author: Leech: VAN FossaN

text:
    Carrie S. Fair, as Executrix of the Last Will and Testament of William B. Fair, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77954.
    Promulgated November 10, 1936.

      Franklin F. Bussell, Esq., for the petitioner.

      Lewis 8. Pendleton, Esq., for the respondent.
   OPINION.

Leech:

This proceeding was brought to redetermine a deficiency of $12,738.09 in the estate tax of the estate of William B. Fair.

The petitioner alleges that the respondent erred in including in the gross estate of the decedent the value of certain interests in land located in the Republic of Cuba, known as “hipotecas” (freely translated “mortgages”) and constituting “immovables” under the laws of Cuba.

The facts, in part stipulated and in part adduced by deposition, in so far as material, are substantially as follows:

The decedent, William B. Fair, died on July 12, 1932, a citizen of, domiciled in, and a resident of the State of New Jersey. The petitioner, who resides in East Orange, New Jersey, is the duly appointed, qualified, and acting executrix under the decedent’s will, having been granted letters testamentary by the Prerogative Court of New Jersey, on October 13,1932.

The decedent’s will was executed in Havana, Cuba, May 23, 1932. It contains the following translated recitations:

Number One Htjnhred and Seventeen
Regular Public Will
In the City oe Havana, on tbe twenty third of May, nineteen hundred and thirty two, Before Me: — Doctor Alterto Jardines and Navarrete. Attorney at Law and Notary Public of the Colleges and District of this Capital and a resident thereof.
APPEARS
Mister William Baenabus Fair. * * * american citizen, sixty six years of age, married once, a merchant and resident of this city in the house numbered thirty nine on Amargura Street, today Marta Abreu.
He states * * *
That he desires to make his will in accordance with the laws of the State of New Jersey, United States of North America, of which he is a citizen, and in accordance with said laws he can freely dispose of all his estate and he orders it in the following manner:
sj< * * >tc * % #

The will established, certain specific bequests to his daughter, grandsons, brothers, and sister and bequeathed the remainder of his estate to his wife, Carrie Stockin Fair, whom he named as executrix.

In addition to his wife, the petitioner herein, the decedent was survived by a daughter, two brothers, a sister, and two grandsons, all of whom are citizens and residents of the United States, and together constitute the decedent’s heirs, next of kin, devisees, and legatees.

At the time of his death the decedent was the owner of three certain mortgages on land located in the Republic of Cuba. The translation of the pertinent portions of one of the mortgages, identical in terms with the other two in all material respects, is as follows:

Number Fifty-Nine
SEGREGATION, SALE AND MORTGAGE
In the City of Havana, on April 1st, 1922.- — Before Me: Doctor Jose Antonio Dowling y Puri, Lawyer and Notary Public of this City with permanent residence therein.— '
APPEAR.:
Party of the Eirst Part: Mr. William Barnabus Pair, * * * who states he was born in the United States of America, of legal age, married, property owner and a resident of this city at 39 Amargura Street.
And Party of the Second Part: Mr. Robert Henry Leeder, * * * who states he was born in Canada, American citizen, of legal age, married, agriculturist and a resident of Itabo, town in the Province of Matanzas, Republic of Cuba, incidentally in this city.—
* * * * * *
Mr. William Barnabus Pair states :
First: That he is the owner in full and complete ownership of the immovable property described as follows: * * * [Here follows a description of a farm containing 358 cabs of land and 162 cordeles.]
Second: That he has agreed to segregate from the above described farm a portion of land with the object of its registration in the Registry of the Property as a separate farm, which is described as follows: * * * [Here follows a description of a farm containing 264 cabs and 250 cordeles.]
Sixth : That having so agreed with the other appearer, Mr. Robert Henry Leeder, who does not use any other name, he executes that he sells really and perpetually the immovable described in clause second of this instrument, with all that constitutes and is annexed to same, free from all liens and with the area existing within the described boundaries * * *
Seventh: The price of this sale is the sum of $37,500 in gold coin of the United States of America, which the buyer, Mr. Robert Henry Leeder, pays to the seller as follows: $1,000 official currency which Mr. William Barnabus Pair confesses to have received before this act to his entire satisfaction from tlie hands of the buyer, for which amount he executes formal receipt anil acquittance; the balance of $36,500 in gold coin of the United States of America which completes the price will be paid by the buyer in the manner hereinafter explained.—
❖ ❖ ❖
Ninth: Mr. Robert Henry Leeder accepts in his favor the sale of the * * * immovables * * * sold to him by this document, accepting the possession and delivery of the latter, and adds that he acknowledges and constitutes himself a certain, and legitimate debtor of the other party appearing, Mr. William Barnabus Fair, for the net amount of $36,500 in gold coin of the United States of America as balance of the price of the sale of the immovable acquired by this instrument, which sum he agrees to return to Mr. William Barnabus Fair, or whoever his rights may represent by any reason, precisely in this city, in the term of six years which shall be counted from the first day of the coming August and shall become due on the same day and month of the year 1928, subject to the following clauses and conditions:
A: The $36,500 owed shall bear interest from the first day of August of the present year, at the rate of 3% per annum during the first two years, and 6% per annum during the four following years. Said interest shall be payable annually, on the first day of August of each year.
B: On default in the payment of one year’s interest within the following thirty days after maturity, the obligation shall become due and the creditor shall be in position to enter suit for the collection of the amount due him.
O: All expenses, costs and damages, including the fees of lawyers and proctors, whom the creditor may appoint in order to establish judicial action for the collection of the amount, due him, shall be for account of the debtor; and for the payment of these liabilities they fix in agreement the amount of $1,000.
D: The debtor shall have the right at any time of making partial payments on account of the price owed, at the rate of $250 per cab, the mortgage being partially cancelled and the cab or cabs of land which the debtor shall designate will be freed from all liability.
E: The debtor shall have the right to dispose freely of up to 60 cabs of land, which shall be considered entirely liberated and free of all liability by reason of the mortgage constituted by this document.
Tenth : That in security of the payment of the $36,500 owed, of the stipulated interest and the amount of $1,000 for expenses and costs, he constitutes a voluntary first mortgage in favor of Mr. William Barnabus Fair, on the immovable which he acquires by this instrument, and which is described in clause second.—
* * * * # * *
Thirteenth : The appearers, to whom I, the Notary, verbally made the warnings required by law, of which they stated they were informed, make express reservation of the legal mortgage in favor of the State, the Province and the Municipality; and designate the City of Cardenas and its Courts, to which jurisdiction they expressly submit themselves, as the place where all judicial and extrajudicial steps which may arise from this contract shall take place, waiving the jurisdiction of their domiciles.—
‡ $ $ $ :Jc 9i« #

The William B. Fair estate paid to the Cuban Government a transfer tax, similar to an inheritance tax in the United States, on certain property situated in Cuba, including the three “mortgages.” Under Cuban law such mortgage interests in Cuban land constitute “immovable” property.

The law governing Cuba is the civil law and is derived from the Napoleonic Code. Cuban law classifies property into “movables” and “immovables.” Its civil code defines “immovables” (bienes inmuebles) as follows:

Abt. 334. — An immovable consists of:
1. Lands, buildings, roads, and constructions of all Rinds adherent to the soil.—
^ V
10. — Administrative concessions for public works, and easements, and other property rights in real estate.—
“Immovables” include leaseholds for terms of years.

Personal property is thus defined:

Abt. 335. — Personal property is considered anything susceptible of appropriation and not included in the foregoing chapter, and, in general, all that which can be carried from one place to another without damage to the real estate to which it may be attached.—
Abt. 330. — Incomes or pensions, either for life or hereditary, in favor of a person or family, provided they do not encumber real estate with a property lien, as well as alienated offices, contracts for public services, and mortgage loan bonds or certificates are also personal property.

The same code, article 1876 and article 105 of the Mortgage Law, refers to mortgages as follows:

A mortgage directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to the 'fulfillment of the obligation for the security of which it was created.

Cuban law regards land and real rights in land as immovables. Mortgages are real rights under that law. The holder of a real right must satisfy the obligation by a sale of the land itself first, while the owner of a personal right can enforce payment from any property of the individual debtor. Since April 3, 1933, holders of mortgages have no right to a deficiency judgment against the obligor in the event that the amount derived from the sale of the land is less than the mortgage debt. Prior to that time a proceeding against the mortgage debtor for the deficiency was permitted. No bonds or certificates were issued to William B. Fair. Mortgages in Cuba are registered in the “Registry” of the “District” in which the land is located and can not be removed therefrom.

The correct deficiency in the estate tax is stipulated to be $4,197.09 if the mortgages are excluded from the taxable' estate.

The tax here is proposed by section 302 (a) of the Revenue Act of 1926, which reads:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death.

The Attorney General of the United States and the Treasury Department have ruled that this provision in' earlier acts exempted from the base of- the tax, real property of the deceased situated outside the United States. Congress amended the section in 1934 by specifically excepting, from the base for the tax computation “real property [of the decedent] situated outside the United States.”

Despite the clarity of the broad base for the tax computation (see Guaranty Trust Co. v. Commissioner, 79 Fed. (2d) 245, affirming Board of Tax Appeals memorandum of decision) and our consequent hesitation to constructively limit such basis (Helvering v. City Bank Farmers Trust Co., 296 U. S. 85), we assume, for present purposes only, that the quoted provision of the Revenue Act of 1934 correctly states the intent of Congress in section 302 (a) of the Revenue Act of 1926, supra, which is controlling here. Cf. Helvering v. Newport Co., 291 U. S. 485.

