text:
    Appeal of Una Libby Kaufman, Executrix of the Estate of Samuel R. Kaufman.
    Docket No. 4698.
    Decided October 8, 1926.
    1. Upon the evidence submitted, helé, that a transfer of certain stock by the decedent to his wife was not made in contemplation of death but was a transfer intended to take effect in possession or enjoyment at death.
    2. Helé, further, that a gift of certain Liberty bonds, which were afterwards exchanged by the donee for stock, was not a transfer in contemplation of or intended to take effect at or after death.
    3. A deduction of $15,000 as executor’s commissions allowed.

      Robert L. Floyd, Esq., for the petitioner.

      Frank T. Horner, Esq., for the Commissioner.
    This is a proceeding for the redetermination of a deficiency of $26,260.44 in estate tax under the provisions of the Revenue Act of 1921. The questions presented are: (1) Whether any portion of the value of certain real estate, located in Powell Township, Mich., owned by decedent and his wife, should be included in the gross estate; (2) whether the transfer of certain stock and bonds by the decedent to his wife and children was made in contemplation of death or was intended to take effect in possession or enjoyment at or after death; and (3) the propriety of a deduction of $15,000 as executor’s fees.
    FINDINGS OF FACT.
    Samuel R. Kaufman, a resident of Chicago, Ill., died- April 29, 1922, at the age of 58 years. By the terms of his will his property passed to his wife and three children, the former and her elder son, Robert Libby Kaufman, being named in the will as executors. Mrs. Kaufman qualified as executrix, but Robert, not having attained his majority, under the statutes of Illinois was unable to qualify. He appears to have been acting, either as executor or trustee, however, when the estate-tax return was filed on April 9,1923.
    In computing the value of the gross estate the executrix excluded therefrom the amount of $5,600, representing the total value of certain real estate held by decedent and his wife as tenants in the entirety, 4,434 shares of the common stock of the Congress Hotel Co. of the value of $443,400, and 400 shares of Chatham & Phenix Rational Bank stock of the value of $94,800, and she deducted $15,000 as executor’s commissions. The Commissioner increased the value of the gross estate by including therein the above-mentioned amounts and by disallowing the deduction of $15,000 as executor’s commissions. He thereby increased the tax from $1,718.07, as shown by the return, to $27,978.51, resulting in a deficiency of $26,260.44

      At the time of his death the decedent and his wife owned certain real estate located in Powell Township, Mich., of a total value of $5,600.
    In October, 1915, Samuel R. Kaufman and his brother, Nathan M. Kaufman, entered into an agreement with one another that, in the case of the death of either, the shares of the stock of the Congress Hotel Co. owned by the party so dying should be purchased by the survivor upon the following terms, to wit:
    1st. The price to be paid for such, stock shall be the par value thereof, without regard being had to the then market value of said stock, whether the same shall be above or below the par value thereof.
    * * ⅝ ⅜ * * ⅝
    3rd. Payment for such stock shall be made by the surviving parties hereto by giving their promissory note payable to the order of the Executor or Administrator of such deceased party on or before ten years from and after the date of the death of such deceased party, and shall bear interest at the rate of five per cent (5%) per annum, payable semi-annually.
    Nathan M. Kaufman died in November, 1918, being the owner at that time of 5,900 shares of Congress Hotel Co. stock. The decedent was the executor under his will and, pursuant to the agreement entered into between them, purchased 4,871 of the 5,900 shares, giving his promissory note therefor and waiving his right to purchase the remainder. The note was payable to the residuary legatees. In March, 1919, a 50 per cent stock dividend was declared upon the stock, increasing thereby the number of shares then owned by Samuel E. Kaufman to 6,556. These shares were owned by him at the time of his death and his note therefor was outstanding.
    Upon the death of Samuel It. Kaufman the shares of stock purchased by him from the estate of Nathan M. Kaufman, including those issued thereon as a stock dividend in March, 1919, were transferred to the payees of the decedent’s promissory note, given by him in payment for the 4,371 shares, whereupon the note was canceled and surrendered to the executrix of the will.
    On or shortly prior to April 20, 1920, the decedent made an absolute gift to his wife, for herself and the children, of $84,500 in United States bonds and told her to “ put them away and take care of them.” At the time she had in her safe deposit box $2,000 of Liberty bonds purchased with funds belonging to their three children. Upon the receipt of the bonds from her husband, she rented a larger safe deposit box to which she alone had access. The bonds were given to her absolutely, without reservation of income or any agreement relative thereto. She clipped the coupons from time to time, but instead of cashing them herself sent them to her husband in Chicago, or handed them to him when he was at home, to be cashed by him. This was her usual custom relative to all securities purchased and owned by her and the children with their separate funds, prior to her husband’s death. It was not because of any request on his part, or of any agreement between them, but because he handled all matters on her behalf relating to the acquisition or change of securities, or other financial matters. He gave his wife various sums of money from time to time for the payment of household expenses and rent, in excess of $28,000 annually, and he also gave her sums in varying amounts for her personal use. Neither at the time the bonds were given to her, nor at any time thereafter, was anything said by the decedent relative to the income therefrom. As Mrs. Kaufman testified:
    He never said a word. It was never discussed, any more than when I gave him the coupons, and as I say, at the time when I gave him those coupons I was conscious of the fact that we were under heavy expenses and he expected we would be, and I just gave him the coupons because I thought we needed them. There was never any discussion as to whether he would cash the coupons and give them back to me or not. I did not expect he was going to do that, but there was never any request on the part of Mr. Kaufman about those coupons at all and never any suggestion on his part that the time was due to cut them or what I would do with them or anything of that sort. It was the only thing for us to do at the moment. I had no other use for the money, other than for the family. Certainly, it would have been very strange for me to accumulate an income when I needed it really for the children, if Mr. Kaufman did not have enough at the moment to take care of the expenses.
    On or before December 15, 1921, the decedent told bis wife of an opportunity to invest in some stock of tbe Chatham & Phenix National Bank, suggesting that it would be a good idea to exchange the Government bonds therefor, and asking her at the same time what she thought about it. She replied that it seemed to her that Government bonds were better for women and children. He stated that he was sorry she regarded it in that light, as he considered it a good investment. Their conversation resulted in her requesting him to negotiate the investment. She removed the $86,500 of bonds from the deposit box, gave them to him and drove with him to the bank to make the exchange. He gave her the receipt of the Chatham & Phenix National Bank for the bonds dated December 15, 1921. This receipt showed the issuance or exchange of the bonds for 400 shares of bank stock, 100 shares to Mrs. Kaufman and 100 shares to each of the three children. Mrs. Kaufman placed the receipt, together with the Chatham & Phenix stock, which she received a few days later, in her safe deposit box, the rent for which she paid and to which she alone had a key. These 400 shares cost $89,500, the difference between the value of the bonds and the cost being paid by the decedent from Ms funds. At the time of the exchange he purchased for himself 200 shares of the Chatham & Phenix stock.
    In 1916 the decedent became ill and his physician, believing that he was suffering from appendicitis, performed an operation, removing the appendix. He soon recovered, however, and enjoyed good health, aside from an occasional cold. Some time during 1919 he became slightly indisposed as a result of a cold and consulted a physician who had been his personal friend for many years. This physician made a thorough examination, as was his custom, no matter how slight the ailment might be. The examination disclosed that the decedent had a slight enlargement of the liver, as a result of which he was advised to wear an abdominal support, which he did for a short time. The decedent suffered no further illness or impairment of his general health until the spring of 1921, when he contracted influenza. In a short time he had apparently recovered from this attack and left Chicago to visit his home in New York. Soon after his arrival there he suffered a relapse and developed an intestinal condition which involved the gall ducts and produced jaundice. In addition, erysipelas developed on the ear and neck and, as the physician testified:
    The toxemia or poisoning was so intense that it not only produced a condition which deprived him — that is, a delirious condition for several weeks, but it involved almost every organ in the body, so that twice, on account of the intensity of the poisoning, I was compelled to wash out the blood, so to speak, with a solution of salts, and at one time death was imminent and I had to take extraordinary measures of stimulation to bring him around again.
    This illness covered the month of April and the early part of May, 1921. Thereafter his condition improved steadily. He visited his summer camp in Michigan, as was his custom each summer, and upon his return in October, 1921, his health and general condition were better than they had been prior to his illness. He continued in the active management of his affairs, particularly in the management of the Congress Hotel at Chicago, discussing with his counsel and friends certain other business ventures in which he was interested.
    On December 3, 1918, the decedent and his brothers, Daniel W. Kaufman, Harry L. Kaufman and Louis G. Kaufman, entered into a contract similar to the one hereinbefore referred to between Samuel It. Kaufman and his brother, Nathan M. Kaufman, dated in October, 1915.
    On August 30, 1921, his brother, Daniel W. Kaufman, died leaving a will in which he designated Samuel R. Kaufman as his executor, and soon thereafter, in accordance with the terms of the agreement between them, the survivors to the contract took over the shares of Congress Hotel Co. stock owned by him. At this time Samuel E. Kaufman expressed to his attorney his objection to insisting upon the terms of the contract but stated that his brothers desired to carry out the same according to its terms and that he was being coerced, against his judgment, into carrying out his portion thereof. He felt that the agreement was unfair in so far as he was concerned. Pie was much disturbed over the fact that, being the owner of so much more stock than the other parties to the contract, he would be depriving his family, in case of his death, of one-third of the par value of the stock owned by him, since, if the other parties to the agreement acquired his stock, it would bring only $66.66 a share by reason of the fact that any stock which had been issued as a stock dividend was, under the terms of the contract, to be included as a part of the original shares without cost.
    Pie consulted his attorney as to the validity of the agreement and was advised by him that it was binding only in respect of such portion of Congress Hotel Co. stock of which he might be the owner at the time of his death, there being no provision in the contract which would compel him to retain any of the shares of stock or restrict him in the sale or disposition thereof; that whatever portion he might dispose of by gift or sale would not be subject to the terms of the contract upon his death. His attorney thereupon urged him to make a gift of the stock and, as he had for some time contemplated giving a portion of it to his wife, he made plans forthwith as to his indebtedness in order that the stock, which had been placed with certain banks as security, might be released so that the transfer and delivery thereof might be made. By December, 1921, the decedent had obtained the release of 4,434 shares of the stock and had the same transferred 'upon the books of the company to his wife. Shortly thereafter he informed his attorney of the transfer and stated to him that it was his purpose to endeavor to have his brothers agree to the cancellation of the contract between them relative to the acquisition by the survivors of the stock of the one who should die first.
    He left Chicago about December 3, 1921, for his home in New York, and upon his arrival delivered to his wife the 4,434 shares of the Congress Hotel Co. stock with the statement, “ There is that stock I have been promising you for so long.” Nothing further was said relative thereto. Some time later the decedent asked his wife what she had done with the stock and, upon being informed by her that she had placed it in a little closet where she kept her jewelry, he stated that the stock was valuable and asked her if she did not think it should be placed in her safe deposit box. Thereupon she placed it in her safe deposit box on that date.
    On January 1, 1922, a 4 per cent dividend was declared by the Congress Hotel Co., resulting in a dividend of $17,736 upon the 4,434 shares theretofore transferred to Mrs. Kaufman. The decedent directed the secretary of the Congress Hotel Co. to malm the check for the stock standing in the name of Mrs. Kaufman payable to him. This was done and the dividend check was deposited in the bank to his credit. On April 1, 1922, a further dividend of 2 per cent was .declared and the dividend check of $8,868, due upon the 4,434 shares of stock in the name of Mrs. Kaufman, was made payable and delivered to the decedent and deposited to his credit.
    About January 10, 1922, the decedent advised his attorney that his brothers had agreed to a modification of the contract relative to the acquisition by the survivors of the stock of the one who should die first, to provide as follows: That the first 5,000 shares should be purchased at par and that any excess above the 5,000 shares of the stock issued at the time of the contract should be purchased at $150 a share, and that only such stock as might be declared as a stock dividend after January 10, 1922, should be included witho'ut cost. This modified agreement was executed on January 10, 1922.
    The decedent was thereafter active in the management of his various interests and enjoyed good health until the night of April 29, 1922, when he was stricken and died a few hours later from a gastric hemorrhage.
    In a will executed five months prior to his death the decedent named his son, who was under 21 years of age, as one of his executors. The son was not old enough at the time of the decedent’s death to qualify as an executor.
   OPINION.

