text:
    The American Metal Company of New Mexico, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65493.
    Promulgated July 17, 1934.

      Joseph B. Gotton, Esq., and Sarrmel Brenner, Esq., for tbe petitioner.

      Harold. Allen, Esq., for tbe respondent.
   OPINION.

Smith :

The petitioner contends that the respondent erred in computing its depletion allowances for 1927, 1928, and 1929 upon a cost basis of $1,495,577.66 as of December 31, 1924, and that the correct basis is the actual cost of the assets to the petitioner on November 30, 1925, which it claims was $4,250,000.

The respondent’s determination is based upon the theory that the petitioner acquired the assets in question by a statutory reorganization in 1925; that is, that the petitioner is a reorganization of the Pecos Corporation, and that the basis for depletion allowances to the petitioner is the same as it would have been in the hands of the trans-feror, the Pecos Corporation. On the other hand, the petitioner contends that it acquired the assets by purchase from the Goodrich-Lockhart Co. upon its organization on November 30, 1925, and that the basis is therefore the cost to it of the assets, which, since it paid only its own stock and securities, is the fair market value of the property at the date of acquisition.

The Revenue Acts of 1926 and 1928 provide that the basis upon which depletion is to be allowed is the same as is provided for the purpose of determining gain or loss upon the sale or other disposition of property, which, with certain exceptions, is the cost thereof with respect to property acquired after February 28, 1913. See section 204 of the Revenue Act of 1926, and sections 113 (a) and 114 (b) (1) of the Revenue Act of 1928. The only exception to this rule with which we are concerned in this proceeding is that where the property was acquired by a nontaxable reorganization the basis remains the same as it would have been in the hands of the previous owner or transferor. See provisions relating to reorganizations contained in section 204 (a) (Y) of the Revenue Act of 1926, and section 113 (a) of the Revenue Act of 1928.

The respondent in his brief filed in this proceeding has conceded that petitioner did not acquire the property in question, that is, the Pecos Mine, by a statutory reorganization, citing West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; affirming 25 B.T.A. 1254. He admits that the basis for computing depletion allowance is the fair market value of the property as of November 30, 1925, the date of its acquisition by the petitioner. We therefore limit our inquiry to that question only, namely, the value of the Pecos Mine at November 30, 1925.

As above indicated, the petitioner claims that the fair market value of the Pecos Mine on the basic date was $4,250,000. Such valuation is predicated upon the report made upon the mine by Otto Sussman, an eminent mining engineer who submitted the report dated December 4, 1925, incorporated in our findings. To sustain that valuation the petitioner has adduced before the Board the testimony of Sussman and a number of other witnesses. The respondent, on the other hand, contends that the fair market value of the mine on the basic date was not in excess of $1,500,000. In support of such contention the respondent introduced the evidence of one John Alden Grimes, a mining engineer in the service of the Bureau of Internal Revenue, engaged in valuing mines for tax purposes. In arriving at his value of approximately $1,500,000 Grimes used the data adduced in evidence by Sussman.

Sussman’s estimate is based upon the proposition that it would take approximately two years to complete a smelting plant and to prepare the mine for operation; that the mine had an ore reserve of approximately 1,000,000 tons; that the ore reserve would require the operation of the mine for a period of five years; that the estimated profits from operation over such period would be $8,890,000, or an annual profit of $1,YY8,000. By the method of valuation used by Grimes the fair market value of the mine on November 30, 1925, is computed to be $1,428,5Y0.

The assumptions of the Government’s witness as to rates of interest to be used in reducing the estimated earnings over the period of operations to a present worth value on November 30,1925, is strongly opposed by petitioner’s witnesses, who contend that the fair market value on the basic date was $4,250,000.

We are of the opinion that it is not necessary to analyze exhaustively the various contentions of the petitioner’s witnesses as opposed to those of the Government’s witness. We are of opinion that there is other evidence which more nearly establishes the fair market value of the Pecos Mine on November 30, 1925.

