be one in which the income was distributable in the discretion of the trustees. * * *

In other words, the Circuit Court held that the rights and obligations of the parties must be determined by the original trust deed for all years instead of only for 1922, unless upon the rehearing, thereafter granted by the court, the petitioner might prove that there was some contract or transaction which was effectual as between the trustees and the beneficiaries to alter the trust so as to requii’e an annual distribution of income by the trustees. Upon rehearing in accordance with the mandate of the court, the evidence introduced, which will be summarized and discussed further on in this report, does not, in our opinion, prove the existence of any such “contract or transaction” as made the income mandatorily distributable. Therefore, for all the taxable years in question the trust was one “in which the income was distributable in the discretion of the trustees.”

Upon the holding that the trust was one in which the income was distributable in the discretion of the trustees the Circuit Court applied section 219 (c) of the Revenue Act of 1921 and section 219 (b) (3) of the Revenue Acts of 1924 and 1926 to the years 1922 to 1926, inclusive, and said: “The law on this point is thus the same for all the years here involved.” We now have under consideration the additional years 192T to 1931, inclusive. Although the year 1927 is controlled by the Revenue Act of 1926, the years 1928 to 1931, inclusive, are controlled by section 162 (c) of the Revenue Act of 1928. Since section 162 (c) is identical to section 219 (b) (3) of the Revenue Acts of 1924 and 1926, and since section 219 (c) of the Revenue Act of 1921 has been held to be the same as section 219 (b) (3) of the two subsequent acts, the applicable statutory law is the same for all the years now before us, and is as follows (quotation taken from the Revenue Act of 1928):

SBC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
* * * * * * *
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

Was that portion of the trust income which was credited after the close of each year to the several beneficiaries’ “invested capital” accounts “properly paid or credited” and therefore allowable as an additional deduction in computing the net income of the trust? In our original report as modified by our memorandum opinion we considered this question as being applicable only to the year 1922, and in answering the question for that year we held that the evidence then before us was not sufficient to show that the several beneficiaries had such a right to the said credits as would entitle the trust to deduct such amounts as having been “properly paid or credited” under the statute. Our reasons therefore begin with the last paragraph at the bottom of page 1227 (25 B. T. A.) and end with the citation of Brown & Ives, Trustees, on page 1229. Cf. Lynchburg Trust & Savings Bank v. Commissioner, 68 Fed. (2d) 356. The Fifth Circuit agreed with our holding as to the year 1922 upon the basis of the then present record, but thought that additional evidence should be taken, and, in so holding, it said:

The actual payments made to the beneficiaries during the several years were comparatively small. Bach year a tenth of the net income was put to the credit of each beneficiary as “invested capital” along with his share of the original trust property. These entries do not purport on their face to be a crediting for withdrawal equivalent to a distribution, but rather an addition to the original invested capital equivalent to an accumulation of the income. We do not think, however, that the entries are conclusive. The trustees, having power so to do, may have undertaken to carry out the direction of the invalid supplementary deed, and they appear in their tax returns to assert that the income was distributed. The evidence on the point is so meager and unsatisfactory that it is better that the case be reinvestigated as to the true facts attending the distribution of income and the effort to change the duties of the trustees in that regard. Under the present evidence we think the conclusions of the Board are not sustainable as to the years since 1922, and we sustain the petition to review with direction to reopen the whole case for further evidence on the contested matters of fact.

Petitioner at the rehearing introduced the testimony of its bookkeeper and four of the beneficiaries, three of whoni were also the trustees.

John Guitar, Sr., occupied the threefold position of grantor, trustee, and beneficiary. He testified that he discussed the question of distribution with Mrs. Guitar and all the children, including the other two trustees, both at home and at the office late in December 1922, and decided that the income for 1922 should be distributed; that “Our intention was to have a distribution of these profits to the beneficiaries, and we wanted it carried out”; that “The trustees instructed Mr. Kean, the bookkeeper, to put it into effect, carry it out”; that these instructions were for every year; that all the beneficiaries were at liberty to draw against the credits that were made on the books; that he understood he could withdraw any of the income so credited; that this was true for all years; that it made no difference that the income was credited to accounts labeled invested capital; that he did not consider he could withdraw the original capital; that he included in his income tax returns the amounts credited to his account on the books of the trust; and that he thought the so-called supplement to the trust was valid for all years.

John Guitar, Jr., was both a trustee and beneficiary. He testified that a family discussion took place around Christmas in 1922, as his father had testified; that the intent of the three trustees was to have the bookkeeper “divide up the profits and place them to the credit of each beneficiary — one-tenth”; that he did not personally give the bookkeeper any instructions; that the beneficiaries left their shares of the income with the trust for the trust to invest; that the reason why the amounts credited were not actually withdrawn was because several of the children were going to school and did not need much money; that he was willing to leave his share with the trust and thought it was better than having it in the bank, but that he did not ask for interest on it; that his own salary was sufficient for himself; that it was his understanding that the beneficiaries could draw whatever amounts they wanted at any time; that the books of the trust were always open so that the beneficiaries could look at them at any time; that he also reported all the amounts, credited to his invested capital account as income in his individual returns for all years; that as trustee he carried out the provisions of the alleged' supplement to the trust.