Littleton :

The first question is whether the Commissioner erred in including in the gross estate certain real estate in Powell Township, Mich., of the value of $5,600.

The second issue relates to the question whether the transfer of the 4,434 shares of common stock of the Congress Hotel Co., made by the decedent to his wife on December 3, 1921, about five months prior to his death, was made in contemplation of death or was intended to take effect in possession or enjoyment at or after death.

The third issue is whether 3,045 shares of the Congress Hotel Co. stock, being the number of shares remaining in the estate exclusive of the 4,434 shares transferred to Mrs. Kaufman and the 6,556 shares given by the estate in payment of the decedent’s note for $437,100 and not purchased by his brothers under the agreement, constituted a part of the gross estate, and whether, if they did, they should be included therein at $101.50 a share, which is conceded to be the fair market value at the time of death, or at the value for which the surviving brothers might have purchased them, had they so elected, under the terms of the contract.

The fourth issue relates to the question whether the 400 shares of the capital stock of the Chatham & Phenix National Bank owned by the decedent’s wife and three children, received by them in exchange for $84,500 of Liberty bonds given to them by the decedent on April 30, 1920, $2,000 of Liberty bonds owned by the decedent’s three children and purchased for them by their mother with their own funds, and $3,000 contributed by the decedent at the time of the exchange on December 15, 1921, should be included in the gross estate as a transfer made in contemplation of death or intended to take effect in possession or enjoyment at or after death.

The fifth or last issue relates to the propriety of a deduction of $15,000 for executor’s commissions.

As to the first issue, it appears that at the time of his death the decedent and his wife owned certain real estate in Michigan valued at $5,600. The executors excluded this property and the Commissioner included the same in the gross estate of the decedent at its full value.

We have no evidence as to when or under what circumstances the decedent and his wife acquired this property. It was merely alleged in the petition that they acquired it as tenants in the entirety, and this was admitted by the Commissioner in his answer. Upon this the executrix claimed that no portion of the value of the property should have been included in determining the value of the gross estate of the decedent. The only reason given for this claim was that the statutes of Michigan recognize tenancy by the entirety. The Revenue Act of 1921, section 402 (d), provides that the value of the gross estate of a decedent shall be determined by including the value at the time of his death to the extent of any interest therein held jointly or as tenants in the entirety by the decedent or any other person.

With no more evidence than is contained in the record concerning this point, we affirm the Commissioner’s determination.

As to the second issue, the Board is of the opinion that, under the facts hereinbefore set forth in detail, this stock was not transferred in contemplation of death within the meaning of the Revenue Act of 1921. It appears that the decedent, prior to any illness of which the Board has knowledge, had told his wife that he intended to make her a gift of some Congress Hotel Co. stock and that this was not done for the reason that the stock was being used by him as security for loans from various banks. At the time the stock was transferred in December, 1921, the decedent had fully recovered from his illnesses. As a result, however, of a situation arising from the terms of certain agreements between himself and his brothers, he concluded, since he was the owner of practically all of the capital stock of the Congress Hotel Co., to make a gift of some of it to his wife, not because be contemplated death within a reasonably near future, but because he desired to protect his family in the event of his death from loss by reason of the small amount which his brothers would pay for the stock should they decide to purchase it under the terms of the contract between them. On the question of whether the transfer of this stock was one intended to take effect in possession or enjoyment at or after death, the Board is of the opinion that the Commissioner correctly included the value thereof in the gross estate upon the ground that it was a transfer intended to take effect at death. We reach this conclusion from all the facts and circumstances surrounding the gift and relating to the decedent’s conduct thereafter.

It is true that the stock was delivered to decedent’s wife and transferred to her upon the books of the company. It appears however, that he reserved to himself the income therefrom. A 4 per cent dividend was declared on the stock on January 1, 1922— less than one month after the gift — and he directed that the same be paid to him. This was also true in respect of the dividend of 2 per cent declared in April, 1922. Transactions between husband and wife do not partake of the same formalities as those between strangers, and the intention of the donor in such a case is best determined from his acts and conduct in relation to the subject matter. It was not necessary for the decedent to have a formal understanding with his wife that the dividends upon the stock should be paid to him during his life or for any period of time. He had no reason to believe that she would insist upon the dividends being paid to her. There is nothing in the record to indicate that the decedent, prior to his death, changed his intention in regard to the payment of dividends to him and, under these circumstances, the transfer took effect at his death.

In the case of In re Brandreth's Estate, 169 N. Y. 437; 62 N. E. 563, the decedent had made a transfer of certain stock, reserving to himself the dividends thereon and the right to vote the stock. The court said:

The effect of these instruments was to transfer to the daughters the remainder in the stock after the donor’s death, reserving to the latter an estate for his life. It is said by the learned appellate division that there is a difference between the stock itself and the dividends that may be declared upon it. This is doubtless true, but it is the same difference thát exists between land and its rents and profits or between a fund and its income. A devise of the rents and profits of land or a bequest of the income of a fund grants an estate in the land or the fund itself in fee or for life, depending on whether the gift of the income or rent is for life or without limitation. Jennings v. Conboy, 73 N. Y. 230. The only income stocks can produce is the dividend declared thereon, and the reservation of the dividends for life is the reservation of an estate for life. A stockholder has no title to the earnings of a corporation before a dividend is declared. Until that time the earnings pass with the stock as an incident thereof, and when a dividend is declared it is a profit on the stock. * * *
* * * Though a remainder may vest in title at its creation, it cannot vest in possession until the determination of the prior estate. It makes no difference in this respect whether the remainder is vested indefensibly or is contingent or subject to be devested. In the present case the prior estate is one for the life of the donor, and therefore the remainder transferred to his daughters falls within the exact provision of the statute as a transfer to take effect in possession or enjoyment on the death of the donor.