Does that section, so construed, include, or rather, does the implied limitation exclude or exempt the present “hipotecas” or “mortgages” from the base for the tax computation? If included, did Congress exceed its power in so doing ?

As this Board said in Retailers Credit Association of Alameda County, 33 B. T. A. 1166:

* * * To secure such exemption, the taxpayer must not only carry whatever burden of proof the determination of the pending deficiency imposes (Helvering v. Taylor, 293 U. S. 507), but must proceed perceptibly further and bring itself strictly within the provisions of the act creating the exemption. Central Cooperative Oil Association, 32 B. T. A. 359, and cases therein cited.

Aside, however, from that measure of proof, we think the decedent’s “hipotecas” were a part of his gross estate under section 302 (a), supra.

Under the law of this country, the term “real property” has a definite and distinct meaning, which includes lands with permanent fixtures thereon, and excludes mortgages.

But, petitioner argues that because of the conflict of laws between Cuba and the United States, in the legal characterization of these “mortgages”, the Cuban classification should control, because their situs is Cuba. Assuming the correctness of the last premise, the argument would have merit if we were determining the title to property. DeVaughn v. Hutchison, 165 U. S. 566. However, here, we have no such question before us, but are deciding, only, the intended legislative base for the computation o,f a Federal excise tax, the power to levy which is limited by its constitutional authority, alone. Notwithstanding possible logic to the contrary, it is, at least, doubtful on practical grounds that the sovereign may be so hampered in the exercise of such an essential and inherent attribute of its sovereignty. See Tyler v. United States, 281 U. S. 497; Lang v. Commissioner, 289 U. S. 109; Rosenberger v. McCaughn, 25 Fed. (2d) 699; Fidelity-Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600; Stratton v. United States, 50 Fed. (2d) 48; certiorari denied, 284 U. S. 651.

But, is Cuba the situs of these “hipotecas” or mortgages? This would seem to depend upon whether they are enforceable, only, against the mortgaged properties. This Board does not take judicial notice of the laws of Cuba, and considers them here only as established as facts in the record. The testimony of petitioner’s legal expert indicates that, prior to April 3,1933, which date is subsequent to that of the death of petitioner’s decedent, a mortgage creditor could proceed against the mortgage debtor, individually, for a deficiency resulting from a sale of the mortgaged property for less than the debt.

Petitioner’s argument then is that since, under the laws of the Republic of Cuba, these “hipotecas” or “mortgages” were classified as “immovable property” and that general term in those laws also included “real property” in the sense in which that term is used in the laws of this country, that Congress must be held to have intended by its use of the term “real property” to include all “immovables” as that expression is used in Cuban law and other countries governed by the civil law, even though “immovables”, as there used, include items of property, such as these “hipotecas” and certain leaseholds, which would not be classified in the United States as real property. We find no reasonable ground for that assumption.

These “hipotecas” in controversy were debts due the decedent, constituting the unpaid purchase price of Cuban lands. The debtors in each instance acknowledge themselves to be such, and the “hipo-tecas” consisted of tbe debtors’ promises to pay sums of money in gold coin of tbe United States, on specified dates, with interest.

It is well settled in this country that a debt has a situs for taxation at the domicile of the creditor, irrespective of the fact that it is secured by a mortgage on real estate outside the jurisdiction of the taxing authority. Kirtland v. Hotchkiss, 100 U. S. 491. Nor is that conclusion disturbed by the fact that the evidence of indebtedness is located outside the taxing jurisdiction (People v. Forman, 153 N. E. 376), or that the disposition of the mortgaged property is controlled by the laws of a foreign state. Blodgett v. Silberman, 277 U. S. 1. Cf. Baldwin v. Missouri, 281 U. S. 586; Beidler v. South Carolina Tax Commission, 282 U. S. 1; State Tax on Foreign-Meld Bonds, 15 Wall. 300.

In construing statutes, of course, the legislative intent is the controlling factor. United States v. Stone & Downer Co., 274 U. S. 225; Wolsey v. Chapman, 101 U. S. 755. This intent must, if possible, be ascertained from the words Congress chose to employ, interpreted according to their ordinary meaning, and in the light of all the circumstances that may fairly be regarded as having been within the knowledge of Congress at the time. Dewey v. United States, 178 U. S. 510.

The controlling statute is American, not Cuban. Thus, whether “real estate” was used there generally or technically, it would seem the meaning intended was that conveyed by the term in the United States. See Report of Finance Committee, covering amendment to section 302 (a) of the Revenue Act of 1926, adopted ,as section 404 of the Revenue Act of 1934. Nothing in this record indicates that Congress used the term “real property” as synonymous with the Cuban word “immovables.” In our opinion, it is a much more reasonable presumption that Congress, in its use of the term “real property situated outside the United States” and in providing for the inclusion in the gross estate as the broad base, for the computation of the tax on other property passing from the decedent, did so in the light of the above rule in the United States as to the situs for taxation of debts, rather than with the law of the Republic of Cuba as to “immovables” in mind. Any other conclusion would attribute to Congress a wholly unnatural, unwarranted, and improbable legislative intent, entirely inconsistent with the evident broad inclusive basis for the tax computation, without any consideration or justification therefor, and unnecessary in accomplishing the purpose of the controlling implied exemption. See Charles W. Bowring. 27 B. T. A. 449.

The power of Congress to impose this excise tax is as clear as its intent to exercise the power. The decedent was a citizen and resident of the United States. His will was executed under the laws of this country and he disposed of his property to citizens of this country. The property here in controversy was owned by him and transmitted by his will. The power of the Federal Government to tax its citizens is not dependent upon jurisdiction over their property. Thus, in United States v. Bennett, 232 U. S. 299, a Federal excise tax imposed upon a citizen of the United States for use of a yacht, built and with permanent situs outside of the territorial limits of this country, was sustained. There it .was argued that the power to tax was limited by the capacity of the Government to afford protection to the property. In answering this argument the Court said:

* * * But here again the confusion of thought consists in mistaking the scope and extent of the sovereign power of the United States as a nation and its relation to its citizens and their relations to it. It presumes that government does not by its very nature benefit the citizen and his property wherever found. Indeed, the argument, while holding on to citizenship, belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.

Following this, the Court in Cook v. Tait, 265 U. S. 47, sustained the power of Congress to impose a tax upon income of a citizen of the United States, with permanent domicile in Mexico, from real and personal property located in that country. In Guaranty Trust Co. of New York, Executor, 21 B. T. A. 330, we sustained the right of the Federal Government to include tangible personal property located in foreign countries in the gross estate of a resident decedent. In Guaranty Trust Co. of New York v. Commissioner, 79 Fed. (2d) 245, the estate of a resident citizen of the United States consisting of personal property located in England and disposed of by an English will, as well as personal property located in this country and disposed of by an American will, was all held within decedent’s gross estate for Federal estate tax purposes. There the court said:

The power of Congress to put the value of foreign personal property in the estate tax base seems as plain as its intent to do so. The fact that this personal property was in the possession of the English executor is immaterial for the tax is imposed upon the transfer not the property. Reinecke v. Northern Trust Co., 278 U. S. 339. The constitutional limitations upon the power of the states to tax personal property do not apply to the United States. Burnet v. Brooks, 288 U. S. 378; United States v. Bennett, 232 U. S. 299. The United States is equally free to tax the transfer of such property. In Cook v. Tait, 265 U. S. 47, the power of Congress to tax a United States Citizen, domiciled outside of this country, upon income from real and personal property located in Mexico was upheld. Here the decedent received the governmental protection upon which the power to tax may be supported under the foregoing authorities until the moment he died. Of course his death was the event which took place to call the taxing statute into operation and at that time he no longer needed or could be accorded protection but the distinction the petitioner would put upon this ground is wholly unreal. The tax may well be supported by the benefit derived up to the instant of death.

We conclude the Federal Government bad the power to and, in the Revenue Act of 1926, section 302 (a), did levy an estate tax computed upon the value of decedent’s property, including the present mortgages or “hipotecas.” Nor does the fact that double taxation may result affect that conclusion. Burnet v. Chicago Portrait Co., 285 U. S. 1.

Reviewed by the Board.

Decision will be entered for the respondent.

VAN FossaN

dissenting: Finding myself in disagreement with the holding of the majority, I feel impelled to state the basis of my conclusion at some length.

The tax in the case before us is claimed under section 302 (a) of the Revenue Act of 1926, which reads:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death * * *.

Despite the all-inclusive language of the statute, in 31 Op. Atty. Gen. 287, the Attorney General of the United States so interpreted this section as to exclude real estate located outside the United States.

The construction given to the statute by the Attorney General was followed by the Treasury Department and has been approved by Congress in subsequent legislation (Senate Rept. No. 275, 67th Cong., 1st sess., p. 24; Senate Rept. No. 558,-73d Cong., 2d sess., p. 46) and Congress itself has formally recognized the correctness of this view by amending section 302 through the enactment of section 404 of the Revenue Act of 1934.

Therefore, the question to be decided is whether or not the mortgages or “hipotecas” owned by the deceased at his death constituted real property.

This problem involves not only a- conflict of laws, but an utter disparity in nomenclature. The word “immovable” is not an exact equivalent of the term “real property”, but the terms have substantially the same meaning.