Repps Guitar was both a trustee and beneficiary. He testified that he lives at Big Springs, about one hundred miles west of Abilene; that he was at Abilene at Christmas in 1922 and remembers a family discussion of what should be done with the trust income for 1922; that “it was agreed by my father and all the rest of us children and the trustees, together, that the best thing to do was to divide this money up among all the children and the beneficiaries, and the only way to do it was to make an amendment”y.tiiat “We all decided that the best thing to do was to draw up an amendment to make this legal in dividing up the money so that they could spend the money and get the money any time they wanted to”; that the agreement for all years down to date was “that we would divide this money up to each and every one of them and put it on the books and they could get the money when they wanted it”; that the supplement to the trust truly expresses his understanding of the agreement made about Christmas, 1922; that he understood that he could personally draw against the credit to his account on the books; that he did not draw against the amount for the reason that his salary was sufficient to take care of all his needs; that it was a common understanding that the matter of declaring dividends would wait until the books were closed in the succeeding year; and that he filed returns for the years 1922 to 1931, inclusive, and included in these returns the income that was credited to his invested capital account on the books. This witness testified that none of the 10 beneficiaries had the right to withdraw his share of profits, at the end of the year; that he had the right to withdraw only after the profits had been figured up and each had been credited with his share, which was always after the close of the year.

Earl B. Guitar was a beneficiary. He testified that there was a discussion around Christmas in 1922, at which time it was decided “that they would distribute these profits to us”; that it was, his understanding that the beneficiaries could draw all of the profits that were made every year; that he withdrew small amounts in 1923, 1924, and 1925; that his .salary started in 1926; and that he included as income in his individual tax returns for the years the amounts credited to his account.

L. M. Hembree was the bookkeeper who succeeded Kean. He. testified that he had been employed since September 16, 1923; that. he made his first entries in 1924; that he received his instructions from Kean; that the annual net income was credited to “Invested capital, John Guitar, Sr.”, etc., and a similar account for each of the other nine beneficiaries; that there were no drawing accounts except for those on salaries; that the trust borrowed money during the operating season; that the credits to invested capital accounts were carried on the balance sheets as invested capital rather than as accounts payable; that the books were closed all the way from March 1 to April 15 of each year following the year just closed; that the credits to the individual invested capital accounts were not put on the books until the books were closed as above stated; and that it was his impression that the actual book entries reflected all the instructions he had received.

We are satisfied from the above testimony that the trustees thought they were acting under the supposed authority of the so-called supplement. But, as previously expressed in this report, we do not regard this testimony as proving the existence of “any contract or transaction which was effectual as between the trustees and the beneficiaries to alter the trust so as to require an annual distribution of income by the trustees.” We think that the provision of the original trust deed that “the trustees shall, at their option declare a dividend out of any profits that may have accrued” continued as the only legal authority for the action taken by the trustees; and that therefore the trust was one “ in which the income was distributable in the discretion of the trustees.” We think the matter which controls this decision, aside from the question as to whether the credits were made in the “proper” year, which we shall discuss later, is whether the credits to the invested capital accounts of the several beneficiaries were in fact placed beyond recall by the trustees so that the amounts credited actually ceased to be the property of the trust and became the property of the several beneficiaries. In Lynchburg Trust & Savings Bank v. Commissioner, supra, the Fourth Circuit, among other things, said:

* * * The phrase “paid or credited” is used in opposition to the term “accumulated”; so that, the amount which is set aside for and made available to the beneficiary, either by actual payment or by credit, may be deducted, but the amount retained or accumulated forms part of the taxable income of the trust.
A similar construction of the same language in the corresponding sections 161 (a) and 162 (b) of the Revenue Act of 1928, 26 USCA sections 2161 (a), 2162 (b), was given by the Circuit Court of Appeals in the Second Circuit in Commissioner v. Stearns, 65 F. (2d) 371, 373. Speaking of thé portions of the income respectively taxable to the fiduciary and the beneficiary, the court said:
“They should appear in the fiduciary’s return, if they are still his; in the beneficiary’s, only in case he has become presently entitled to them, or received them.
“This serves to determine what is meant by the word ‘credited,’ the alternative to ‘paid’, though we can find no authority on the point. The income must be so definitely allocated to the legatee as to be beyond recall; ‘credit’ for practical purposes is the equivalent of ‘payment.’ Therefore, a mere entry on the books of the fiduciary will not serve unless made in such circumstances that it can not be recalled.”
Compare Ordway v. Wilcutts (D. C.) 12 F. (2d) 105; Id. (C. C. A.) 19 F. (2d) 917.
We agree with this interpretation, and hence we conclude * * * that the withheld income of the grandchildren may not be deducted in computing the net income of the trust estate as amounts credited to the grandchildren or their guardian. For although the moneys were retained for the benefit of the grandchildren and became part of the fund ultimately to be paid to them or to their descendants, or to the cross-remaindermen named in the will, they were not credited in the sense that they were made available to the grandchildren or their guardian during the current taxable year. Taxpayers generally are charged with income not reduced to possession, but only if it may be said that the income is received constructively, and has become so far subject to the taxpayer’s demand that its non receipt is a matter of his own choice. [•Citations.]