See, also, In re Keeney's Estate, 194 N. Y. 281; 87 N. E. 428.

As to the third issue, it is the opinion of the Board that the 8,045 shares which the surviving brothers, under the terms of the contract of January 10, 1922, had a right to purchase at par, but which they did not purchase, constituted a part of the estate and were properly valued by the Commissioner at $101.50 a share for the purpose of the tax. The executrix contends that this stock was subject to an agreement between the decedent and his brothers whereby they had a right to purchase the stock, and that whatever was over and above the price at which they could purchase the same should be considered as a gift from them. The surviving brothers were not compelled to purchase the stock and the most that they can be said to have had was an option to do so. They did not exercise this option and the stock remained a part of the estate.

As to the fourth issue, the Board is of the opinion under the evidence that no portion of the value of the 400 shares of the Chatham & Phenix National Bank stock constituted a part of the gross estate. As set forth in the findings of fact, the decedent in April, 1920, gave to his wife, for herself and children, $84,500 in Liberty bonds, which she kept in her possession and over which he did not have or exercise any control. In addition, it appears that Mrs. Kaufman from time to time, with separate funds of her three children, had purchased Liberty bonds in the amount of $2,000. On December 15, 1921, it appears that she concluded to exchange the Liberty bonds for stock of the Chatham & Phenix National Bank and that she delivered the bonds in the amount of $86,500 to her husband and went with him to make the exchange. At that time 400 shares of Chatham & Phenix National Bank stock were issued in the name of his wife and their three children in exchange for the $86,500 of Liberty bonds and $3,000 contributed out of his own funds. At the same time the decedent acquired in his own name 200 shares. This stock was delivered by the bank to Mrs. Kaufman and retained by her without any control thereof by her husband.

The evidence does not warrant the conclusion that the gift of the Liberty bonds on April 30, 1920, or that the $3,000 contributed by the decedent toward the purchase of the Chatham & Phenix National Bank stock, ,^vas a gift in contemplation of death or intended to take effect at or after death.

The only circumstance which might indicate that the gift of $84,500 of Liberty bonds on April 80 was intended to take effect at or after death was the delivery by Mrs. Kaufman to her husband from time to time of the coupons clipped by her from the bonds. In the opinion of the Board, however, this circumstance does not warrant the conclusion that the gift was one intended to take effect at or after death. The decedent made no reservation of the income from the bonds at the time of the gift. The coupons which were attached to the bonds constituted a part of the gift and thereafter constituted her property. Neither at the time of the gift nor at any time thereafter did the decedent ever make any statement to Mrs. Kaufman relative to the income from the bonds. Her reason for delivering the coupons to her husband was because their expenses were heavy and she wished to contribute to the payment thereof. This was entirely a voluntary act on her part and had no relation to the character of the original gift.

The fifth and last issue relates to the propriety of a deduction of $15,000 for executor’s commissions. Section 403 (a) (1) of the Kevenue Act of 1921 provides for the deduction of—

Such amounts for * * * administration expenses, claims against the estate, * * * as are allowed by the laws of the jurisdiction, whether . within or without the United States, under which the estate is being administered * * *.

The following provision is from Callaghan’s Illinois Statutes Annotated, vol. 1, ch. 3, Administration of Estates:

Par. 135 [Compensation of representative.] § 133. Executors and administrators shall be allowed as compensation for their services a sum not exceeding six per centum on the amount of personal estate, and not exceeding three per centum on the money arising from the' sale of real estate, with such additional allowances, for costs and charges in collecting and defending the claims of the estate and disposing of the same, as shall be reasonable.

The total estate left by decedent was in excess of $900,000, $437,100 of which was given in exchange for the decedent’s personal note for that amount held as collateral by his brothers. All except $6,500 of this was personal property. The debts of the decedent were $241,117.21, a large part of which was in small amounts. There is nothing to indicate that the executor’s duties required less ability or were less onerous than are usual in the settlement of estates of like amounts. The commission claimed is about one and two-thirds per centum. It is not unreasonable and should be allowed. Appeal of Samuel E. A. Stern, 2 B. T. A. 102.

Order of redetermination will be entered on IB days’ notice, under Rule 50.


source: Caselaw Access Project

author: Millxken :

license: Public Domain

text:
    Appeal of Charles L. Harris, Administrator of the Estate of William L. Harris.
    Docket No. 4426.
    Decided October 8, 1926.
    1. Under the Revenue Act of 1921, the proceeds of life insurance policies made payable to beneficiaries other than the estate of the decedent prior to the effective date of the Revenue Act of 1918, may not be included in the gross estate of the decedent. Lewellyn v. Frick, 268 U. S. 238.
    2. Section 1400(a) of the Revenue Act of 1921 repealed the estate tax imposed by the Revenue Act of 1918, and section 1400(b) provided that the parts of that Act which are repealed shall remain in force for the assessment and collection of all taxes which have accrued at the time such parts cease to be in effect. Held, that no liability for estate tax accrued, within the meaning of section 1400(b), against the estate of a decedent who died subsequent to the date of the repealing statute.
    3. Prior to the effective date of the Revenue Act of 1918, decedent took out a policy of insurance on his life, naming his estate as beneficiary; in 1920, prior to the enactment of the Revenue Act of 1921, which repealed the estate tax imposed by the Act of 1918, decedent named his wife as beneficiary, and, upon his death in 1923, the proceeds of the policy were paid to her. Held that, in determining liability for estate tax imposed by the Act of 1921, the proceeds of such policy may not be included in the gross estate of the decedent.

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

      J. F. Greaney, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in estate tax in the amount of $934.96. The deficiency arises from the inclusion by the Commissioner in the gross estate of the decedent of the proceeds of certain policies of insurance taken out by the decedent upon his own life and payable to beneficiaries other than his estate.
    FINDINGS OF FACT.
    William L. Harris, a resident of the State of Minnesota, died intestate on September 11, 1923. On October 30, 1923, Charles L. Harris was appointed administrator of the estate of said decedent in the Probate Court of Hennipen County, Minn., and he now is the duly appointed, qualified and acting administrator of said estate.
    During the period October 1, 1887, to March 15, 1912, inclusive, William L. Harris took out upon his own life nine policies of insurance, in the aggregate amount of $99,000, all of which continued in full force and-effect until his death. Eight of these policies, at the time they were taken out by and issued to William L. Harris, were made payable either to Elizabeth E. Harris, his wife, or to Ethel Harris Gauntlett, or Charles L. Harris. The original beneficiaries under these eight policies of insurance continued to be such beneficiaries until the death of William L. Harris and they received the proceeds of said policies. The other policy of insurance mentioned was taken out by William L. Harris on March 15, 1912, and was made payable to his estate. On September 30, 1920, he caused the beneficiary of this policy to be changed, and it was on that date made payable to his wife, Elizabeth E. Harris, instead of to his estate. From September 30, 1920, until the death of William L. Harris on September 11, 1923, she was the beneficiary of said policy and she received the proceeds thereof. The nine insurance policies referred to, the date of issue, the amounts thereof, the incumbrances thereon, and the amounts received by the beneficiary were as follows :

    On or about September 4, 1924, the administrator of the estate of William L. Harris filed a return for said estate under the Federal estate tax law, showing tax due in the amount of $5,243.09, which was duly paid. No part of the proceeds of the policies of insurance referred to herein was included by the administrator in the return filed by him for said estate. The Commissioner, upon audit of the return, included in the gross estate of the deceased, subject to the Federal estate tax, the entire amount of the proceeds of the nine-policies of insurance herein mentioned in excess of $40,000, and determined that there is a deficiency in tax in the amount of $934.96.
   OPINION.

Millxken :

The only issue presented herein is as to the right of the Commissioner to include in the gross estate of the decedent the proceeds of the nine insurance policies set forth in the findings of fact. The facts,' which are not in dispute, are that all of these policies were taken out by the decedent on his own life prior to the enactment of the Revenue Act of 1918, and that, with one exception, they were before that date made payable to specific beneficiaries. The exception is the policy taken out on March 15, 1912, in the amount of $50,000.

Concerning the eight policies made payable to specific beneficiaries prior to the effective date of the Revenue Act of 1918, it is now conceded by the Commissioner, and we so hold, that in view of the decision of the Supreme Court of the United States in the case of Lewellyn v. Frick, 268 U. S. 238, the proceeds thereof should not be included in the gross estate for the purposes of the Federal estate tax under the Revenue Act of 1921.