It is a well settled rule that the nature of property or of rights thereto and the conditions governing its transfer must be determined by the lex situs. Story on Conflict of Laws, ¶¶424, 591; Restatement of Conflict of Laws (American Law Institute), p. 247, 12 C. J. 468, 477; United States v. Fox, 94 U. S. 315; Robertson v. Pickerell, 109 U. S. 608. Dicey, in his work, “Conflict of Laws”, thus states the principle:

Rule 149. Tlie law of the country where a thing is situate (lex situs) determines whether (1) the thing itself or (2) any right, obligation or document connected with the thing, is to be considered an immovable or a movable. [4th ed., p. 550.]

Rule 150 (p. 553) states:

All rights over, or in relation to, an immovable (land) are (subject to the exceptions hereinafter mentioned) governed by the law of the country where the immovable is situate (lex situs).

On page 558 Dicey also states:

Every question with regard to the devolution of immovables, or land, in consequence of death is, subject, of course, to the exceptions hereinafter mentioned, governed by the lex situs.

The exceptions are not pertinent to the question here, at issue.

On examination, one of the mortgages in question is found to be primarily a deed conveying the land described for $37,500, of which $1,000 was paid in cash and the remainder according to specified terms. No notes or other evidences of indebtedness were executed to Fair. The payment of the $36,500 was secured by a first mortgage on the land sold. Cuban law permits no deficiency judgment to be taken against the purchaser, but the land itself must stand good for all unpaid purchase money. The document before us, therefore, was merely an evidence of the mortgagee’s right to take the land in default of the full payment of its purchase price.

All the incidents of ownership and the factors which rendered the mortgage valuable were located in Cuba and were derived from the land in that Republic and from the power of its courts.

Mortgages are known and classified as immovables in Cuba and all the characteristics of real estate and real property designated as such in the United States, are inherent in them under Cuban law. Therefore, although mortgages on property located in the United States might be considered personal property, a mortgage on property in Cuba would seem to fall within the term “foreign real estate.” This being true, it is not subject to the estate tax imposed by the United States Government.

The respondent relies on the following propositions:

(1) The power of the Federal Government to tax is not dependent upon jurisdiction over property alone, but may be predicated upon jurisdiction over the citizen.
(2) The power to tax being an essential attribute of sovereignty is not controlled or limited by consideration of the laws of foreign countries.
(3) The statute should not be construed to exempt from its provisions debts due a citizen of the United States from the sale of foreign lands.

To support his first contention the respondent cites (and the majority opinion relies on) United States v. Bennett, 232 U. S. 299, and Cook v. Tait, 265 U. S. 47, neither of which cases involves an estate tax. The facts in these cases, moreover, were quite different from those in the case at bar. In the Bennett case the Government imposed an annual excise tax on the use of a foreign-built yacht owned by a citizen of the United States. In sustaining the tax the Supreme Court stressed the assistance and protection accorded by the Government to its citizens while living and trading in foreign countries. In the case of Cook v. Tait the Commissioner assessed a tax on the income of a citizen of the United States residing and domiciled in the city of Mexico. The Court there said:

* * * tbe basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicil of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicil, and the property from which his income is derived may have situs, in a foreign country, and the tax be legal, — the government having power to impose the tax.

Thus, in this case also the decision was predicated on the benefits of citizenship, including the right to protection in a foreign country. These cases are not comparable to the case before us. There was no question of tax upon the transfer of property ,at death, but in the one case a tax upon personal property oAvned and used by an American citizen and in the other a tax on income derived from real and personal property, such property in both cases being located outside the United States. In the case at bar the element of governmental protection is not, and can not be, present. In order to enforce her rights as executrix of the will of William B. Fair, which was executed in the Spanish language and legally filed in Cuba, the petitioner would be compelled to submit herself wholly to the jurisdiction of that country and to the requirements of its courts. Neither her citizenship nor the citizenship of her husband could help her.

The respondent also cites, and the majority relies on, Guaranty Trust Co. of New York, Executor (Smallman estate), 21 B. T. A. 330, and Guaranty Trust Co. of New York (executor of Kennedy estate) v. Commissioner, 79 Fed. (2d) 245. Both of these cases involve tangible personal property located outside the United States. In both it was held that an estate tax was properly assessed. The decisions were based on the citizenship of the decedent and the power to transfer. It is obvious that these decisions are not in point.

In support of the respondent’s second proposition he cites several cases, all of which, however, relate to interstate taxation and do not apply to the taxation of property situated in a foreign country. In United States v. Bennett, supra, the Supreme Court made clear the distinction between the taxing by one state of property situaled in another and the taxing by the United States of property situated in a foreign country. See Burnet v. Brooks, 288 U. S. 378.

The respondent relies on Kirtland v. Hotchkiss, 100 U. S. 491, to sustain his third point. In that case the holder of a bond secured by real estate in another state was held subject to tax. The decision there, likewise, was based on the theory of protection. Other cases cited by him involved tax controversies between states. He also contends that the expression “real property” means real estate as such, “that is, lands and things permanently affixed thereto” and quotes from the chairman of the Committee on Finance of the Senate (S. Kept. No. 558, 73d Cong., 2d sess., p. 46) as follows:

Your committee is of the opinion that real property located abroad should not be subject to the Federal estate tax since it is an almost universally established principle of estate taxation that real estate should be subject to death duties only in the country where situated. To tax such real estate, will make it difficult for many American citizens to live in foreign countries in the interest of American foreign trade for they will be subject to a tax burden much greater than that imposed on foreigners in a similar situation. Accordingly, your committee has amended the House bill to make it clear that real estate located abroad shall not be subject to the .Federal estate tax. The effect of this amendment with other amendments made by the House is to place nonresident American citizens in the same category as residents and thus subject them to the estate tax with respect to all of their property except real property located abroad.

The respondent can obtain little help from this quotation. In effect, the mortgages in question constituted “real property located abroad.” They were so treated by Cuba. Their taxation by Cuba patently subjected the petitioner to “a tax burden much greater than that imposed on foreigners in a similar situation.”

It is pertinent to note that in clause 13 of the mortgage, the parties waived the jurisdiction of their domiciles and submitted themselves to Cuban law in all respects. Their action in so doing removes all doubt, if any there was, as to the decedent’s conception of the character of the mortgages as immovables.

For the reasons indicated above I dissent.

       31 Op. Atty. Gen. 287—
      ESTATE TAX ON REAL ESTATE OUTSIDE UNITED STATES.
      Real estate as such located outside of the United States belonging to decedent resident witbin the united States, should not be included in determining the value of the gross estate of such decedent for the purposes of the tax imposed by Title II of the revenue act of September 8, 1916 (39 Stat. 777).
      *******
      The plain sense of the matter is that real estate in a foreign country, unlike personal estate there, can not be enjoyed as suoh in any true sense without the protection and supervision of the laws of the foreign jurisdiction in which it is situated, while as to-personal property the fact may very well, for obvious reasons, be different. Hence all Governments agree to recognize the domicile of the decedent as the situs of primary-administration upon his personal estate, while none recognizes this domicile as to his realty.

         T. D. 3725, 20 Treasury Decisions 435—
      The following ruling is based upon an opinion of the Attorney General, dated May 14, 1918:
      The value of real estate, belonging to a decedent resident within the united States at the time of his death, located outside of the united States, meaning thereby the States, Territories of Alaska and Hawaii, and the District of Columbia, should not be included in determining the value of the gross estate of such decedent for the purposes of the tax imposed by Title II of the revenue act of September 8, 1916.

       Your committee is of tile opinion that real property located abroad should not be subject to the Federal estate tax since it is an almost universally established principle of estate taxation that real estate should be subject to death duties only in the country where situated. To tax such real estate, will make it difficult for many American citizens to live in foreign countries in tbe interest of American foreign trade, for they will be subject to a tax burden much greater than that imposed on foreigners in a similar situation. Accordingly, your committee has amended the House bill to make it clear that real estate located abroad shall not be subject to the Federal estate tax. The effect of this amendment with other amendments made by the House is to place nonresident American citizens in the same category as residents and thus subject them to the estate tax with respect to all of their property except real property located abroad. [S. Rept. No. 558, 73d Cong,, 2d sess., p. 46.]

       See footnote No. 3, page 47.

       SEC. 404. REAL ESTATE SITUATED OUTSIDE THE TOUTED STATES.
      So much of section 302 of the Revenue Act of 1926 as reads as follows: “The value of the gross estate of the decedent shall he determined hy including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated” is amended to read as follows: “The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the united States.”


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    De Nederlandsche Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44702.
    Promulgated November 13, 1936.

      Montgomery B. Angelí, Esq., and Allen A. Dobey, Esq., for the petitioner.

      Arthur Cwnduff, Esq., and F. D. Strader, Esq., for the respondent.
   OPINION.

Van Fossan :

The single question for determination is whether or not petitioner is entitled to deduct from its taxable income earned within the United States a ratable part of losses carried in its “Reorganization Loans”, it being contended by petitioner that such losses can not definitely be allocated to any item or class of its gross income. The pertinent provisions of the Revenue Act of 1926 are found in section 234 (a) (1) (4) and (5), section 234 (b), and section 217 (e).

Under the above provisions and the pertinent regulations, the facts as to the case are controlling. If the accounts giving rise to the losses claimed are of such character that they can not be attributed to any item or class of gross income a ratable part of the expenses or losses is to be allowed as a deduction from such gross income separately allocated to sources within the United States. The burden is on the petitioner to prove that the deductions are of such a character as to make them allowable.