Weighing the testimony in this light, we do not believe that the crediting to invested capital account of the amounts in question on the books of the trust placed such amounts beyond recall by the trustees, or made the amounts so subject to the demand of the beneficiaries that the nonreceipt by the latter was a mere matter of the beneficiaries’ own choice. True, the witnesses testified that they understood that the beneficiaries could withdraw any of the amounts so credited. But, as the Fifth Circuit said in the instant case, “It is not, however, the beliefs of the interested parties which control, but the terms of the trust instrument and the rightful acts of the fiduciary under it.” In addition to the provision quoted elsewhere in this opinion, the original deed of trust also provided:

Tbe beneficiaries hereunder will have no voice in the control and management of said estate, and they shall not mortgage or encumber their beneficial interest, or in anywise dispose of said interest until they have received same from the trustees.

In view of this provision of the original trust deed it does not seem to us that the several beneficiaries, several of whom were minor children at the time the trust deed was executed, could have exercised the rights of absolute ownership over the amounts which were merely credited to their invested capital accounts on the books of the trust and had not yet been actually received. Such amounts, as we view the situation, became an increase in their beneficial interests in the trust. But, even if we are wrong in holding that the crediting to “invested capital” account of the trust under the circumstances which we have narrated was not a “proper crediting” within the meaning of the applicable statute, we think there is still another ground on which petitioner must lose. The applicable statute, which we have already quoted, provides that the trust shall be entitled to a deduction against its gross income for the taxable year of the portion of such gross income “which is properly paid or credited chtring such year to any legatee, heir or beneficiary.” (Emphasis supplied.) No provision is made for deductions of payments made or credits made after the year has closed. Such payments or credits would not be taxable to the beneficiaries and would not be deductible to the trust. For example, in Lynchburg Trust & Savings Bank, supra, the court said: “For although the moneys were retained for the benefit of the grandchildren and became part of the fund ultimately to be paid to them or to their descendants, or to the cross remaindermen named in the will, they were not credited in the sense they were made available to the grandchildren or their guardian during the cwrent taxable year.” (Emphasis supplied.)

Certainly it would not be contended, for example, that income of the trust for the year 1922 which was.not paid to the beneficiaries until the year 1923, would be a deduction to the trust in its income tax return for 1922 as income “paid” to the beneficiaries. There would be no more reason to contend that a crediting which admittedly was not made before March 1,1923, would be deductible by the trust for the taxable year 1922. The court correctly pointed out in Commissioner v. Stearns, 65 Fed. (2d) 371, that “credit” for practical purposes is the equivalent of “payment.”

Article 333 of Regulations 74 provides:

Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited, or set apart, although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited or set apart as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn, at any time, and its receipt brought within his own control and disposition ⅜ * ⅜.

It is plain that section 219 of the several applicable acts and section 162 of the Revenue Act of 1928 mean to tax all the net income of the trust for the year in which it is earned, either to the trust or to the beneficiaries. The Supreme Court so held in Helvering v. Butterworth, 290 U. S. 365. In that case the Supreme Court said: “The evident general purpose of the statute was to tax in some way the whole income of all trust estates.” As we have already pointed out, there would be no legal authority to tax income to a beneficiary of a discretionary trust which was neither paid nor credited to such beneficiary during the taxable year. Of course if under the terms of the trust distribution of income is mandatory, the income is taxable to the beneficiary whether distributed or not. The statute so requires.

As we view the facts in this case, the only way we could decide in favor of the petitioner on the main issue would be to hold that the trust is one in which it is mandatory upon the trustees to distribute the net income each year. As we have already stated, we do not thin It such a construction of the trust agreement under which the trustees acted justifies such a holding.

In several rulings the Bureau of Internal Revenue has held that nunc pro tunc crediting is not effective to meet the terms of the statute in such a situation as we have here. In T. B. R. 47, Cumulative Bulletin No. 1, p. 178, among other things it is said:

The conclusion reached is not open to the objection that it makes tax lia^ biiity dependent upon bookkeeping entries. The crediting of income to a beneficiary of an estate, which is referred to in the statute, is more than the making of a mere bookkeeping entry — the recording of an existing fact. It is in itself an act which separates the income of the beneficiary from the income of the estate, and from the standpoint of the beneficiary, effects a realization of income by him. In the opinion of the Advisory Tax Board there must be a transferring of income to the control of the beneficiary if there is to be a crediting of income within the meaning of the statute. For somewhat analogous situations see article 53 of Regulations 45. The crediting of income is not, therefore, a mere formality and can not be omitted or done nunc pro tunc. It is unnecessary, however, in the present case to determine precisely what constitutes a crediting of income to a beneficiary since there is here no act which can in any event be so regarded.