This leaves for consideration the policy of insurance taken out by the decedent on March 15, 1912, of the face amount of $50,000. The amount receivable on this policy payable at the date of death was $47,331.53 and, as appears from the findings of fact, was originally' made payable to the decedent’s estate. On September 30, 1920, the beneficiary of this policy was changed to Elizabeth E. Harris, wife of the decedent, who, on the death of the decedent, received the proceeds of the policy. It is the contention of the Commissioner that the amount of the policy just referred to, in excess of the statutory exemption of $40,000, or $7,331.53, should be included in the gross estate of the decedent under the provisions of the Revenue Act of 1921. It is argued that, despite the specific repeal by the Revenue Act of 1921 of Title IY of the Revenue Act of 1918, section 402 (f) of both' acts is identical and that, accordingly, the provisions of the Revenue Act of 1921 must be considered as a continuation of the identical provision of the Revenue Act of 1918; or, stated in another way, where a statute is repealed and its provisions are at the same time reenacted, the reenactment neutralizes the repeal and the provisions of the repealed act which are thus reenacted continue in force without interruption.

The death of the decedent on September 11, 1923, was the occasion for the exaction of an estate tax, and the measure of the tax is to be determined in accordance with the statute in force at the date of the death of decedent. That statute was the Revenue Act of 1921. It is contended, however, that, since the decedent changed the beneficiary of his insurance in the year 1920, and the provisions of section 402 (f) of the Revenue Acts of 1918 and 1921 were identical, the proceeds of the policy, less the statutory exemption, forms a part of the gross estate. It is not denied that the Revenue Act of 1921 in section 1400 (a) does by express provision repeal Title IV of the Revenue Act of 1918, and that section 1400 (b) of the Revenue Act of 1921 provides that the parts of the Revenue Act of 1918 repealed shall remain in force for the assessment and collection of all taxes which have accrued under the statute repealed. Here we have a complete repeal of the prior statute with a saving clause as concerns taxes accrued under the same. We can not perceive that any taxes had accrued in this case — the decedent was living at the date of the repeal and certainly the change and the designation of beneficiaries did not cause a tax to accrue. The decedent, while the Revenue Act of 1918 was in force and effect, incurred no liability for taxes of the nature here in question, and no right accrued to the Government in respect to the assessment and collection thereof. As concerns the liability of the decedent for estate taxes under the provisions of the Revenue Act of 1918, he was entirely relieved therefrom by reason of the express repeal of the statute.

If this were a case involving the punishment of a crime, the protection of a vested right, or a right of action growing out of a contract, there might be some occasion for the rule of statutory construction submitted in behalf of the Commissioner. The Commissioner proposes to exercise a right which was created by a former statute, and this right existed only by virtue of the provisions of that statute. Accordingly, the repeal of the statute defeats the right itself, unless the same be within the exceptions referred to above. We are of the opinion that with the repeal of Title IY of the Revenue Act of 1918, the authority to include in the gross estate the proceeds of the policy of insurance here in question was lost and that the right ceases and determines with the statute upon which it depends. The effect of the repeal of Title IY of the Revenue Act of 1918 was to obliterate the repealed statute just as completely as if it had never been enacted into law, and it must be considered as a statute that never existed, excejff for the purpose set forth in section 1400 (b) of the Revenue Act of 1921.

It is also a well-settled rule of statutory construction that a new law can have no retrospective operation unless made so by its own express language. When the legislative branch of the Government determines to pass retrospective legislation, it usually does so by express terms, as, for example, section 302 (h) of the Revenue Act of 1924 causes section 302 (g), (which is identical with the provision of the Revenue Acts of 1918 and 1921 here considered) to apply to past transactions.

Since there was a complete repeal of Title IV of the Revenue Act of 1918, we have the absence of a statute upon which the liability of the decedent rests, and we are governed by the controlling reason for the decision of the Supreme Court in the case of Lewellyn v. Frick, supra.

Judgment for the petitioner.


author: Littleton:

text:
    Appeal of Pittsburgh & Bessemer Coal Co.
    Docket Nos. 5626, 9004.
    Decided October 13, 1926.
    1. Petitioner was not entitled to classification as a personal service corporation during 1918 and 1919.
    2. Evidence held, insufficient to show that the Commissioner erred in his computation of the profits tax for 1918 under section 328 of the Revenue Act of 1918.
    3. Petitioner is entitled to have its profits tax for 1919 computed under the provisions of section 328 of the Revenue Act of 1918.

      H. A. Mihills, O. P. A., and W. D. McBryar, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    These appeals involve deficiencies for 1918 and 1919 in the amounts of $10,912.98 and $43,108.63, respectively. Separate petitions were filed for each year and they were consolidated for hearing and decision. The petitioner assigns as error on the part of the Commissioner the following:
    (1) Failure to classify it as a personal service corporation.
    (2) Failure to select proper comparatives when computing its profits tax for 1918 under the provisions of section 328 of the Revenue Act of 1918.
    (3) Failure to compute its profits tax for 1919 under the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is a Pennsylvania corporation organized in 1917. Fred G. Lamb was president and owned all of the stock in 1918, of $5,000 par value; the number of shares outstanding being 100, of the par value of $50 each. At the time of organization he paid in $750 in cash, and a few months later a stock dividend of $4,250 was declared.

      During 1919 one A. S. McQueen purchased certain shares, leaving Lamb the owner of 74 per cent of the entire capital stock.
    During 1918 petitioner operated under the regulations of the United States Fuel Administration. In that year ail efforts were directed toward securing coal to fill orders received. In 1919 the condition changed and the petitioner’s efforts were directed toward securing purchasers for the surplus coal of the several mines from which the petitioner obtained its supply. During 1918 the petitioner’s income was derived from commissions on coal sold, which commissions were paid by purchasers. In 1919 its commissions were paid by the producer. Lamb had been in the coal business since 1899. During 1918 and 1919 he was regularly and actively engaged in the conduct of the petitioner’s business. A salesman was also employed by the cor'poration to assist Lamb in negotiations in the purchase and sale of coal and in connection with other work. This employee was not a stockholder. All transactions were approved by Lamb. When McQueen came into the corporation he was made vice president and sales manager and was regularly engaged in the active conduct of the affairs of the corporation. The petitioner maintained branch offices at Columbus and at Cleveland, Ohio, in which branch managers, who were not stockholders, were employed and paid a commission on coal sold.
    Petitioner’s operations in the purchase and sale of coal were conducted in such a way as to have the terms of sale provide for payment for coal prior to the date on which it was required to pay the operator therefor. The terms were that purchasers should pay on the 10th of the following month, and petitioner arranged to pay the operator for the coal on the 2Sth. There were some exceptions to this rule. When coal was shipped by petitioner on orders of the Fuel Administration it required consignees to pay in advance, or give security for the payment of the coal shipped, in cases in which the petitioner was not thoroughly satisfied with the financial responsibility of the consignees.
    In 1919 operations, in so far as they related to payments for coal, were practically the same as in 1918, but consumers were slower in making payments.
    Petitioner owned no mines. It was not a producer of coal, directly or indirectly. It kept no inventory of coal on hand, except in so far as it was necessary during 1918 to accumulate cargoes at Lake ports for shipment under orders of the Fuel Administration. The company did not buy coal for speculation. It had contracts with producing companies, but coal was ordered when a purchaser was found. Contracts were made with mines whereby petitioner agreed to take upon itself the duties of distributing and selling the entire output. Subsequent to 1918, when it was no longer possible to require purchasers to pay petitioner’s commissions, arrangements were made with the coal companies to pay the same. During 1918 petitioner’s commission was 15 cents a ton, and during 1919 the commission was upon the basis of a certain percentage of the price at which the coal was sold.
    In 1918, Lamb negotiated with persons desiring coal and they sent orders to petitioner for the amount of coal desired, agreeing, at the same time, to pay petitioner a commission. In 1919 the demand for coal was not great and it was necessary for petitioner to find purchasers, to meet competition in this line and to sell the coal to the best possible, advantage. Petitioner did not order shipment of coal unless it had first secured an order from the consumer. During 1918 all shipments were upon orders to the petitioner from the consumer and from the petitioner to the operator, substantially as follows:
    Pittsburgh & Bessemer Coal Company:
    Please furnish the following and ship promptly via * * * 10 Cars Run of Mine Coal at $2.45 per net ton, f. o. b. mine.
    We hereby appoint you agent to purchase 10 cars R/M coal and allow you $.15 per ton commission for your services.
    Such ordei’s were frequently given by telephone and later confirmed in writing. Upon the receipt of such orders petitioner mailed written order to one of the various mines with which it had contracts “ to ship for our account ” the quantity of coal specified, to the person from whom it had received the order. Such orders to the mines specified the price per ton and stated “ Shipping notices and invoices to this office only. Terms: Net cash, 10 days after receipt of invoice,” oi “ Net cash on 25th of month following shipment.”
    During 1918 petitioner purchased coal principally from the Four States Coal Co., the Kehota Mining Co., the Paul Coal & Supply Co., the Export Coal Co., and the Locust Hill Coal Co. Lamb was a stockholder, secretary treasurer, and a member of the board of directors of the Export Coal Co. and a stockholder in the Paul Coal & Supply Co., and he acted in an advisory capacity to the Four States Coal Co. He had no connection with the other two mining companies.
    In 1918 petitioner obligated itself to pay the mine for the coal shipped on its order, and in 1919 it guaranteed the payment under its contract with the producer for all coal shipped. The producer did not concern itself with the matter of whether the person .to whom the petitioner had sold the coal paid his bill or not.
    Bills'were rendered by petitioner to the purchaser and all payments were made by such purchaser to it. Petitioner endeavored to make collection from the purchaser prior to the date upon which it was required to pay the producer, but such payments by consumers were not always received by petitioner before it was required to pay for the coal shipped upon its order.