Here the losses included in the account styled “Reorganization Uoans” were suffered on loans made to financial houses, chiefly Marx & Co.’s Bank of Rotterdam. The loss of 4,000,000 guilders in 1927 was exclusively on the Marx & Co’s Bank account. The losses are thus clearly identified with specific accounts of banks located in Holland. Moreover, the proceeds of these loans were further advanced by the bank to other concerns doing business in Holland.

Though it appears that petitioner was motivated by a patriotic impulse of striving to preserve the parity of the guilder, this fact can not obscure the other fact that the actual transactions were identifiable and related to identifiable accounts. The loans bore interest and interest was collected. Neither the names by which an account is denominated nor the maimer of keeping accounts is controlling. The determination of taxable income is a practical matter governed by specific statutes and regulations. It is our opinion that to hold that these losses, suffered on clearly identifiable accounts, were so related to the national policy of Holland as to make them deductible from gross income within the United States as items not susceptible of allocation would require us to shut our eyes to the obvious facts. The simple fact seems to be that, whatever the motive that impelled the loans, they were losses suffered on specific accounts "in Holland and should be allocated to income earned in Holland.

The corollary of this line of thought is to consider the “Reorganization Loans” from their relation to the earning of income within the United States. The applicable statute (section 234 (b)) allows deductions “only if and to the extent that they are connected with income” within the United States. The remainder of the statute allowing a ratable part of items which can not definitely be allocated does not purport to be based on any other premise. The concept underlying this provision is that some part of such items is related to the earning of income within the United States. This relationship to the income within the United States must be apparent, although the determination of the amount may be left to more or less arbitrary allocation. On the record before us we must hold that the petitioner has not proved the existence of this relationship.

The cases of Fajardo Sugar Co. of Porto Rico, 20 B. T. A. 980, and the Texas Land & Mortgage Co., Ltd., 30 B. T. A. 861 (petition to review dismissed July 25, 1935, C. C. A. (5th Cir.), have been cited by the petitioner. Those cases, however, afford us little assistance in deciding the case before us. In the Fajardo Sugar Co. case the petitioner claimed as a deduction the ratable part of certain so-called “operating charges.” We held that the evidence established that substantially all of such expenditures were allocable to income produced outside of the United States and that the petitioner had not sustained its burden of proof of showing such amounts should be apportioned ratably. In the Texas Land & Mortgage Co., Ltd., case the question at issue was whether or not certain losses chargeable against income from sources within and without the United States should be deducted before arriving at the “ratable part” of unal-locable expenses deductible from the petitioner’s gross income from sources within the United States. We held that they should not be deducted. In both cases we followed the obvious import of the statutory language.

We are of the opinion and hold that petitioner has not proved respondent’s determination to be in error.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sec. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
      (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
      * $ $ $ $ # $
      (4) Losses sustained during the taxable year and not compensated for by insurance or ■otherwise. * * *
      (5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow ■such debt to be charged off in part.
      (b) In the ease of a foreign corporation or of a corporation entitled to the benefits of section 262 the deductions allowed in subdivision (a) shall be allowed only if and to the ■extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 217 under rules and regulations prescribed by the Commissioner with the approval of the Secretary.
      Sec. 217. (e) Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or without the United States under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the ease of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some items or class of gross income; and the portion of such net income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. * * *


author: Smith:

text:
    Almours Securities, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78544.
    Promulgated November 13, 1936.

      Earl W. Shinn, Esq., E. H. Batson, Esq., Charles M. Trammell, Esq., and Warren W. Grimes, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and EL. D. Thomas, Esq., for the respondent.
   OPIKION.

Smith:

The respondent has held that the petitioner is subject to tax for 1931 and 1932 under the provisions of section 104 of the Revenue Acts of 1928 and 1932. There are no material differences between the provision in the two acts. Section 104 of the Revenue Act of 1928 provides in part as follows:

(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in'addition to the tax imposed by section IS and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
* # * * * * *
(d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. * * *

On May 12, 1931, the respondent mailed a deficiency notice to the petitioner advising it that it was subject to tax under the provisions of section 220 of the Revenue Act of 1926 and section 104 of the Revenue Act of 1928 for the years 1927,1928, and 1929, in the aggregate amount of $7,777,933.42. Section 220 of the Revenue Act of 1926 is substantially the same as section 104 of the Revenue Act of 1928. On June 6, 1931, the petitioner filed a petition with this Board, Docket ISTo. 58864, for a redetermination of the deficiencies for 1927, 1928, and 1929. Before any hearing was had by this Board upon the merits the petitioner and the respondent on October 19, 1931, filed a stipulation with this Board to the effect “that there is no deficiency in Federal income tax due from the above named petitioner for the calendar years 1927,1928, and 1929 and that the Board may enter an order accordingly.” Pursuant to such stipulation this Board on October 19, 1931, entered the following decision:

Under written stipulation filed by the parties in the above entitled proceedings and filed with the Board on October 19, 1931, it is—
Obdebed and Decided that there are no deficiencies for the years 1927, 1928, and 1929.

The respondent, on October 27, 1931, advised the petitioner:

Reference is made to your protest against the proposed application of Section 104 of the Revenue Act of 1928 for the year 1930, as announced in Bureau letter dated August 14, 1931.
You are advised that after carefully considering all of the facts and circumstances set forth in your protest and the additional evidence submitted at the hearing afforded your representative on September 16, 1931, before the Office of the General Counsel of the Bureau, such protest is sustained.
Accordingly, it is held that you are not subject to taxation for the year 1930 under the provisions of Section 104 of the Revenue Act of 1928.

The petitioner makes the contention that the Board is estopped by the judgment entered October 19, 1931, to determine deficiencies for the years 1931 and 1932, since, as it contends, the facts relating to the years 1931 and 1932 are not substantially different from those which obtained with respect to the years 1927, 1928, and 1929.

In United Business Corporation of America, 33 B. T. A. 83, one of the questions presented was whether the taxpayer was liable to tax under section 220 of the Revenue Act of 1921 for the years 1922 and 1923. The Board had held that the taxpayer was liable to tax under section 220 of the Revenue Act of 1921 for the year 1921 and our decision in that case was affirmed (C. C. A., 2d Cir.), 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635. In our opinion in the latter case we said:

The respondent’s contention that such prior decision, involving this same taxpayer, is res judicata, as to the present proceeding, is without merit. The application of section 220, supra, in any particular taxable year is wholly dependent upon whether the facts and circumstances pertaining to that year bring the taxpayer within the scope of that section — that is, was the corporation availed of for the prohibited purpose during the taxable year in question, irrespective of a finding by the Board and the courts that it was so availed of in a prior taxable year. We do not deem it necessary to enter into a discussion of the principle of res judicata, when clearly such principle is not applicable here.

The ruling made in that case is equally applicable to the proceeding at bar. In this proceeding the respondent is not contending that the petitioner is liable to any deficiencies for the calendar years 1927, 1928, and 1929. The respondent admits that the decision entered by the Board in Docket No. 58864 on October 19, 1931, is conclusive, so far as those years are concerned. What the respondent is contending here is that the petitioner is liable to deficiencies for the years 1931 and 1932 and that the Board is not estopped by the judgment entered in Docket No. 58864 from considering the question on the merits with respect to those years. We sustain that contention.

It should be noted that in respect of the proceeding in Docket No. 58864 neither the law nor the facts of the case were judicially ascertained. When the petitioner and the respondent submitted the stipulation on October 19,1931, the Board was not advised as to the reason for the stipulation. For aught the Board knew there had been an error on the part of the respondent in the determination of the deficiencies or the deficiencies had been paid.

Under the statute, liability for the tax imposed by section 104 of the Revenue Acts of 1928 and 1932 is incurred if the petitioner was either “formed” or “availed of” for the interdicted purpose. The petitioner strenuously contends that the prior decision of the Board is tantamount to a finding by it that the petitioner was not “formed” for the interdicted purpose and that that question may not be inquired into by the Board in this proceeding; in other words, that the doctrine of res judicata bars this Board from considering the purpose for which the petitioner corporation was formed.

In view of the fact that in the prior case the Board did not judicially determine the applicability of section 220 of the Revenue Act of 1926 and section 104 of the Revenue Act of 1928, we are of the opinion that the petitioner’s contention is without merit. Cf. Wayne Body Corporation, 22 B. T. A. 401; Stanley Co. of America. 26 B. T. A. 705; Sand Springs Railway Co., 31 B. T. A. 392; Keener Oil & Gas Co., 32 B. T. A. 186; D. F. Strickland, 32 B. T. A. 804; E. A. Hughes, 32 B. T. A. 1248.

Liability for the tax imposed by section 104 (a) of the applicable taxing statutes is not incurred unless a corporation is (1) formed or (2) availed of “for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.” There must be such an intent on the part of those who were responsible for the organization of the corporation, or for the conduct of its operations. United Business Corporation of America v. Commissioner, supra; United States v. Tway Coal Sales Co. (C. C. A., 6th Cir.), 15 Fed. (2d) 336; Irvington Investments Co., 32 B. T. A. 1165.

The petitioner contends that it was formed for the purpose of engaging in the business of banking and real estate development upon a large scale. It gives as the reason why it did not do so during the earlier years of its existence that the Florida land boom collapsed in 1925, with the result that the Florida banks were all left in a precarious condition and that the Florida real estate market was stagnant. Then followed the stock market crash in 1929 and the resulting business depression. Petitioner further contends that it was its plan to build up a surplus of approximately $55,000,000 to carry out its banking program and an additional reserve of approximately $70,000,000 to conduct its real estate developments.