While it is true that the ruling from which the above quotation is taken dealt with income of an estate during the period of administration, we think the reasoning is applicable to the income of discretionary trusts and is sound. It will be noted that section 162 (c) of the Revenue Act of 1928, already quoted in this opinion as representative of the law for all the taxable years, deals with income of estates'during the period of administration and the income of discretionary trusts and treats both alike. Paul and Mertens, in Law of Federal Income Taxation, vol. 4, par. 34.112, say: “The crediting of income is not a mere bookkeeping entry or formality and cannot be done nunc pro tunc.” Then in a footnote are cited several rulings of the Bureau of Internal Revenue, among which is the ruling from which we have taken the above quotation. As we have already stated, we think the reasoning back of these rulings is sound.

For the reasons which we have set out above, we do not think the decisions cited by petitioner relating to the charging off of bad debts after the year has closed are in point. These decisions cited by petitioner are Rockwell Manufacturing Co., 19 B. T. A. 277, and Loritan Investment Co., 21 B. T. A. 1412.

We therefore conclude that the amounts of income of the trust which were credited each year after the year had closed to the several beneficiaries’ invested capital accounts were not “properly paid or credited” within the meaning of those words as used in the taxing statutes, and that the said amounts are not allowable as additional deductions in computing the net income of the trust. Only the amounts which were actually paid are deductible. These amounts are not in dispute.

This issue involves assignment of errors (e), (f), and (g). Based upon the facts found in our findings we hold that, under section 214 (a) (1) of the Revenue Acts of 1924 and 1926, petitioner is entitled to deduct 'from its gross income for the years 1924, 1925, .and 1926 the respective amounts of $420, $960, and $645. George Ringler & Co., 10 B. T. A. 1134.

This issue involves assignment of error (h). Upon the facts found we sustain; the respondent’s determination on this point. Killian Co., 20 B. T. A. 80, 85 (items 21 and 34). Cf. Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289.

The respondent has affirmatively alleged that since it is now settled that petitioner is taxable as a trust rather than as an association, the dividends received by petitioner from domestic corporations, which the respondent allowed petitioner to deduct from its gross income under section 234 (a) (6) of the Revenue Acts of 1921 and 1926, and section 23 (p) of the Revenue Act of 1928, should now be restored to petitioner’s income. The several amounts were received by petitioner as set out in our findings. Under section 213 (a) (1) of the Revenue Acts of 1921 and 1926, and section 22 (a) of the Revenue Act of 1928, dividends are included as a part of gross income. The taxing statutes applicable to trusts do not allow dividends as deductions from gross income. The amounts previously allowed by the respondent will, therefore, be restored to income, with such modifications in the amounts as have been agreed upon in the stipulation.

This issue is substantially the same as the preceding one, except that it involves only the year 1930.

In determining petitioner’s net income for 1930 the respondent included in gross income, and also allowed as a deduction under section 23 (p) of the Revenue Act of 1928, dividends of domestic corporations amounting to $43,106.55. In his amended answer the respondent avers that he erred by “erroneously allowing a deduction under section 23 (p) of the Revenue Act of 1928 of dividends amounting to $43,106.55.” Petitioner in its reply denies that the respondent so erred and also alleges that $27,000 was a stock dividend and was not properly includable in petitioner’s gross income.

In determining the deficiency for 1931, the respondent in computing the loss on the 2,000 shares treated 540 shares as having been

received as a “stock dividend”, which, is in accord with petitioner’s contention relative to the $27,000 in question. Whether a dividend declared is a stock dividend or a cash dividend is a question of fact to be determined from all the circumstances. Luthe Hardware Go., 6 B. T. A. 53. We think petitioner has proved by affirmative evidence that the $27,000 dividend in question was a stock dividend and not a cash dividend. ' Petitioner’s proof on this subject brings the dividend in question within the rule announced by us in George T; Smith, 21 B. T. A. 782. Our holding on this issue renders it unnecessary to disturb the respondent’s determination in 1931 that the 540 shares were received as a stock dividend.

7. The seventh issue involves assignment of error (c) in Docket No. 56931, for 1927. Petitioner alleges that respondent “erroneously increased petitioner’s net income by disallowing accrued expenses in the sum of $7,637.29.” In the statement attached to the deficiency notice the respondent explains the disallowance as follows:

This item consists of capital stock tax, penalties, and interest paid in year which are applicable to prior years. Since your books are kept on the accrual basis the items have been disallowed under the provisions of article 23 of regulations 69.
The items disallowed are:
Capital stock tax for years 1923, 1924, 1925, and 1926-$5', 360. 00
25% penalties for years 1923 to 1926_ 1, 339. 50
5% penalties for years 1923 to 1926_ 335.00
Interest accrued prior to January 1, 1927- 602. 79
Total disallowed_ 7, 637.29

The parties have stipulated that if the Board should be of the opinion that any part or all of the sum of $7,637.29 is deductible in any of the years involved in these proceedings, such part or all may be allowed in such year or years without the filing first of amended pleadings for such year or years.