      On April 1, 1919, petitioner entered into a contract with the Short Creek Coal Co., whereby the petitioner became the exclusive sales agent of the coal company for the distribution of its entire product. The coal company agreed to turn over to petitioner all pending inquiries, orders, and agreements for the purchase of coal received or secured by the coal company and to pay petitioner the commission hereinafter mentioned on all such orders or agreements should petitioner accept or conclude the same. Petitioner agreed to sell the coal at “ the best market prices obtainable therefor and at not less than such as shall be fixed from time to time ” by the coal company. The agreement further provided:
    Upon all sales made by the Pittsburgh Company pursuant to this agreement, the Short Creek Company agrees to pay the Pittsburgh Company, and the Pittsburgh Company agrees to accept, compensation for its services therein on the following basis, viz: — for all coal sold by the Pittsburgh Company where the purchaser pays less than $2.00 per ton, a commission of 4% of the selling price, and where the price is $2.00 per ton and over, a commission of 5% of such selling price.
    Upon all sales made by the Short Creek Company prior to said April 1, 1919, calling for delivery of coal after said April 1, 1919, if the orders or agreements covering such sales are acceptable to the Pittsburgh Company, the same shall be taken over by the Pittsburgh Company, as of said April 1, 1919, the compensation of the Pittsburgh Company in all such cases, however, to be a commission of 2% of the selling price upon all coal delivered under such orders or agreements on and after said April 1, 1919.
    All such sales are to be made for the account of the Short Creek Company in such amounts, for such deliveries and at such prices as shall be from time to time approved by the Short Creek Company and the coal so sold shall be invoiced to all purchasers thereof in the name of the Pittburgh Company and payment for the same shall in every case be made to the Pittsburgh Company by the purchasers of the coal. This condition as to payment shall be stated in all coal sales agreements made by the Pittsburgh Company pursuant hereto.
    The Pittsburgh Company hereby guarantees to the Short Creek Company all accounts for coal sold by the Pittsburgh Company under the terms of this agreement and the Pittsburgh Company agrees to make payment monthly to the Short Creek Company on the 25th day of each month for all coal delivered to the purchasers thereof during the preceding month, less the commissions to which the Pittsburgh Company shall be entitled pursuant hereto in respect of the coal so delivered, it being provided, however, that in every case where any purchaser of the said coal refuses to pay any invoice of the Pittsburgh Company or retains a portion of any amount due under such invoice or invoices claiming an offset or counterclaim by reason of a poor quality or other defect in the coal delivered or by reason of poor deliveries or other causes beyond the control of the Pittsburgh Company, the Short Creek Company will thereupon reimburse the Pittsburgh Company for such amounts in dispute, the Pittsburgh Company agreeing to undertake the adjustment and settlement of such differences under the direction and subject to the control of the Short Creek Company, but at the cost and expense of the Short Creek Company.
    The said payments to be made by the Pittsburgh Company to the Short Creek Company shall be based upon and governed by the weights of the coal as determined by tbe railroads which weights as reported by the railroad or railroads to the Short Creek Company shall be promptly furnished by the Short Creek Company to the Pittsburgh Company. The moneys payable by the Pittsburgh Company to the Short Creek Company under this paragraph are in no sense advances but are payments for coal delivered by the Short Creek Company.
    The contract was for a period of six years, subject to cancellation under certain circumstances. Similar agreements were entered into with the Locust Hill Coal Co., the Pine Bluff Coal Co., the Export Coal Co., the Kehota Mining Co., and others.
    Subsequent to the effective date of the above-mentioned contracts, petitioner secured orders for various quantities of coal at varying prices to be shipped over such period as was desired by the purchaser. These orders were in the following form:
    Pittsburgh & Bessemer Coal Co.,
    Pittsburgh, Pa.
    Memorandum Agreement between Roberts & White * * * hereinafter * * * referred to as “ Buyer ” and the Export Coal Company * ⅜ ⅝ hereinafter * * * referred to as “ Seller ”, by which the buyer hereby purchases and agrees to receive and pay for, and the seller hereby sells and agrees to ship from its mines * * * the quantity and grade or grades of coal hereinafter stated upon the terms and subject to the conditions following; * * * It is further * * * agreed * * * that all coal shipped pursuant hereto shall be invoiced by the Pittsburgh & Bessemer Coal Company to which company payment for the coal shall be made. * * *
    These agreements were signed by the purchaser and the petitioner, as sales agent, and were approved by the president of the producing company.
    The petitioner’s income and deductions as shown by its return for 1918 were as follows:
    Gross income:
    Gross sales-$2,457,318. 82
    Cost of goods sold_ 2,326,477. 98
    130, 840. 84
    Deductions:
    $15,700. 00 Compensation of officers_
    9, 856. 07 Nonofficers salaries and labor-
    12,787.34 Agents’ commissions_
    2,355. 00 Rent-
    6, 879. 41 Interest_
    500.10 Worthless debts-
    711. 46 Exhaustion, wear and tear-
    - 48,789.33
    Net income. 82, 051. 51

      The income and deductions as shown by the return for 1919 were as follows:
    Gross income:
    Commissions-$100, 555. 65
    Interest on U. S. obligations- 1,116.79
    Interest from other sources-:— 2,455.25
    104,157.69
    Deductions:
    Ordinary and necessary expenses, commissions, salaries, rent, etc-$34, 519.61
    Officers salaries- 27, 616.62
    Interest paid- 6, 720.18
    Taxes_ 706. 05
    Exhaustion, wear and tear- 923.27
    69, 485.73
    Net income- 34, 671. 96
    The balance sheets at the beginning and the end of the years 1918 and 1919 were as follows:

      “Bills and Accounts Receivable” represents amounts due petitioner for coal sold; “Accounts Payable ” represents amounts due from petitioner to coal companies; “ Bills Payable ” represents amounts borrowed by the petitioner to pay coal companies for coal shipped before payment had been received from the purchasers.
    During the year 1918 petitioner borrowed the following amounts on its notes:
    Dec. 26, 1917 (carried over), demand-$7,500.00
    Feb. 2, 1918, demand,_ 20,000. 00
    Apr. 29, demand_ 5, 000. 00
    May 15, demand_ 8, 000. 00
    June 15, demand_ 13, 750. 00
    Aug. 16, demand_ 3, 000.00
    July 22, 60-days_ 25, 000. 00
    July 30, 60-days- 30, 000.00
    July 15, demand_ 18, 750. 00
    Aug. 20, demand_ 9, 439.27
    Aug. 27, 30-days- 50, 000. 00
    Aug. 27, demand- 19, 677. 33
    Sept. 25, 30-days_ 25, 000. 00
    Sept. 25, 30-days_ 9,629. 56
    -$252,246.16
    Amounts borrowed on notes during 1919 were as follows:
    Mar. 1, 1919, demand_$3, 000.00
    Mar. 10, demand_ 18, 500. 00
    May 6, demand_ 65, 000.00
    May 29, 60-days_ 34, 650, 51
    Sept. 26, demand- 5,000.00
    Oct. 20, 90-days- 10, 000.00
    June 25, 60-days- 25, 438.27
    June 13, 60-days_ 34, 650. 51
    -$196,239.29
    The ratio of profits tax determined by the Commissioner for 1918 under the provisions of section 328 of the Revenue Act of 1918 to net income for that year was 46.39 per cent.
    Upon consideration of petitioner’s application for assessment of its profits tax for 1919, under the provisions of section 328, the Commissioner held that the comparison of petitioner with other representative concerns failed to disclose that the computation of its profits tax under section 301 imposed upon it an exceptional hardship within the purview of section 327 of the Revenue Act of 1918.
    During 1918 the W. C. Atwater Co., of New York, the White Oak Coal Co. of Mount Hope, W. Va., the Pittsburgh & Ohio Mining Co., of Cleveland, Ohio, and the Crozer Pocahontas Co., of Pennsylvania, all corporations, were engaged in selling coal. The invested capital, total sales, net taxable income, etc., of these corporations and the petitioner were as follows:

    W. C. Atwater & Co. of New York was engaged in selling coal as a jobber upon a commission from the coal fields of Virginia, West Virginia, and Kentucky. Its rate of commission is not shown. Its tax liability for 1918 as determined by the Commissioner has been agreed to, except in so far as it may be affected by the tax liability for 1917 yet to be determined.
    The White Oak Coal Co. was a subsidiary of twenty other corporations, all of which were producing companies. Its tax liability for 1918 has not yet been finally determined.
    The Pittsburgh & Ohio Mining Co. was engaged in selling coal, coke and kindred commodities. Forty per cent of its operations consisted of purchasing a supply of coal and coke and selling the same at the best possible price. Sixty per cent of its operations consisted of selling coal upon commission, the amount of which is not disclosed. This company owned all the stock of another corporation and its tax for 1918 was computed upon the basis of a consolidated return.
    The Crozer Pocahontas Co. was engaged in selling coal upon the basis of a commission of 10 cents a ton. The stockholders of the seven coal companies, the output of which the Crozer Pocahontas Co. sold, owned all of its stock.
   OPINION.