The facts leading up to the organization of the petitioner are that prior to 1926 Alfred I. du Pont had some unfortunate experiences with a corporation known as the Nemours Trading Co. He sustained large losses upon his investments in that company. In 1925 or 1926 he obtained an income tax refund from the Government which, including interest, amounted in the aggregate to more than $2,000,000. John Zimmerman had been employed as a certified public accountant in the adjustment of th,ese tax liabilities and in the opening up of books of account to be kept by du Pont. Zimmerman deposed that he was then:

* * * requested to do some research work in connection with various taxes, such as the Delaware State income tax, the Federal income tax, gift taxes and inheritance taxes, in connection with the Delaware State income taxes and, also, the Delaware inheritance taxes. I recommended to Mr. du Pont that he change his domicile from Delaware to Florida, which had no state income and/or inheritance taxes.

As a result of this recommendation of Zimmerman, du Pont changed his domicile from Delaware to Florida in either 1925, or the early part of 1926. At that time du Pont’s fortune consisted largely of shares of stock of the du Pont Co. From these shares he was receiving dividends of from $2,000,000 to $3,000,000 per annum, which amounts were greatly in excess of his current needs. Zimmerman was then requested to go to Florida and become associated with du Pont’s enterprises. In answer to the question, When did you first go to Florida and under what circumstances? Zimmerman further deposed:

In July 1926, after it had been explained to me that the policy of the office was one of ultra-conservatism, that Mr. du Pont’s affairs now having acquired a highly liquid shape, that they would retain their high degree of liquidity and conservatism, that every effort would be made to maintain this conservative policy and prevent entangling messes, such as had previously been cleaned up by Mr. Ball.

He further deposed:

As far back as the spring of 1926,, when the proposition of employment was first made to me, it was understood that the estate was to be kept in a highly liquid shape. * * *

Zimmerman became the first comptroller of the petitioner and served in that capacity from December 1, 1926, to some time in January 1929.

Upon the organization of the petitioner du Pont turned over to it all of his holdings in the du Pont Co., of a fair market value at the time of something in excess of $31,000,000. All of the shares of stock first issued by the petitioner, except five qualifying shares, were turned over to du Pont in exchange for the securities transferred by him to it. At subsequent dates he turned over additional securities for additional shares of stock. Petitioner thus became the owner of substantially all of the securities formerly owned by du Pont. In 1927 Jessie Ball du Pont turned over securities to the petitioner of an approximate value of $2,700,000 for shares of stock, and Edward Ball, du Font’s brother-in-law, also turned over securities to the petitioner in exchange for shares of its stock.

Zimmerman made up the petitioner’s income tax return and those of its stockholders for 1926. In the preparation of the returns he questioned his superiors as to whether the petitioner should not be recognized as one subject to the provisions of section 220 of the Revenue Act of 1926 and whether he should not include in the income tax returns of the stockholders their pro rata shares of the undistributed earnings in accordance with the provision of section 220 (e) of the Revenue Act of 1926. The question was referred to income tax counsel who instructed Zimmerman to prepare the income tax returns of the stockholders without including therein the undistributed income of the petitioner. He raised the same question in the preparation of the return for 1927. The record upon this point reads as follows:

Q Did the matter of the manner of handling these dividends become the subject of further discussion between you and officers of the corporation?
A I mentioned it a number of times.
Q To whom?
A To both Mr. Ball and Mr. Batson. By the time the 1927 return was in course of preparation the question arose again. By that time the subject had gotten to be a rather, apparently, a distasteful one and I was told rather curtly to prepare the returns in the way I did and let the question of legality go for decision by Mr. Batson.

The deposition of Zimmerman is further illuminating with respect to the contentions of the petitioner that it was organized for the purpose of engaging in the banking business and in real estate development. From such deposition it appears that the acquisition of shares of stock of the Florida National Bank of Jacksonville, its first acquisition of bank stock, was to enable the petitioner to obtain control of a bank in Jacksonville in which it might safely deposit its funds. Alfred I. du Pont severely criticized Zimmerman for having made a large deposit in one of the banks in Jacksonville before the petitioner had obtained control of the bank.

In January 1929 Zimmerman suggested to du Pont that the petitioner acquire control of a large chain of banks in Florida and permit him to own a substantial interest in the company which was to be formed to acquire them. Du Pont stated to Ball that the proposition was “preposterous.” He addressed a memorandum to Zimmerman dated January 5, 1929, reading as follows:

I have before me your letter of January 5th, setting forth in detail, your proposition involving control of the Jacksonville Banks and others in the State, as specifically set forth.-
This proposition does not appeal to me, as it is not in line with the plan for developing the Almours Securities, Inc. Banking, in the abstract, does not appeal to me in the least.

Shortly after January 5, 1929, Zimmerman was summarily discharged as comptroller of the petitioner.

With regard to the real estate development Zimmerman deposed in part as follows:

Q And what other corporations were operated or were organized during the time you were connected with the Almours Securities?
A During 1925 Mr. Ball purchased the properties of a Mr. Covington in Bay County, Florida, located on the Bast Peninsula. A corporation was organized in the early part of 1927 which took title to that property. This corporation was named the Panama Beach Development Company.
Q Who owned the stock in that corporation?
A Mr. du Pont, Mrs. du Pont and Mr. Ball owned one-third each of 85% of the total stock; Mr. Edward H. Batson acquired 10% and I acquired 5% of the stock that was issued.
Q Were you acquainted with the plans and intentions in relation to the development of this real estate?
A Yes, sir.
Q And what were they?
A That the properties would be sold in small parcels as soon as a suitable buyer could be found at a profit.
Q Was any of it sold during your time?
A No.
Q Were any plans made in respect to improving, the properties or developing the properties by yourself?
A None at all during the years from 1925 to the end of 1928.
Q Was it the intention to improve the properties yourselves? When I talk about “yourselves” I am talking about the stockholders of these corporations you have mentioned.
A There was no intention of developing the property; the thing was offered to me as a short term speculation. I couldn’t have taken the proposition if there had been any intention to carry on a long term development program involving the investment of additional funds.

It is further in evidence that many attempts were made by the corporations holding title to most of the lands in the western part of Florida to sell them at a profit, but that no attempts were made to develop them.

From the organization of the corporation to the end of 1932 the petitioner confined its activities principally to the collection of its income, the investment of its funds, the operation of a small concession at Mt.'Yerno-n, Virginia, and the direction of corporate subsidiaries, especially of banking corporations in which it owned a controlling interest. The petitioner contends that the supervision of the banking corporations took up much of the time of its officers and required the services of several other employees. It is apparent, however, from a consideration of all of the evidence that the operating activities of the corporation were of little consequence. Petitioner’s tax returns for 1931 and 1932 show salaries paid to officers of $200,000 and $215,000, respectively, and other “salaries and wages” of $55,382.55 and $36,051.31, respectively.

The evidence conclusively shows that the petitioner was primarily a “holding or investment company.” The name of the corporation is indicative of its character. Its return for 1926 describes the corporation’s “Kind of Business” as “Owners of Investment Securities”; the returns for 1927,1928, and 1929, after the same title, have simply the phrase “Investment Securities”; the return for 1930, after the same title, “Owners Investment securities”; that for 1931 “Real Estate, Banking, Timber Operations, etc.”; and that for 1932 “Banking, etc.”

The petitioner was a family corporation. It took over substantially all of the securities formerly owned by Alfred I. du Pont and large quantities, if not substantially all, of those owned by Jessie Ball du Pont and Edward Ball in exchange for its shares of stock. It retained most of these securities to the end of 1932 and utilized most of its earnings in the acquisition of other securities and in the purchase of income-producing real estate.

The petitioner’s total earnings to the end of 1932 amounted to $22,463,674.97. Of this amount only $4,433,693.05 was distributed in the form of cash dividends to the end of the year 1932. Most of the balance was invested in securities or in the purchase of income-producing real estate in Jacksonville. The principal stockholders of the petitioner escaped the payment of large amounts of surtaxes by the failure of the petitioner to distribute as cash dividends its accumulated earnings.

Section 104 (b) of the Revenue Acts of 1928 and 1932 provides: “The fact that any corporation is a mere holding or investment company, * * * shall be prima facie evidence of a purpose to escape the surtax.” The petitioner contends that this prima facie presumption does not apply to it for the reason that it was something more than a “mere” holding or investment company. Even assuming that the petitioner in its actual operations was something more than a “mere” holding or investment company, it was, nevertheless, the type of corporation which, in our opinion, Congress had in mind in the enactment of section 104 of the Revenue Acts of 1928 and 1932 and similar provisions of the earlier acts. If it was “formed” for the purpose specified in the acts, it is immaterial whether the prima facie presumption applies or not. Cf. Rands, Inc., 34 B. T. A. 1094.

We think that it may be said in this case, as was said in United Business Corporation of America, supra, that “Here the purpose [of the formation of the corporation] appears to us, if not transparent, at least plain enough to leave no doubt.”

From a consideration of all of the evidence the conclusion is inescapable that the petitioner was formed “for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to be accumulated instead of being divided or distributed.”