Petitioner was never liable for a capital stock tax. It would therefore be improper to accrue 'any liability for such a tax for the years 1923 to 1926, inclusive. Cf. E. L. Bruce Co., 19 B. T. A. 777. The collection in 1927 was illegal. Immediately after payment in 1927 it filed claims for refund. These claims were rejected in 1928. It then brought a test suit for the year 1923. Had it been successful in the test suit it had until October 6, 1932, to file suits for the other years. But it was not successful. On February 24, 1930, the United States District Court rendered judgment against petitioner and for the Government. Petitioner filed no appeal and made no further attempts to recover the amount it had erroneously paid in 1927. The time has now expired in which a valid claim or suit could be filed.

We think petitioner is entitled to deduct the amount in question as a loss or business expense for 1927, in which the illegal taxes, penalties, and interest were paid.

In E. L. Bruce Co., supra, we held that the taxpayer was entitled to a deduction, either as a loss or a business expense, of an amount which the taxpayer paid in the taxable year under a state tax statute which was later declared to be unconstitutional. In that case we pointed out the distinction between the facts there stated and those present in Philip C. Brown, 10 B. T. A. 1122, as follows:

An objection might be made to the allowance of the deduction on the ground that it is in conflict with the principle laid down in Philip C. Brown, et al., supra, where a taxpayer was denied a deduction on account of taxes paid under an unconstitutional statute, but in that instance the amount had been refunded in a later year and we in effect held that the fact that the taxpayer had been made whole, though in a later year, precluded the allowance in the year when paid.

In the instant case no refund of the taxes has ever been made and, inasmuch as the statute of limitations has now barred the possibility of refund, we see no reason why, under the doctrine of the Bruce case, petitioner should not be allowed as a deduction for 1927 the amount of capital stock taxes, penalties, and interest paid in that year. True, the amounts here involved were not paid under an unconstitutional statute, but they were illegally collected from petitioner and the same reasoning which prompted the allowance of the deduction in the year in which the amounts were paid in the Bruce case we think also applies here.

On this issue we hold for petitioner. Cf. Niagara Share Corporation of Maryland v. Commissioner, 82 Fed. (2d) 208; Commissioner v. Thatcher & Son, 76 Fed. (2d) 900; Mummert Lumber & Tie Co., 16 B. T. A. 1188. In the latter case we said: “We do not think that the possibility of recovery was sufficient to postpone the determination of the loss.”

8. This issue involves assignment of error 8 (b) in Docket No. 69665 for 1930. Petitioner alleges that respondent erred “in finding that petitioner derived $14,600 profit from the sale of Hartline farm, whereas petitioner’s profit on such sale was only $2,880.00.”

The parties agree that the total selling price was $34,000; that the depreciated cost of the buildings on the land was $2,000; and that petitioner paid commissions in connection with the sale of $1,400. The respondent determined that the fair market value of the 400 acres on March 1,1913, was $16,000 and that the profit on the sale was $14,600. Petitioner reported a profit of only $2,880 because of a claim of a higher March 1, 1913, value than the Commissioner allowed. The respondent offered no proof.

In our findings we found as a fact that the fair market value on March 1, 1913, of the 400 acre tract sold in 1930 was $62.50 per acre, or a total value of $25,000. We believe the evidence offered by petitioner is sufficient to establish that value.

The deficiencies will be recomputed in accordance with this report.

Reviewed by the Board.

Decision will be entered under Rule 50.

Leeoh and Tyson concur in the result.


author: Leech :

text:
    Fred Shingle, Manager of a Joint Venture Designated as “Italo Petroleum Syndicate”, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83159.
    Promulgated August 4, 1936.

      A. E. James, Esq., for the petitioner.

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

Leech :

This proceeding came on to be heard May 20, 1936, upon motion of respondent to dismiss for lack of jurisdiction upon the ground that the petitioner therein was a different party from that against whom the contested deficiency was determined.

It appears that the deficiency notice, dated December 23, 1935, was addressed to the Italo Petroleum Syndicate, % Mr. Fred Shingle, Shingle, Brown and Co., San Francisco, California. The deficiency was determined against the Italo Petroleum Syndicate, as an entity taxable as an association. Premised upon this notice of deficiency, a petition was filed March 6, 1936, captioned “Feed Shingle, Manager of a Joint Venture designated as ‘Italo Petroleum Syndicate’.”

The introductory paragraph of the petition refers to the caption as designating “the above named petitioner.” Paragraph 1 of the petition identifies the petitioner as an individual. Paragraph 2 denies that “The Italo Petroleum Syndicate” was at any time a corporation or association, and denies the existence of such an entity. Paragraph 3 denies the jurisdiction of this Board to hear and determine the income tax liability of Italo Petroleum Syndicate at any time.

Paragraph. 4 of the petition avers that “petitioner” files the petition because he was the actual recipient of the deficiency notice “and because he is and was the manager of a joint venture organized in 1928 by seventy-nine persons, partnerships and corporations, more or less, for the purpose of financing the purchase by Italo Petroleum Corporation of America, a Delaware corporation, of certain oil properties. Said joint venture was and is erroneously designated Italo Petroleum Syndicate. The reason for the variance between the name of Italo Petroleum Syndicate, against whom the respondent determined the deficiency, and your petitioner, is that all of the transactions had and taken by and on behalf of said joint venture or the members thereof were had and taken by your petitioner, Fred Shingle, as manager thereof.”