Littleton:

We are of the opinion from the evidence that petitioner was not entitled to be classified as a personal service corporation during 1918 and 1919, for the reason that capital was necessary and was used in the business, and was a material factor in producing its income. It made contracts with a number of producing companies to sell all or a large proportion of their output and to pay for all coal shipped on its order from the 20th to the 25th of the month following shipment. During 1918 petitioner obligated itself to pay the producer for all coal shipped. During 1919 the petitioner, by the terms of its contracts, guaranteed payment to the producer for all coal sold by petitioner. The producer looked to the petitioner for payment and was not concerned with the matter whether the consignee ever paid the petitioner.

Through the knowledge and experience of its president and principal stockholder, the petitioner was to a large extent enabled to make collection from those to whom it sold coal before it was required to pay the producer from which it purchased the same. This was not always true, however, and it was necessary for petitioner to borrow large sums of money from time to time in order to make payments to the producers for coal shipped. Petitioner was not merely a sales representative. It received no profit unless the purchaser paid it for the coal, and it sustained all losses in connection with failure of the consumers to pay for coal shipped to them.

We think the fact that petitioner was enabled to carry on its operations to a large extent by requiring purchasers of coal to pay it before it was required to pay the producer is not proof that it was a personal service corporation. When a person indebted to petitioner did not make payment or was late in doing so, petitioner either used its surplus cash or borrowed sufficient funds with which to pay for the coal which it had sold. We are of the opinion that capital was a material income-producing factor. Appeal of C. N. Merritt & Brother, Inc., 1 B. T. A. 927; Appeal of Cleveland & Western Coal Co., 4 B. T. A. 93.

We are not convinced from the evidence that the comparatives used by the Commissioner in determining the profits tax for 1918 were improper, nor can we say, under all the facts and circumstances, that the four corporations submitted as comparatives were similarly circumstanced within the meaning of section 328 of the Bevenue Act of 1918.

We are of opinion that petitioner has brought itself within the provisions of the first sentence of section 327 (d) of the Bevenue Act of 1918, and is therefore entitled to have its profits tax for 1919 computed under the provisions of section 328 of that Act.

Judgment will he entered on 15 days' notice, wider Bule 50.


author: Sterni-iagen:

text:
    Appeal of Otto A. Altschul.
    Docket No. 5407.
    Decided October 13, 1926.

      Samuel P. Gurman, Esq., for the petitioner.

      W. S. Delaney, Esq., and W. Frank Gibbs, Esq., for the Commissioner.

      Deficiency of $6,543.70 income tax for 1919, based upon the dis-allowance of alleged inventory losses and loss on plant and machinery.
    FINDINGS OF FACT.
    The petitioner is a resident of Chicago, Ill. In July, 1918, he organized the Purity Packing Co., a partnership. He owned a one-third interest in the partnership and during its existence was its treasurer and the only active partner.
    In the early part of 1919 the partnership was engaged in the business of preparing roast beef in cans for the United States Army. For this purpose it had installed a large amount of machinery and equipment. The Army’s allotment to the partnership for March, 1919, was canceled, and no more orders were received. The partnership started preparing goods for domestic commerce. This involved the manufacture of a varied-line of twenty or thirty items in different sizes and packages. About three-quarters of the machines they had for the Army work were useless for the domestic trade.
    The Army in 1919 placed its surplus stores on the market at greatly reduced prices and thus made it impossible for petitioner to operate at a profit. The business was run at a loss, but it was not discontinued because the petitioner thought that he could more readily dispose of it by keeping it apparently active.
    At the close of the year 1919, due to the inability of the partnership to sell goods and the continued operation of the business, a large stock of goods had accumulated. Much of it had started to spoil. All these goods were carried on the books at cost in order that a good showing might be made.
    When making out the income-tax return for the year, petitioner took as a deduction from inventory an arbitrary figure of $61,432.23 below that shown on the books, which he figured would about represent the loss due to shrinkage, spoilage, and obsolescence.
   OFINION.

Sterni-iagen:

The petitioner presented two points as the grounds of his proceeding. He deducted $61,432.23 as an inventory loss at the close of the year, and now complains that the Commissioner should not have disallowed this deduction. An unnecessarily long record is made up largely of general testimony as to the conditions of the business and its vicissitudes at the close of the war. But this is of little or no help in determining the precise question before the Board. It appears that the petitioner carried his inventory at cost and continued to do so throughout the year. Notwithstanding this, he guessed that at the close of the year the goods on hand were .worth something less than cost, and although he made no reducing entry on bis books he nevertheless deducted what he admits to be an arbitrary amount of $61,432.23 on his income-tax return. Such a haphazard deduction can have no place in the determination of net income. If and when the merchandise was disposed of at less than cost the loss would be deductible, but the petitioner’s unsupported guess as to a shrinkage in value is obviously not deductible.

The second alleged error was the refusal of the Commissioner to allow a deduction for losses on plant. The evidence does not support the petitioner’s allegation.

Judgment will be entered for the Commissioner.


author: Lansdon :

text:
    Royal Packing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3962.
    Decided October 13, 1926.
    Upon the evidence, held, that the loss taken as a deduction from gross income of the petitioner for the year ended January 31, 1919, was not realized during such taxable year.
    ■ D. Webster Egan, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended January 31, 1919, in the amount of $9,192.86. It arises from the refusal of the Commissioner to allow petitioner’s deduction of an alleged loss of $15,000, occasioned by the failure of a corporation in which the petitioner was a stockholder.
    FINDINGS OP PACT.
    The petitioner is a corporation engaged in the packing business at Los Angeles, Calif. Prior to April 1, 1918, it invested $10,000 in the common stock of the Universal Packing Co. of Fresno, Calif., a corporation organized in 1916. The first purchase of its stock was made by the petitioner on November 25, 1916. This was paid for by the company’s check for $2,500. Other purchases of stock were made on April 26, June 16, and July 24, 1917, respectively, for which the total amount of $7,500 was paid. In January or February, 1918, petitioner’s president learned that the Universal Packing Co. was short of funds. He thereupon arranged to purchase for his company additional common stock of the par value of $5,000, and payment therefor was made by the petitioner on March 29, 1918. This last purchase was made for the protection of the prior investments of the company. All purchases were made at par.

      The Universal Packing Co. began operations in 1917 and from the beginning was a failure financially. June 1, 1918, the Universal Packing Co. levied an assessment of $14 per share on all its capital stock, notice of which was duly published on June 3, 10, 17, 24, and July 1 and 5, 1918. The petitioner did not pay this assessment. On November 1, 1918, or immediately prior to that date, the Universal Packing Co. closed its doors and ceased to function. Petitioner charged off on its books $12,000 as of January 31, 1919, and $3,000 as of January 31, 1920, and claimed deductions therefor in its tax returns for the taxable years ending on those dates, respectively. On July 12, 1924, it made entries on its books correcting the charge-off as of January 31, 1920, and making it as of January 31, 1919. It now claims the deduction of $15,000 in the determination of its taxes for the fiscal year ended January 31, 1919.
   OPINION.

Lansdon :

The law under which the petitioner claims is as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise. (Revenue Act of 1918.)

To prevail in its contention the petitioner must prove that the loss was sustained in the taxable year. The evidence is clear that the Universal Packing Co. became insolvent and ceased to function prior to November 1, 1918, a date within the taxable year. It is also in evidence that the insolvent corporation owned certain assets and that the sale of such assets and the final liquidation of its business were not completed within the fiscal year ended January 31, 1919. There is no convincing evidence that any loss was sustained in the taxable year.

Judgment will be entered for the Commissioner.


author: Lansdon:

text:
    Appeal of W. R. Jacques.
    Docket No. 3277.
    Decided October 13, 1926.

      Perry W. Shrader, Esq., and Edward J. Dillon, O. P. A., for the petitioner.