Coming now to the question of whether the petitioner was “availed of” for the interdicted purpose for the years 1931 and 1932, the evidence shows that the petitioner’s book income for those years was $2,585,795.57 and $1,563.201.18, respectively, and that the dividends paid were $863,839.15 and $867,660.40, respectively. From the date of its inception to the end of 1932 the corporation accumulated undistributed earnings and profits amounting to more than $18,000,000. The petitioner contends that this accumulation was necessary to carry out the purpose of its organization. We are of the opinion, however, that there is no merit in this contention. The petitioner had substantially no liabilities. It was not actively engaged in any business which required this large accumulation of earnings. Its assets were approximately 90 percent liquid. Its balance sheet at December 31, 1930, showed a surplus of $7,882,959.52. The evidence does not show that there were “reasonable needs” for any further accumulation of earnings. The accumulated earnings apparently were already greatly in excess of the reasonable needs of the business.

We conclude from a consideration of all of the evidence that the petitioner was “availed of” in 1931 and 1932 for the purpose specified in section 104 of the Revenue Acts of 1928 and 1932.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Black: Leech,

text:
    Roy H. Laird, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79760.
    Promulgated November 13, 1936.

      Robert As7i, Esq., and H. I. 'Wilhelm, G. P. A., for the petitioner.

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

Black:

Petitioner in his brief succinctly states the issues raised in the petition as follows:

The issues involved in this case have to do with allowable depletion on three kinds of lease transactions; first, the assignment of the entire interest in a lease for cash; second, the assignment of a lease-interest for cash and the right to receive certain stipulated amounts from the oil, if, as and when produced ; and, third, the granting of a lease on fee land for a cash consideration plus the right to receive certain stipulated amounts from the oil, if, as and when produced.

The stipulation of facts with respect to the first issue involving petitioner’s right to depletion upon an amount of $35,420, received as a cash consideration for the conveyance of all of his interest in certain leases, refers to this payment as a “bonus.” That stipulation, however, shows that this payment is in no sense a bonus for the execution of a lease or other conveyance of interests in oil properties, but is the entire consideration paid. The transaction was merely a sale of property for a cash consideration and the issue is controlled by our decision in Macon Oil & Gas Co., 23 B. T. A. 54. See also Lester W. Fritz, 28 B. T. A. 408; Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56; certiorari denied, 284 U. S. 666. Petitioner is not entitled to depletion upon the consideration received.

The second issue is whether petitioner has a right to depletion on certain amounts received under contracts by which he assigned certain oil leases owned by him for a consideration, including a cash payment in a stipulated amount, and deferred payments to be made from the proceeds of oil, if and when produced from the properties. No percentage oil royalty was reserved by petitioner on the assignment of these leases. Respondent has disallowed depletion deductions on both the cash payment received and the payments realized under the contract from the proceeds of oil produced.

The Revenue Act of 1928, section 114 (b) (1) and (b) (3), is controlling.

Petitioner’s right to deductions for depletion at the rate of 27% percent on $3,166.55 received by him under the contract which gave him the right to receive $29,472.50 payable out of oil if and when produced, seems clear. Palmer v. Bender, 287 U. S. 551; Chester Addison Jones, 31 B. T. A. 55; affd., 82 Fed. (2d) 329; Commissioner v. Williams, 82 Fed. (2d) 328; Commissioner v. Elliott Petroleum Corporation, 82 Fed. (2d) 193; Alexander v. Continental Petroleum Co., 63 Fed. (2d) 927; William Fleming, 31 B. T. A. 623; affd., 82 Fed. (2d) 324. We hold that petitioner is entitled to percentage depletion on this payment of $3,166.55 out of oil produced.

Petitioner also claims the right to a 27% percent deduction on the so-called cash bonus aggregating $18,472.50 received in the transaction involved in paragraph IY of the findings of fact. The $18,472.50 in question was not paid as a true bonus or advanced royalty in anticipation of future oil production such as was present in Palmer v. Bender, 287 U. S. 551; Herring v. Commissioner, 293 U. S. 322, where a percentage oil royalty was reserved by the assignor or sublessor. It was received as a cash payment for the assignment of leases. These leases had an aggregate cost of $2,325.08 and we assume the Commissioner in computing the gain in this transaction has allowed a recovery of the entire cost basis of the leases assigned. There is no contention to the contrary.

In William Fleming, supra, we denied to the taxpayer percentage depletion under section 114 (b) (3) of the Bevenue Act of 1928 of a cash payment of the character here presented. Our decision was affirmed by the United States Circuit Court of Appeals, Fifth Circuit. See Commissioner v. Fleming, 82 Fed. (2d) 324. In the Fleming case the court held that upon the sale of Texas oil leases for cash and a share of the oil when produced, the vendor is not entitled to percentage depletion as to the cash received, as such money payment, unconnected with production of oil, is to be dealt with as representing a conversion of capital by sale. The court further held that the vendor is entitled to the percentage depletion deduction as to his income from the sale of oil produced.

We are unable to distinguish the cash payment of $18,472.50 here in question from the cash payment involved in the Fleming case and therefore, following the Fleming case, we affirm the Commissioner in his disallowance of percentage depletion on the cash payment in question.

The third issue involves the correctness of respondent’s action in disallowing petitioner’s claim for depletion upon payments received from oil production under leases granted by him on lands owned by him in fee, where a percentage oil royalty was reserved. As to these leases it is stipulated:

The petitioner executed certain oil and gas leases in the usual Texas form, reserving unto himself the usual Vs royalty interest * * * and received therefor cash bonuses aggregating §33,802.50 and the right to receive $136,928.25 out of oil, if and when produced. During the calendar year 1931, petitioner received $15,677.45 on account of the oil payments. The petitioner claimed depletion on the cash bonuses and on the $15,677.45 received on account of the oil payments. The respondent allowed depletion on the cash bonuses, but disallowed depletion on the oil payments.

We reverse the action of respondent in disallowing percentage depletion on the $15,677.45 received by petitioner on account of the oil payments. Palmer v. Bender, supra; Herring v. Commissioner, supra.

Beviewed by the Board.

Decision will be entered wider Rule 50.

Leech,

dissenting: I dissent on the second point. The majority opinion relies upon Fleming v. Commissioner, 82 Fed. (2d) 324, which affirmed the result but discarded the Board’s reasoning in 31 B. T. A. 623, on the present issue. Both cases involve identical facts on this issue. Both opinions decided that, in the lease transaction., the taxpayer retained an economic interest in the oil in place. That transaction is then segregated, and the deferred payments from the oil production are held to be income from the economic interest retained, and therefore depletable. But the court and the majority opinion of the Board then refused depletion on the bonus or cash payment, on the ground that such payment was consideration for the absolute sale of something.

In my judgment, this is exactly what the Supreme Court refused to do in Palmer v. Bender, 287 U. S. 551, arising under section 214 (a) (10) of the Revenue Act of 1921, and again in Herring v. Commissioner, 298 U. S. 322, involving section 214 (a) (9) of the Revenue Act of 1926, which is similar to the depletion provisions in the Revenue Act of 1928. The tax-free recovery, by the taxpayer, of his statutory investment in the property is the basis of all these provisions. The method of computation, only, was changed. United States v. Dakota-Montana Oil Co., 288 U. S. 459. In the Herring case, the Supreme Court held that, in such a transaction, where the taxpayer retained an economic interest in the oil in place, the bonus or cash consideration was income from that economic interest, and subject to depletion, even though no production at all occurred on the lease during the year when the taxpayer received the bonus.

Certainly, neither the actual source of the funds with which the bonus was paid to the taxpayer, nor the legal relationship existing between the parties, was considered controlling in either the Palmer or Herring cases.

I think the rule in such cases is that when the taxpayer retains an economic interest in the oil in place, the bonus or cash consideration, from whatever the payor’s source, as well as the deferred payments from the oil, are gross income to the owner from that retained economic interest, and are, therefore, subject to the depletion allowance. Palmer v. Bender, supra; Herring v. Commissioner, supra; Burnet v. Harmel, 287 U. S. 103; Welch v. Obispo Oil Co., 61 Fed. (2d) 1045; Helvering v. Falk, 291 U. S. 183; Signal Gasoline Corporation v. Commissioner, 66 Fed. (2d) 886.

Here the retention of any “economic interest in the oil in place” may be debatable. However, I agree with the Fleming case and the majority opinion of the Board here that the taxpayer did retain such an interest. Commissioner v. Elliott Petroleum Corporation, 82 Fed. (2d) 193; Chester Addison Jones, 31 B. T. A. 55; affd., 82 Fed. (2d) 329; Commissioner v. Williams, 82 Fed. (2d) 328; Alexander v. Continental Petroleum Co., 63 Fed. (2d) 927. But, since he did retain such an economic interest, I think that the bonus, as well as the deferred payments, were income from that economic interest, and both are, therefore, depletable. Palmer v. Bender, supra; Herring v. Commissioner, supra.

Smith, Moebis, Yah Fossah, and TtsoN agree with this dissent.

       SBC. 114. BASIS BOR DEPRECIATION AND DEPLETION.
      (b) Basis for depletion.—
      (1) General rule. — The basis upon which depletion is to be allowed in respect of any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon the sale or other disposition of such property, except as provided in paragraphs (2) and (3) of this subsection.
      * * * * * * ‡

      (3) Percentage depletion for oil and gas wells. — In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.


author: SteRhhageN :

text:
    La Arcada Bondholders Committee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75684.
    Promulgated November 17, 1936.