The allegations of fact in the petition constitute a somewhat detailed averment of the transactions by the said Fred Shingle, resulting in the alleged gain upon which the contested deficiency was determined, and that they were conducted by the said Fred Shingle as “Syndicate Manager.”

The petition is signed and verified by Fred Shingle as an individual.

The petitioner has the burden of establishing the jurisdiction of the Board. Herbert Brush Mfg. Co., 22 B. T. A. 646; Consolidated Co.'s, 15 B. T. A. 645. This Board has frequently dismissed for want of jurisdiction, proceedings in which it appeared from the pleadings or the record that the petitioner therein was not the taxpayer against whom the deficiency had been asserted. J. F. McKean, 15 B. T. A. 795. The assumption from these pleadings, most favorable to petitioner, is that the petitioner is “Fred Shingle, Manager of a Joint Venture designated as ‘Italo Petroleum Syndicate.’ ” Not only is the petitioner here not the taxpayer against whom the controverted deficiency was determined (cf. J. F. McKean, supra), but there is no allegation by the petitioner of his authority to represent the taxpayer against whom that deficiency was determined. If the Italo Petroleum Syndicate was taxable as an association during the tax year, the petition contains no allegation of his relationship thereto, properly premising the petition. And, more than that, this same Fred Shingle, in his petition, denies that such a taxable entity existed, which, in itself, conclusively contradicts the possibility of his having authority to represent it here. If the Italo Petroleum Syndicate constituted a joint venture, as petitioner avers, then the tax liabilities arising upon the transactions carried out in its name, were, in fact, the individual tax liabilities of the several joint adventurers. True, a petition might have been filed by them, as such syndicate, through a properly constituted agent, but the petition is filed here, not by them, through an agent, but by the agent for himself, as agent. The present petition obviously does not bring before the Board and make subject to its jurisdiction the seventy-odd individuals and corporations which the petitioner alleges were joint adventurers in the transactions giving rise to the income upon which the present deficiency is premised. There is no affirmative allegation in the petition supporting or indicating an intention to support the authority of Fred Shingle to represent the members of the alleged joint venture in filing this petition. In fact, it does not purport to be filed in their behalf, or for the purpose of bringing them before this Board. There is no averment that Fred Shingle had any direct or indirect interest in such venture, upon which liability for the contested deficiency could rest. His managership, obviously, did not constitute such interest. The petitioner, “Feed Shingle, Manager of a Joint Venture designated as ‘Italo Petroleum Syndicate’ ” is not the taxpayer against whom the pending deficiency was determined. The present petition does not even attempt to bring before the Board the taxpayer or taxpayers against whom that deficiency is proposed. It does not purport to be more than an attempt by an agent of the taxpayer or taxpayers, acting for himself, to raise the question of the taxpayer’s existence and liability for the deficiency. The Board has no jurisdiction. Mary M. Shea, 31 B. T. A. 513; E. N. and O. M. Ennis, 21 B. T. A. 406; J. F. McKean, supra; Sanborn Brothers, Successors, 14 B. T. A. 1059. Cf. DeForest Hulburd v. Commissioner, 296 U. S. 300.

Reviewed by the Board.

Decision will be entered dismissing the above entitled froceeding for want of jurisdiction.


author: Leech : Morris, Mellott,

text:
    Harvey M. Toy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mabelle T. Lucas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 72932, 72933.
    Promulgated August 7, 1936.

      A. O. McOloshey, G. P. A., for the petitioners.

      P. A. Sebastian, Esq., for the respondent.
   OPINION.

Leech :

The deceased died January 23, 1921. The tax which is the basis of the disputed interest payments was due January 23, 1922, from which date interest ran. Petitioners, as administrators, distributed to themselves, as sole beneficiaries, all the property of the estate on December 19, 1923. On the latter date the Federal estate tax deficiency due from the estate was $7,511.67, with interest at 6 percent from January 23, 1922.

The sole issue is the right of the petitioners to deduct all or any part of the interest payments detailed in the findings of fact, in the computation of their taxable incomes for the year 1931.

Section 23 of the Revenue Act of 1928 provides:

In computing net income there shall he allowed as deductions:
5⅝ ⅜ ⅜ ⅜ * ⅜
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

The question.of law presented, therefore, is whether or not these payments constitute interest upon indebtedness within the meaning of the quoted act.

Section 3467 of the Revised Statutes provides as follows:

Liability of fMmeiaries. — Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate for the debts so due to the United States, or for so much thereof as may remain due and unpaid.

While the action filed by the United States against these petitioners was not only asserted “individually” but also against them “as administrators of the will annexed of the Estate of Geoege Daniel Toy”, it is clear that the Government, in that action, was ■standing upon its rights under section 3467, supra, because paragraph 14 of the complaint filed in such action, after alleging “possession and custody as administrators * * * [of] assets belonging to the Estate * * * amounting to more than the sum due the United States * * * ” — notice or knowledge of the tax due by the ■estate — the payment of debts by the estate and the distribution of assets prior to the payment of “aforesaid debt for taxes due and owing to the United States” alleges:

* * * that by reason thereof the executors became answerable under the-laws of the United States in their own proper persons and estates for so much of the aforesaid debt due the United States as remained due and unpaid and that the said debt remaining due and unpaid amounts to the sum of $16,303.87, together with interest thereon from January 23, 1922, at the rate of 6% per annum.