      Briggs G. Simpioh, Esq., for the Commissioner.
   Lansdon:

The Commissioner has asserted a deficiency in income tax for the year 1919 in the amount of $727.59. The petitioner alleges that the Commissioner erred in ascertaining the cost of a parcel of real estate acquired in 1916 and sold in 1919, and thereby erroneously increased his gross income for the taxable year.

FINDINGS OF FACT.

The petitioner is an individual residing in Kansas City, Mo., where he has been engaged in the real estate business since the year 1913. Some time in the year 1916, acting for the owner, one Halsell, he sold a parcel of real estate located at Fourteenth and Main Streets, in Kansas City, Mo., for $302,000. In lieu of cash commission for making such sale, he accepted a parcel of land adjacent to the tract sold, fronting on Fourteenth Street for 14½ feet and 157 feet in depth. Some time in 1919 he sold such land and received therefor the amount of $10,000.

In making his income-tax return for 1916, the petitioner did not include in his gross income any amount representing the value of the land received as commission for the Halsell sale, but in an amended return for the same year he acquiesced in a valuation of $2,500, determined by the revenue agent who checked his accounts and return, and he paid the Federal income tax thereon. In making his income-tax return for 1919, the petitioner did not include any amount representing gain from the sale of the land in question. Upon audit of such return, the Commissioner determined that the petitioner realized a profit of $7,500 from the sale of such land, which amount he added to the petitioner’s gross income for the taxable year. The value of the property at date of acquisition was $2,500.

Judgment will be entered for the Conu-mtissioner.


text:
    Appeal of The Law and Credit Co.
    Docket No. 508.
    Decided October 13, 1926.
    1. Salaries paid to executives of the petitioner determined to have been reasonable.
    2. Rate of depreciation on property used in printing and publishing determined.

      Henry S. ConradEsq., and Phil D. Morelock, Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes of $2,400.59, $2,869.92, and $1,844.54, respectively, for the years 1917, 1918 and 1919, arising from the disallowance by the Commissioner of certain deductions claimed by the petitioner on account of salaries paid, invested capital, and exhaustion, wear and tear, and obsolescence of property used in the business. The Commissioner admits error as to the invested capital for the three years.
    FINDINGS OP PACT.
    1. In 1889, Ernest E. Smith and one other formed a partnership and embarked in the job-printing business in Kansas City, Mo. The firm owned one small job press, and commenced with a four-page weekly paper, containing legal notices of state and municipal court matters in Jackson County and Kansas City, Mo., and reports of matters pending in and decided by those courts.
    2. In 1892 the partners incorporated under the laws of Missouri, with a capital stock of $12,000, consisting of 240 shares, each having a par value of $50. The corporation took over and continued the business of the partnership.
    3. In 1895, Elbert E. Smith, a brother of Ernest E. Smith, purchased 105 shares of the capital stock, and, at all times since this purchase, Ernest E. Smith has owned 134 shares, Elbert E. Smith, 105 shares, and another brother, one share of the stock. The business of the corporation has steadily increased, keeping pace with the growth and development of the City of Kansas City and County of Jackson, and, in 1919, the company had an investment in capital assets of $100,000, more or less, a gross income of $61,370.27, and had forty or more employees on its payroll.
    It publishes the “ Daily Record,” a newspaper in which is printed information with regard to court procedure, transfers of property and legal notices. This paper has been designated the official paper of Kansas City and of Jackson County, Mo., and by reason of such designation the taxpayer secured the publication of legal notices from said city and county.
    The taxpayer also publishes a weekly paper, issues a credit guide, and does job printing, but its principal source of income is from printing legal notices.
    4. At no time since its organization has the corporation paid a dividend.
    5. During the three years of the partnership the salary of Ex-nest E. Smith averaged $362.95 per year. For 1892, the first year after incorporation, it was $398.03; for 1893, $725.23; for 1894, $990; and, for each of the next four years, $1,200 — giving an average for the first ten years of $800.21. In 1905 it had increased to $7,000, and so continued until the end of the second decade of his connection with the business, the average during this decade being $4,205. During the third decade his average salary was $14,121, and the highest salaries paid were $15,000 for 1911, $18,680 for 1912, $18,000 for 1915 and 1917, and $20,000 for 1916. The average salary for the next two years, 1919 and 1920, was $8,800, and the average for the 32 years was $6,524.16.
    6. The annual salary received by Elbert E. Smith during the first four years of his connection with the corporation was $900. During the ten years ended with 1908 the average was $3,480, and the highest salary was $6,000. During the next ten years the average was $13,623.10; that for 1911 being $15,000; for 1912, $15,821; 1915, $18,000; 1916, $20,000, and 1917, $18,000. The salaries of the two were the same for 1910, 1911 and 1914-1920, inclusive.
    7. From and after 1895 the whole management of the corporation, financially and otherwise, devolved upon these two men. They had no other business interests, and each devoted his entire time to the business of the corporation. They were both men of excellent business ability, with rare talent for securing and retaining the good will of other men. The salaries paid and here in controversy were fixed by the unanimous vote of the board of directors on April 3, 1907, March 15, 1918, and March 10, 1919, respectively. The directors agreed on such salaries as they thought the company could pay and still leave a little balance so that they “ were going ahead on the plan based on their past experience.”
    8. The average useful life of the machinery and furniture used in the business was not in excess of ten years.
    9. The Commissioner admits in his answer that he erred in computing the petitioner’s profits tax for the year 1917, under the provisions of section 210 of the Revenue Act of 1917; admits that the said tax should be computed under the provisions of section 201 of said Act, and that, in computing the invested capital of the petitioner, there should be included the following assets: ...
    Land account_$32, 202. .91
    Von Pawel account- 19, 383.14
    Good will_ 13, 912. 94
    All of these items were eliminated by him in computing invested capital for the said year. He also admits that the deficiency ip tax for the years 1918 and 1919 should be recomputed to giv’e effect to the adjustments which will necessarily result from such redetermi-nation of the profits tax for 1917. . .
   OPINION.

Lansdon:

The only questions remaining for the Board to determine are as to the salaries allowable under the law to Ernest E. and Elbert E. Smith for the years 1917, 1918 and 1919, and what percentage should be allowed for exhaustion, wear and tear, and obsolescence of taxpayer’s properties. The law governing the allowance for salaries is:

For 1917, — section 12, Act of September 8, 1916:

* * * Sucli net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources—
First. All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, * * *.

For 1918 and 1919, — Revenue Act of 1918:

See. 234. (a) That in computing the net income of a corporation * * * 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, including a reasonable allowance for salaries or other compensation for personal services actually rendered, * * *

The salaries paid for 1917 were $18,000 each; for 1918, $14,000 each; and for 1919, $12,000 each. The Commissioner allowed for each of the three years a total payment of $20,000 for the salaries of the two men.

It is somewhat difficult to determine a reasonable allowance for salary. In the instant case there is now no dispute as to the earnings for the several years involved, the necessary expenses other than these two salaries, or the invested capital, except as that is affected by the salary allowances for the years 1917 and 1918. The Commissioner states in paragraph 3 of his answer that “ the net income for 1917, 1918 and 1919, after deduction of the salaries claimed, represents a return on the invested capital of 7.97 per cent, 8.59 per cent, and 10.31 per cent, respectively.” All circumstances considered, we are of the opinion that this is a fair return on the investment and that the salaries paid were reasonable.

We have found as a fact that the average useful life of the machinery, furniture, etc., of the corporation was not in excess of ten years. The taxpayer’s prayer that it be allowed a deduction of 10 per cent for exhaustion, wear and tear, and obsolescence is, therefore, sustained.

The Commissioner having admitted that the petitioner is right in all other matters involved in the appeal, judgment is directed accordingly.

Judgment will be entered on 15 days' notice, under Buie 60.


text:
    Union Title Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5319.
    Decided October 13, 1926.

      Dan J. Ohapin, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
   Lansdon:

This appeal is from a deficiency of $4,964.95, income and profits taxes for the calendar years 1919, 1920 and 1921. The deficiency arises from the refusal of the Commissioner to allow as invested capital, at the time of the organization of the company, any amount in excess of the full amount paid in 1903 for the capital stock and assets of Reed & Burt, from whom all the assets of the taxpayer were purchased.

The petitioner called three witnesses to testify at the hearing. Rone of such witnesses was an officer of the Union Title Co. or qualified in any way to testify as to the issues in controversy. There is no evidence in the record sufficient to warrant the Board in disturbing the Commissioner’s determination.

Judgment will be entered for the Qornrrm-sioner.


author: Sternhagen :

text:
    Appeal of The Farmers Cooperative Association.
    Docket No. 4296.
    Decided October 13, 1926.
    The fixed payments made by a Kansas cooperative corporation to its stockholders upon the capital stock in accordance with a statute providing for “ fixed dividends ” held not deductible as interest.

      Warren H. White, Esq., and A. 0. Johnson, O. P. A., for the petitioner.