      Arthur J. Hair, Esq., G. E. 'Walling, Esq., and Lawrence E. Tripp, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

SteRhhageN :

The issue is the amount which the petitioner was, in the taxable year 1932, entitled to deduct, under section 23 (k) of the Revenue Act of 1928, as a reasonable allowance for the exhaustion, wear, and tear of the La Arcada building, including a reasonable allowance for obsolescence. The Commissioner, in determining the deficiency, used a straight line annual depreciation rate of 2±/2 percent, and this rate the taxpayer does not contest. The controversy turns upon the basis to which this rate should be applied, the Commissioner having determined a basis of $188,334.66 and the petitioner claiming a basis of $350,000. These figures represent the respective contentions of the parties to this proceeding as to the petitioner’s cost of the building at the time, July 29, 1929, when the building was acquired at the so-called foreclosure sale. The respondent’s determination and contention is founded upon the proposition that the accepted bid of $230,000 must be taken as the cost to the petitioner of both the land and the building, of which a proper apportionment, namely 69.6 percent, is applicable to the depreciable building. The petitioner, contesting the use of the bid price, seeks instead to prove that the actual value of the land and building is greatly in excess of the bid price, and contends that the actual value of the building at the time of its acquisition in 1929 is to be taken as the depreciation base.

Prior decisions establish the proposition that the bid price, although not to be disregarded as evidence, is not conclusive of cost of depreciable property acquired in foreclosure or comparable circumstances. Suncrest Lumber Co., 25 B. T. A. 375; Newberry Lumber & Chemical Co., 33 B. T. A. 150 (on review, C. C. A., 6th Cir.),; Pelham Hall Co., 33 B. T. A. 329. Consistently with this doctrine, the evidence in this proceeding shows that the bid of $230,000, which was the only bid made at the sale, was prompted not by the value of either the property being sold or the bonds used for its payment, but by a convention to offer no more than 50 percent of the face amount of the outstanding bonds, which convention had been established by the trust companies and the title companies of the community as a minimum sale price of property held as collateral for defaulted bonds. In view of the fact that the terms of the sale under the trust instrument permitted the bondholders to use the bonds in payment of the purchase price, it was of small moment to them at what precise figure they bid for the property. The only difference which the amount of their bid would make would be to control the amount of cash to be paid to the nondepositing bondholders. These owned approximately 11 percent of the outstanding bonds.

The basis for depreciation in this case, as in others, is the cost of the depreciable property. Revenue Act of 1928, sec. 114 (a). The cost is the sum of the money and the actual value of property given up for the depreciable property received. Thus it is necessary to ascertain from the evidence the actual value of the bonds given up by the petitioner; and this, plus the money, is to be taken as the cost of the entire property acquired, which cost must be properly apportioned between the nondepreciated land and the depreciable building. There is no direct evidence of the value of the deposited bonds, and such value can only be arrived at by considering all of the circumstances by which they were surrounded upon the date in question. Manifestly, since they were in default and the default was the occasion for the foreclosure,- the bonds may not be regarded as worth more than par, or the property as worth, as petitioner contends; around $650,000. While due and respectful consideration has been given to the opinions of the petitioner’s witnesses to this effect, the conclusions as to value which have been stated in the findings are the result of consideration of the facts and circumstances affecting such value as well as the several opinions in evidence. (Although it happens that the figure of $345,000 is the mean between the $230,000 bid and the $460,000 face value of the outstanding bonds, this is purely a coincidence and has not been arrived at by any arbitrary method like splitting the difference.)

The entire property, it has been found, had a fair market value of $345,000, of which approximately $240,000 was applicable to the de-preciable building. Since the bondholders were, by the terms of their bonds, entitled by foreclosure to take the property for their bonds and the comparatively slight expense of sale, taxes, etc., it is fair to say that all of the outstanding bonds ($460,000) were worth as much as the property -for which they could be redeemed, minus only the amount of the expense, viz., $16,229.02. The bonds were thus worth .71472. But $50,500 of the outstanding bonds were not paid for the property but were discharged through the payment by the petitioner of $24,366.75. This left bonds of a face value of $409,-500 and an actual value, at .71472, of $292,677.84 as paid for the property, plus $40,595.77 cash, a total cost of $333,273.61 for the entire property. This has been apportioned in the findings of fact upon the ratio used by the Commissioner and apparently not assailed by the petitioner and not overcome by any evidence, so as to result in a cost of the building of approximately $231,950. To such figure the undisputed rate of 2% percent should be applied, to arrive at the correct allowance for the taxable year in question.

Judgment will be entered wnder Rule 50.


author: Aeundell:

text:
    Benjamin E. May, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76785, 76880, 76881, 76882, 76883.
    Promulgated November 18, 1936.

      Herbert J. Haas, Esq., J oseph F. Haas, Esq., and Bertram S. Boley, Esq., for the petitioners.

      Ralph E. Smith, Esq., for the respondent.

      The following eases were submitted on the same stipulation of facts and were consolidated for hearing: Benjamin E. May, Docket No. 76785; Alvin H. Fuller, Docket No. 76880; Joseph May, Docket No. 7G881; Arthur I. May, Docket No. 76882; Benjamin F-May, Docket No. 76883.

   OPINION.

Aeundell:

The two issues involved here are (1) whether the petitioners are liable as transferees of the French Dry Cleaning Co. under section 311 of the Kevenue Act of 1928, and (2) the value of the stock of the Atlanta Laundries, Inc., which was distributed to petitioners as stockholders of the French Dry Cleaning Co. In a prior proceeding before this Board a deficiency in income tax for the year 1928 was determined against the French Dry Cleaning Co. in the amount/ of $12,299.11, arising out of its profit from the exchange of almost all of its assets for cash and stock in the Atlanta Laundries, Inc. Our determination was affirmed on appeal by the Circuit Court of Appeals for the Fifth Circuit. French Dry Cleaning Co. v. Commissioner, 72 Fed. (2d) 167. The collector of internal revenue made due effort to collect this deficiency from the French Dry Cleaning Co. and on November 15, 1933, issued a warrant of distraint which was returned unsatisfied. Deficiencies were then proposed against each of the petitioners as transferees of the assets of the French Dry Cleaning Co.

The first issue is whether the petitioners are liable as transferees. Each of them received assets from the French Dry Cleaning Co. after its tax liability arose, but it is the petitioners’ position that none of the distributions were made while the company was insolvent or served to render the company insolvent and therefore no transferee liability was incurred. The company ceased to do business as of January 1, 1928, when most of its assets were transferred to the Atlanta Laundries, Inc., and thereafter it conducted no business except such as was incidental to its liquidation. There was a series of distributions to stockholders, beginning on May 29, 1928, when the stock of the Atlanta Laundries, Inc., held by the French Dry Cleaning Co. was distributed to its common stockholders in exchange for all of the outstanding common stock, of a par value of $94,900. Successive payments in cash and distribution of personal overdrafts were made after that date to the preferred stockholders of the French Dry Cleaning Co. and by July 31, 1928, the entire outstanding preferred stock of the corporation, having a par value of $80,000, was liquidated except for an amount of $728.52' held by Arthur I. May. After July 31, 1928, additional payments were made to Joseph May and Benjamin F. May (of Atlanta) in excess of $14,000. The petitioners present balance sheets to show that at successive stages in the distribution the French Dry Cleaning Co. remained solvent, with an excess of assets over liabilities, including its tax liability for 1928, which had not then been determined. On May 29, 1928, after all of its common stock had been redeemed, the French Dry Cleaning Co. retained assets of $125,855.37 against liabilities of $98,748.97. On July 81, 1928, after all of its preferred stock except the amount of $728.52 had been liquidated, the company retained assets of $30,672.89 against liabilities of $19,323.49. No balance sheet later than July 31,1928, is in evidence, but it is apparent from the stipulation that the distributions made to Joseph May and Benjamin F. May after that date wiped! out the margin of solvency existing as of July 31 and rendered the company insolvent, and it was found to be without assets when a distraint warrant was issued in 1933. Benjamin F. May would therefore be liable to the extent of the $10,000 he received after July 31, 1928, and Joseph May would be liable for the $4,855.64 he received on October 26, 1928, plus any part of two undated distributions listed in the stipulation which were made after July 31, 1928. But the petitioners claim there is no liability on the part of any of the stockholders for distributions made prior to July 31,1928, because the corporation remained solvent on that date, and three of the five petitioners here received all of their distributions jDrior to July 31, 1928, namely, Benjamin E. May (of Mobile, Alabama), Alvin H. Fuller, and Arthur I. May.

The petitioners’ position, we think, overlooks the controlling fact that the distributions in liquidation of their stock were all made in pursuance of a plan of complete liquidation of the French Dry Cleaning Co. The petitioners do not deny the existence of a plan of liquidation ; in fact, they admit in their pleadings the respondent’s allegation that a large part of the assets of the French Dry Cleanmg Co. was distributed pursuant to a plan of liquidation. In the French Dry Cleaning Co. case we found the fact to be as stipulated that:

The plan under which the assets of the French Dry were transferred to Atlanta Laundries, Inc., contemplated that the holders of the French Dry common stock should receive pro rata the preferred and common stock of Atlanta Laundries, Inc., and that the cash should first be used in liquidating the indebtedness of the French Dry and then for retiring the outstanding preferred stock of the French Dry.