The statutory deduction for interest (Revenue Act of 1928, sec. 23 (b), supra) is limited to amounts chargeable against the taxpayer qua interest (Automatic Sprinkler Co. of America, 27 B. T. A. 160) upon his indebtedness. Morris Plan Co. of Binghamton, 26 B. T. A. 772. For the purpose of discussion, the interest on the original obligation of the estate may be allocable to two periods. The first period! continued from January 23, 1922, to the date when petitioners, as administrators, paid debts of the estate which, on this record, was not later than December 19, 1923. The second period continued from the latter date to that of payment.

We now consider the interest covering that first period.

Under section 3467 of the Revised Statutes, supra, the petitioners did not become liable for deficiencies in estate taxes until, as representatives of the estate, they paid debts of the estate. And, when such payment was made before satisfaction of that deficiency, they became liable, personally, “for the debts [of the estate] so due to the United States.” Those debts included, as debts, the principal of the estate tax deficiency and interest thereon to that date. That interest thus became due, from petitioners, not qua interest on the petitioners’ indebtedness, but as their debt. Since that amount was not interest on petitioners’ indebtedness, but was their debt, per se, it was not deductible within the statute. The fact that no interest was payable on that item of indebtedness does not change that conclusion.

But as to the interest for the second period, the answer is different.

The petitioners took the property of the estate distributed to them cum onere. That burden included the obligation of paying the-then existing estate tax deficiency, amounting to $7,511.67, together with interest at 6 percent per annum, upon that deficiency, from that date until paid. Since distributed to petitioners, the property was-their property, subject only to these obligations which, from that time forward for 10 years from the date of the distribution (Revenue Act of 1921, sec. 409) constituted a lien upon this property.

After the distribution of the property to petitioners, they were the owners of the income therefrom. Had they then paid this indebtedness, which included both tax and accrued interest, no further interest would Rave been due. The interest on that debt thereafter accrued because of the petitioners’ delay or withholding of payment of the obligation which constituted a lien on their property.

Under these conditions, the situation is not different from that where one receives property, assuming the payment of a mortgage thereon. The property is burdened with an obligation to pay the mortgage debt and, as long as such recipient withholds satisfaction of this debt, he must pay the interest specified. We know of no case, in computing net income, where the owner’s right to deduct interest paid by him on a mortgage encumbering his property, which accrued since he became the owner, has been questioned. Manifestly, he has that right. The interest paid is a fixed and stated sum, payment of which is required for the withholding of the payment of the indebtedness. The owner has an equity in the property represented by its value in excess of the mortgage, but he is holding and using the entire value. See Brons Hotels, Inc., 34 B. T. A. 376. The fixed amount the owner pays as interest to the mortgagee is interest for the retention, use and enjoyment of that portion of the total value represented by the mortgage debt. Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; Fall River Electric Light Co., 23 B. T. A. 168. That situation seems indistinguishable from the one presented here except that there the obligation to pay the mortgage and interest is specifically assumed, while here the same character of obligation is fixed by law. Here, as in the instance where a mortgage is specifically assumed, the obligation of the petitioners is a personal obligation under section 3467 of the Revised Statutes, supra.

Thus the payments of interest which accrued on the unpaid tax subsequent to petitioners’ receipt of the property are deductible as “interest paid * * * on indebtedness” (Revenue Act of 1928, sec. 23, supra), unless the interest payable under section 406 of the Revenue Act of 1921 for delay in payment of the tax after its due date, is not such “interest on indebtedness” but is merely an increase in the amount of the tax.

In resolving this question, no reason is apparent why the interest payable under section 406, supra, should be considered as anything other than “interest on indebtedness.” It is characterized by the act as “interest.” It is graduated in accordance with the time the payment of the tax is withheld and it is fixed at the normal legal rate of 6 percent per annum. True, such interest has been held to be part of the tax for purposes of assessment and collection. Louisiana & Arkansas Railway Co., 28 B. T. A. 153; aff'd., 70 Fed. (2d) 286. But, no reason or authority has been suggested why its deduction as interest should be denied in the computation of taxable income. The Commissioner has uniformly treated it as deductible.