      Briggs G. Simpieh, Esq., for the Commissioner.
    Deficiency of $991.83, income tax for 1920, of which not all is in controversy. The petitioner contends that fixed payments on capital stock are deductible as interest.
    FINDINGS OF FACT.
    The petitioner was incorporated under the laws of Kansas in 1915 by certain of the farmers in the vicinity of Hays, Kans. Its purposes are stated in its charter as follows:
    (a) The conversion and disposal of all agricultural products by means of mills, elevators, stores or otherwise.
    (b) Buying and shipping grain for profit.

      (c) Cleaning and handling of grain for its members and others.
    [(d) Omitted in original.]
    (e) Buying and selling of coal, flour, farm supplies and other merchandise, including livestock for mutual benefit of its shareholders and such other benefits as the shareholders direct.
    The constitution contains the following provisions, among others:
    ARTICLE! VII — RESERVE FUND.
    -• After the payment of the operating expenses of this association, the remaining profits, if any, two per cent shall be set apart for a reserve fund and carried on the books as a reserve fund for the payment of any unexpected losses, not otherwise provided for. The reserve fund may be invested or loaned to stockholders, provided that a part of said fund may be used in the payment of interest on capital stock, at the direction of the directors.
    ARTICLE VIII — CAPITAL STOCK.
    Section 1. The capital stock of this Association shall be ($50,000) fifty thousund dollars, divided into one thousand (number of shares) at the par value of fifty dollars per share, this stock shall be non-assessable.
    Section 2. And at least fifty per cent of the face of all shares subscribed shall be paid for in cash; and in case of deferred payments, such payments shall'be' settled for in full by note secured by the capital stock for which note is taken, as part payment; all such notes to mature in six months from date of issue.
    Section 3. All shares shall be transferable to members of the E. E. & O. U. of A. at the option of the holder and the Directorate, and recorded on the books of the Association, Provided, That any credit due the Association by the holder of said stock shall be deducted from said stock before being transferred.
    ARTICLE IX — INTEREST ON STOCK.
    (a) After the reserve fund of two per cent is deducted from the profits, pay interest on stock what it earns up to 8 per cent; but no interest shall be paid on any shares of stock that are not paid in full at the time of the annual settlement ; and interest shall be paid only from and after date when said shares are paid in full, all interest to become due on the annual settlement. And if any member of said association is found delinquent in his local, such amount shall be taken out of his interest and dividends and paid to his local secretary on or before the 15th day of January of each year.
    , (b) Provided that stockholders before drawing their interest or dividend, from the Association shall present receipt or membership card from their local showing that they are in good standing in the S’. E. & O. U. of A.'
    ARTICLE X — NET PROFITS.
    The net approximate profits of the business shall be paid to the members of the association at the close of each year after having been prorated on the amount of their purchases or sales, for, or by themselves or families during the year. Provided, that if a stockholder holds only one share, his dividend shall be applied on his second share until the full amount of said second share shall be paid in full, Provided, further, that the profits from non-stockholders’ business shall be retained as a reserve fund.

      ARTICLE XIII — MANNER OE CONDUCTING BUSINESS.
    (a) All money received on account of shares, contributions or otherwise, shall be paid to the Treasurer, unless otherwise ordered by the directors, and said money shall be withdrawn only by a vote of the board of directors, on the written order of the President, countersigned by the Secretary.
    (b) - Such funds as the association may have, not needed for immediate use, in said association’s business or to meet accruing liabilities, shall .with the consent of the association, given at any regular meeting, be invested by the directors.
    (c) All business of the association shall be conducted on a cash basis; provided, credit may be extended to stockholders not to exceed the amount of their capital stock; any credit above this amount may be applied for to the directors. Produce or labor taken in exchange for merchandise, and merchandise and produce on deposit at net cash value will be considered as cash.
    (d) Goods shall be purchased and sold at ordinary market prices to all alike.
    (e) All members trading or selling with the association shall be furnished statements showing the amount of their purchases and said statements shall be the basis for computing dividends on purchases or sales, and any said statements transferred shall be void and not binding on the association.
    (f) Dividend duplicates shall be issued only for goods purchased and sold at regular retail prices; said goods to be purchased for use of members of this association or their families.
    (g) The business manager or trades agent shall keep a sales book showing correct list of all sales, the amount and prices of said sales, the name of purchaser and the kinds of goods sold; this sales book shall be balanced daily and show total sales for each day, week and month for the purpose of aiding in computing the per cent of dividend on purchases for each year, and said sales book shall be kept open for the inspection of any member of the association.
    ARTICLE XXIII — DECEASED MEMBERS.
    Any member of the association dying in said locality, the directors may repay to his legal representatives the face value of the capital stock owned by said member, together with all accrued interest and purchased dividends within twelve months after the absence of said member.
    ARTICLE XXV — DISSOLUTION.
    In case the members of the association require a dissolution — after the debts of the association are paid, the stock and property of the association remaining, or the proceeds of the sale thereof, shall be divided among the shareholders in proportion to their shares of paid up stock. In case of disagreement among the stockholders, in such division the matter shall be settled by arbitrators as follows: One to be chosen by the officers and directors, one by the other members, and the third by the first two; and their decision shall be final.
    The petitioner’s capital stock originally consisted of 200 shares of $50' each. This was increased to 500 shares in 1919 and to 1,000 shares in 1920. All stockholders are farmers. It handles the products of and does business with farmers in the community who are not stockholders. In addition to wheat, it handies potatoes, cabbage, apples and other fruit and feed which it purchases from members and non-members. It also purchases coal and sells it to any one who wants it.
    The corporation insures all the wheat in its elevators and is the beneficiary named in the policy.
    In every year except one during the corporation’s existence it has paid 8 per cent to the stockholders upon the outstanding capital stock. The 8 per cent is paid out of earnings from both stockholders’ and non-stockholders’ business, and payment is made annually in February out of the earnings of the preceding year. The exception was in 1922. In that year there were not enough earnings to make the payment; there was a loss and no accumulated surplus. When the corporation failed to pay the 8 per cent for 1922 no entry was made upon the books in respect thereof, either as a liability or otherwise. The corporation intends at some time in the future to pay the 8 per cent which it omitted to pay for the year 1922.
    At the time the farmer delivers his wheat a price is fixed in cents per bushel; the corporation pays him for it and takes title. It issues to him a “ scale ticket ” which shows the quantity and quality of the wheat delivered, the price per bushel, and the total amount paid. At the end of the year, after all necessary payments including the 8 per cent on the stock have been made, the remaining earnings are distributed in accordance with a computation based upon the quantity and price of grain or produce delivered each day by each farmer to the corporation. Each stockholder receives a single check, which includes the 8 per cent, and also his pro rata distributive share of the remaining earnings. For example, one stockholder received a check for $283.04 which represented “ $210.06 refund on wheat, $22.15 on merchandise, and $50.83 for interest on capital stock.” This payment is accounted for by charging the entire amount against surplus. The surplus account consists of the profits shown by the profit and loss statement before any deduction of the 8 per cent stockholders’ distribution.
    On its tax return the petitioner deducted the 8 per cent payments upon its capital stock as interest.
   OPINION.

Sternhagen :

Although there was in the presentation of the case some confusion as to whether the petitioner’s tax liability is affected by the exemption provision of section 231 (11) of the Revenue Act of 1918, it seems to be clear that the only question before us for decision is whether, under the circumstances of its organization and operation, the amount paid out by the corporation to its stockholders as 8 per cent on its capital stock is in truth interest and therefore a proper deduction.

The question of the nature of this payment as a matter of law can only be decided by looking to the source of the obligation under which it is paid. Since the corporation was organized under the Kansas law governing cooperative associations, we may look to that statute. Kansas Laws, 1913, chapter 137, after authorizing the organization of corporations under the cooperative plan, defines such plan “ to mean a business concern that distributes the net profits of its business by: First, the payment of a fixed dividend upon its stock; second, the remainder of its profits are prorated to its several stockholders upon their purchases from or sales to said concern or both such purchases and sales.” The petitioner here conducted its business in accordance with this plan. It will be seen that the basis of the plan is a prescribed distribution of “ net profits ” as between a “fixed dividend” upon stock and a pro rata distribution of the remaining profits upon the basis of the amount of business done with each stockholder. This is exactly what the petitioner here did, and no matter how thoroughly its contributing stockholders believed that they were investing their money or lending it at 8 per cent, and notwithstanding the equivocal language of the constitution, the legal nature of the payment is exactly what the statute describes as a distribution of net profits by way of a fixed dividend upon the stock. The fact that 8 per cent happened to be the rate at which banks were lending money, or the fact that the president testified that the corporation some day intended to make up for the dividend which it passed in 1922, does not establish a legal obligation as for interest. See Sacred Heart Cooperative Mercantile Co., 2 B. T. A. 24.

Judgment will be entered for the Commissioner.

Lansdon did not participate.