In order to insure that the indebtedness would be paid, it was agreed that the cash consideration paid by the Atlanta Laundries, Inc., would be deposited in an Atlanta bank in the name of the French Dry Cleaning Co., and that checks issued thereon should be countersigned by Herbert J. Haas, attorney for the Atlanta Laundries, Inc., until an affidavit should be made on behalf of the French Dry Cleaning Co. that all the indebtedness had been fully paid, “it being the understanding that said funds shall be used insofar as they are necessary to the discharge of said indebtedness, and for no other purpose.” The corporate resolution of May 26, 1928, recited the plan of complete liquidation of all the capital stock of the French Dry Cleaning Co. It provided for the distribution of all of the stock received from the Atlanta Laundries, Inc., as a liquidating dividend to the common shareholders of French Dry, to be delivered upon the surrender of their shares of common stock in the corporation; and it provided for the redemption of preferred stock of French Dry at par for cash. The part of the plan calling for the redemption of the entire- capital stock was carried out, and by July 31, 1928, it had all been liquidated except for $728.52 due to Arthur I. May on his preferred stock; but that part calling for payment of all debts of the corporation was not carried out, and the tax liability here in question was never paid. In such circumstances, where a corporation sets out to retire all its capital stock, even though it may plan to leave enough assets to discharge its obligations to creditors, we have no doubt that the stockholders are not free from liability as transferees until the debts are finally paid. The courts have repeatedly held, as did the Circuit Court of Appeals for the Fifth Circuit in Robinson v. Wangeman, 75 Fed. (2d) 756 (1935), that: “The assets of a corporation are the common pledge of its creditors, and stockholders are not entitled to receive any part of them unless creditors are paid in full.” This doctrine dates back as far as Justice Story’s famous formulation in Woods v. Dummer, 3 Mason 308, and it was stated by the Supreme. Court in these words in Sanger v. Upton, 91 U. S. 56:

The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation, for their security.

Whatever may be the present status of the trust fund doctrine as applied to some situations (see McDonald v. Williams, 174 U. S. 397; United States v. Fairall, 16 Fed. (2d) 328), we think that certainly this much of it remains — that a corporation must pay its debts before it liquidates its entire capital stock. Even those cases which have pointed out limitations on the trust fund doctrine recognize this as fundamental. In the case of Hospes v. Northwestern Manufacturing & Car Co., 48 Minn. 174, the Supreme Court of Minnesota, in discussing Woods v. Dummer, supra, said:

Evidently all that the eminent jurist [Justice Story] meant by the doctrine was that corporate property must be first appropriated to the payment of the debts of the company before there can be any distribution of it among its stockholders — a proposition that is sound upon the plainest principles of common honesty.

Another court has said that the trust fund theory “is not obsolete and will not become obsolete anywhere until honesty shall become obsolete.” Witt v. Nelson (Tex. Civ. App.), 169 S. W. 381. The courts of Georgia where this case arises have adhered to the trust fund doctrine from Hightower v. Thornton (1850), 8 Ga. 486, and Reid v. Eatonton Manufacturing Co. (1869), 40 Ga. 98, to Fitzpatrick v. McGregor (1909), 133 Ga. 332; 65 S. E. 859; and Williams v. Clemons (1934), 178 Ga. 619; 173 S. E. 718. In this state of the authorities we must hold that all the stockholders in the case at bar who received distributions pursuant to the plan of complete liquidation are liable as transferees to the extent of the value of the assets received. We do not think the cases relied on by the petitioners hold to the contrary. McDonald v. Williams, supra, involved dividends paid by a corporation out of capital but received by the stockholders in good faith, believing them to be out of earnings and profits. In such a situation the stockholders were not chargeable with knowledge of the wrong of the directors and the dividends were not recoverable by creditors on subsequent insolvency. Here, however, we have a totally different situation. The assets of the French Dry Cleaning Co. were sold to the Atlanta Laundries, Inc., pursuant to a plan that the proceeds of the sale would be used first to pay the debts of the French Dry Cleaning Co. and then the remaining assets would be distributed to the stockholders in liquidation of their stock. The Atlanta Laundries, Inc., made certain requirements to insure that the debts would indeed be paid first. But the plan was not carried out; the distributions to stockholders were made first and the debt to the United States was never paid. In such a case there can be no question of notice to the stockholders that capital is being impaired or that a complete liquidation is being effected, for they were required to surrender their capital stock in order to participate in the distribution. Thus, as the stockholders participated in the complete liquidation of the entire capital stock before all debts were paid, we think their liability persists and that the creditors can follow the funds distributed to them. The responsibility of stockholders who receive a return of their capital in complete liquidation does not cease with their merely setting aside a fund which at its then value is sufficient to pay debts, but continues until the debts are actually paid. The equity of the creditors is superior to that of the stockholders.

Eliza J. Wray, 24 B. T. A. 94, invoked by the petitioners, was a case where the Commissioner failed to establish the ultimate insolvency of the company, and we held that he had not proved that the corporation itself was unable to pay the tax or that he had exhausted bis remedies against tbe corporation. M. H. Graham, 26 B. T. A. 301, did not, properly speaking, involve a liquidating dividend at all since it does not appear tbat any stock in tbe transferor was surrendered upon tbe distribution in question; also tbe distribution did not impair tbe capital of the corporation, but left the assets representing tbe capital stock completely intact to meet tbe claims of creditors; finally, there was no evidence there of tbe existence of any plan of complete liquidation of all of the capital stock, or, indeed, any of tbe capital stock of tbe corporation at the time when the dividend in question was paid. On tbe other band, a case which is very closely in point is W. S. Scamehorn, 27 B. T. A. 155. There a corporation sold its assets for $100,000, liquidated tbe minority stockhold-ings for $125 a share, paid all tbe debts of the corporation except tbe Federal tax liability, and still bad on band sufficient assets to cover tbat liability. The corporation was subsequently made insolvent by distributions to certain of its shareholders and the tax liability was never paid. It was held tbat the minority stockholders whose interests were first liquidated, as well as those receiving the final distributions, were liable as transferees. It seems to us that the particular order of distribution is immaterial where all the distributions are made in pursuance of a single plan of complete liquidation.

We think it is unimportant in the case at bar that certain of the holders of common stock were not apprised of the distributions made after July 31, 1928, in violation of the plan. By surrendering their stock in return for the distribution of May 29 they subscribed to the plan of reversing the normal order of liquidation by making distributions to stockholders before debts were paid. This, we think, makes them liable along with the rest of the stockholders if the fund remaining for creditors should for any reason prove inadequate. As stockholders receivipg distributions in complete liquidation, we think they became guarantors that the fund left for creditors should actually prove sufficient to discharge their obligations. In view of the imminent possibility of dissipation or depreciation of assets left for creditors in such a case as this, it might even be held, if it were deemed necessary to go so far, that as a matter of law the retirement of a corporation’s entire capital stock is made in contemplation of insolvency and therefore is in fraud of creditors. The courts have been zealous in transferee cases to protect the revenues from any misuse of the corporate entity theory. See Helvering v. Wheeling Mold & Foundry Co., 71 Fed. (2d) 749; Concrete Industries Co., 19 B. T. A. 655.

The second issue is the value of Atlanta Laundries, Inc., preferred stock which was distributed to the petitioners on May 29, 1928; the respondent concedes that the common stock distributed was without value. In the transferor case, French Dry Cleaning Co. v. Commissioner, supra, we found the value of the preferred stock of Atlanta Laundries, Inc., on the day of its receipt by the French Dry Cleaning Co., January 16, 1929, to be $60 per share, and this finding was affirmed by the Circuit Court of Appeals for the Fifth Circuit, which pointed out:

It appears from the record that in July, 1932, Atlanta Laundries, Inc., defaulted on the payment of interest on its bonds. It is probable that thereafter the stock had little or no value. That, however, is immaterial as we are dealing with the situation existing in January, 1928, when the reorganization was effected. It further appears that for the twelve months ending November 15, 1927, petitioner’s volume of business was approximately $505,000. The basis of cost of the tangible property transferred was, in round figures, $384,000. Since petitioner received only about $305,000 in cash, this left a considerable amount of the purchase price of tangibles to be represented by stock. In addition, the going business value was represented by stock. This must have been a large percentage of the value considered in effecting the consolidation.

It appears in evidence that the book value of the preferred stock of Atlanta Laundries, Inc., considering the common stock as having no value, was more than $100 a share from January 16, 1928, when the books of the Atlanta Laundries, Inc., were first opened, through December 31, 1931. Furthermore, and more important, the net earnings available for dividends in both 1928 and 1929 were well in excess of the $1 per share which was required to pay dividends on the preferred stock, and regular semiannual dividends were paid on the preferred stock throughout those two years. The earnings for 1925 through 1927 of the respective companies which were consolidated support the earning power indicated for the preferred stock of the new company, Atlanta Laundries, Inc. This would indicate a value in the neighborhood of its $100 par for the year 1928, when the distribution occurred. The respondent claims a value of only $60 per share for the preferred stock, and we have no doubt that such a valuation is justified on the basis of the earning power of the stock and its book value. The petitioners do not challenge the correctness of the figures put in evidence by the Commissioner, but only their materiality, claiming that, in the absence of evidence of any sales of the stock, fair market value can not be established from book value and earning power alone. Where there is no evidence that the figures are unreliable, we think it is well settled that book value and earning power are sufficient to establish fair market value. Wessel v. United States, 49 Fed. (2d) 137; Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777; Shanley & Furness, Inc., 21 B. T. A. 146. We have found as a fact that the preferred stock of the Atlanta Laundries, Inc., on May 29, 1928, had a fair market value of $60 per share.

Judgment will be entered wider Rule 50.

       See also Bank of Morgan v. Reid, 107 S. E. 555 (Ga. App., 1921) ; for the effect of the municipal law in transferee cases see Harwood v. Eaton, 68 Fed. (2d) 12; for a further limitation on the power of a Georgia corporation to liquidate its entire capital stock see Kaminsky v. Phinizy, 54 Fed. (2d) 16.