In Law Opinion 922, 2 C. B. 227, rendered under the 1918 Act on provisions similar to those here involved it is held that interest paid on taxes due, although assessed and collected as part of the tax deficiency, constitutes interest paid on indebtedness and is, therefore, deductible in computing net income. There it is said:

The question arises, however, whether this interest is for all purposes to be regarded as part of the tax. I am of opinion that sueh is not the intent of the statute. Sections 214 (a) 2 and 234 (a) 2. expressly provided for the deduction from gross income of all interest paid or accrued within the taxable year on the indebtedness of an individual or corporation (with certain specific exceptions). Interest paid under the provisions of section 250 is interest within the meaning of sections 214 (a) 2 and 234 (a) 2, notwithstanding that it is added to the amount of the tax. Had it been intended that interest paid or accrued on income taxes should be excluded from deductions, such exception would have been set forth specifically in sections 214 (a) 2 and 234 (a) 2, as was done in the case of interest on the indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation .under the income tax.
Sections 214 (a) 3 and 234 (a) 3, Revenue Act of 1918, which provide for the deduction of taxes paid or accrued within the taxable year, expressly except income, war profits, and excess profits taxes. This exception, however, is not intended to include interest payments made under the provisions of section 250. To so hold would amount to a direct contradiction of the provisions of the previous subdivision expressly providing for the deduction of interest.
⅜ * * ⅜ ⅜ ⅜ *
It is held, therefore, that interest paid or accrued under the provisions of section 250, Revenue Act of 1918, is deductible under the provisions of section. 214 (a) 2 or section 234 (a) 2 in computing net income.

It does not appear that this administrative interpretation of the law has ever been changed or modified.

We conclude that interest payable under section 406 of the Revenue Act of 1921, supra, for delay in payment of tax after its due date, though part of the tax for assessment and collection purposes, is still “interest on indebtedness” and deductible as such by the payor under section 23 of (he Revenue Act of 1928.

If the liabilities disputed here rested only upon petitioners’ status as distributees or transferees, it may be that none of the interest paid on the deficiencies would have been deductible here. Joseph W. Bettendorf, 3 B. T. A. 378; Helen B. Sulzberger, 33 B. T. A. 1093. But the deductibility of the disputed interest payments here was rested by respondent, solely, upon petitioners’ personal liabilities under section 3467 of Revised Statutes, supra.

Reviewed by the Board.

Decision will Toe entered v/nder Rude 50.

Van Fossan dissents.

Morris,

dissenting: I disagree with the majority opinion in so far as it disallows the deduction of that part of the interest which accrued prior to the distribution of the assets of the estate by the petitioners. In my opinion the total interest paid by the petitioners is deductible. That conclusion is based solely on the nature of the petitioners’ liability under section 8467 of the Revised Statutes. The error in the majority opinion is in confusing the time at which the liability arises with the substance of that liability. Although under that section the petitioners did not become answerable in their own persons and estates until they distributed the assets of the estate without having satisfied the debts due the United States, the distribution made them personally liable for the debt, namely, the unpaid tax, and in addition any interest that had or would accrue to the time of payment. The excess over and above the tax is designated as interest by the statute, the judgment of the court was for the tax with interest, and the amounts claimed as a deduction were paid as such. The debt became the petitioners’ personal obligation and they were equally answerable under the above section for any excess which the statute adds as interest. The statute permits the deduction of all interest paid on indebtedness. Under 3467 this was the petitioners’ indebtedness, and the interest paid is therefore deductible.

Black and McMahon agree with this dissent.

Mellott,

dissenting: The deceased died January 23, 1921. The petitioners were appointed administrators with the will annexed June 6, 1922. The additional tax was assessed August 16, 1922. December 19, 1923, petitioners as administrators, distributed to themselves as sole beneficiaries all the property of the estate, which the opinion of the majority finds to be “in excess of the tax liability of the estate.”

The tax was a tax against the estate. It became due and payable one year after decedent’s death. (Sec. 406, Revenue Act of 1921.) The interest was “added as part of the tax.” (Sec. 406, supra.) The tax, including the interest, was “a lien for ten years upon the gross estate of the decedent.” (Sec. 409, Revenue Act of 1921.)

When petitioners received all the assets of the estate they took them cum onere. They were transferees and the property in their hands was impressed with a trust for the payment of the tax. (Capps Manufacturing Co. v. United States, 15 Fed. (2d) 528, and cases cited.) Even in the absence of a statutory provision, interest and penalties are part of the tax and may be collected from the transferee. (Coca-Cola Bottling Co., 22 B. T. A. 686; Louisiana & Arkansas Railway Co., 28 B. T. A. 158; aff'd., 70 Fed. (2d) 286.)

Petitioners paid no interest upon an indebtedness of theirs. The debt was the tax of the estate, together with the interest “added as part of” it. It is immaterial that suit was brought against them on the theory that their liability arose because they, as executors, had distributed the property of the estate. The gravamen of the action was to collect the tax due the Government, which included the interest. That is what was collected from the petitioners. (Cf. I. T. 1424, I-2 C. B. 101.)

I am of the opinion that the deficiency should be approved.

       Sec. 406. That the tax shall be due and payable one year after the decedent’s death: but in any case where the Commissioner finds that payment of the tax within such period would impose undue hardship upon the estate, he may grant an extension or extensions of time for payment not to exceed three years from the due date.
      The executor shall pay the tax to the collector or deputy collector, and to such portion of the tax, not paid within one year and six months after the decedent’s death, interest at the rate of 6 per centum per annum from the expiration of one year after such death shall be added as part of the tax irrespective of any extension or extensiona of time that may have been granted for the payment of the tax, or any portion thereof.