Prior to the sale of the Pecos Mine to the petitioner in November 1925, all of the capital stock of the company owning the mine was owned by the Goodrich-Lockhart Co. That company parted with its ownership in the mine for a cash consideration of $1,000,000 plus $500,000 noninterest-bearing, 10-year, second mortgage bonds and a 48 percent interest in the stock of the petitioner corporation. The $1,000,000 cash was paid to it by the American Metal Co., Ltd., a New York corporation, for which that company was given $1,000,000 of the 8 percent first mortgage bonds of the petitioner company. The American Metal Co., Ltd., was to advance an additional amount of approximately $2,000,000 to the petitioner company, secured by an additional issue of first mortgage bonds, the first mortgage bonds to be redeemed in their entirety out of the first profits of operations of the petitioner. It was only after the first mortgage bonds should be redeemed in their entirety, together with interest, that any of the profits were to be utilized in the redemption of the second mortgage bonds and in payment of dividends upon the stock. Whether these bonds or the shares of stock had any fair market value either on November 30, 1925, or at any subsequent date is not shown by the evidence. The evidence does show, however, that there was never any transaction in them-

The respondent has determined that the Goodrich-Lockhart Co. parted with 70 percent of the estimated profits from the enterprise for a cash payment of $1,000,000 for the mine; that on this basis the mine was worth not more than $1,500,000 cash on November 30, 1925; and that this is a sale of controlling interest for cash by a willing seller to a willing buyer and should be “ absolutely conclusive evidence of the value of the mine.”

Although the opinion of experts in a question of this character is entitled to weight, those opinions are not conclusive upon the Board. Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893. Where the testimony of experts varies so widely as the testimony of the several experts in this proceeding, the Board is not measurably enlightened thereby

. It is at once apparent that the American Metal Co., Ltd., acquired a 51 percent interest in the stock of the petitioner corporation at a cash outlay of very little, if any, for the stock. Indeed, it seems that the stock was given to that company as an inducement to it to advance money to the petitioner, to be secured by first mortgage bonds which were all to be retired before any profits would accrue to the second mortgage bondholder or to the stockholders.

The computation of the respondent, that the Goodrich-Lockhart Co. parted with a 70 percent interest in the estimated profits to be realized from the operation of the Pecos Mine for a cash consideration of $1,000,000, appears to be substantially correct. In the light of all of the evidence we sustain the respondent’s contention that the cost of the Pecos Mine to the petitioner was not in excess of $1,500,000, which we have found as its fair market value on November 30,1925.

Eeviewed by the Board.

Judgment will be entered under Rule 50.

Leech dissents.


source: Caselaw Access Project

author: Aeundell:

license: Public Domain

text:
    Watson-Moore Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. John R. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alma V. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62179, 64790, 64791, 68218, 68219.
    Promulgated July 19, 1934.
   OPINION.

Aeundell:

The first and second questions raised by these proceedings will be considered in one discussion, since both questions involve the ownership of the 110,939 shares of Sunshine Mining Co. stock. Eespondent determined that this stock was purchased by the Watson-Moore Co. during 1926 and 1927 and that it was carried on its books in the “ Sunshine Mining Company ” stock account as the property of the Watson-Moore Co. until December 31,1927, when the account was closed out to John E. Moore, who thereby received a constructive dividend in the amount of the fair market value of the stock, which respondent says is $122,032.90. The petitioners contend that the stock appearing in the above mentioned account belonged to and was purchased for John It. Moore, pursuant to his instructions to the Watson-Moore Co.

It has been fully established that the Sunshine stock in question was purchased and paid for by the Watson-Moore Co., and that the stock was carried in its books in a stock account entitled “ Sunshine Mining Company.” However, John R. Moore has testified that these purchases were made pursuant to his order and in his behalf; that the stock was issued in his name, except for the first few thousand shares; that the account was known to be his personal account; that the purchases were paid for by him from time to time as deliveries were made, either by cash, credit on the books, or assets turned over to the company; that no Sunshine stock was ever given to him that belonged to the Watson-Moore Co.; and that the latter company purchased the stock as his agent.

Moore’s testimony is corroborated, in part at least, by the books of the Sunshine Mining Co., which show that its account with the Watson-Moore Co. was closed out shortly after transferring 33,335 shares to it, while John R. Moore’s account with that company has continued to date, and practically all the shares originally in the. Watson-Moore account can be traced by certificate numbers into the account of J ohn R. Moore.

'Furthermore, a summary of certificates by serial numbers, which shows the date each certificate was transferred to Moore, discloses that prior to November 26, 1927, at least 111,780 shares stood in Moore’s name. The evidence shows that these same certificates still stood in his name in June 1931, and the books of the Sunshine Mining Co. show that at the end of 1927 the balance of J ohn R. Moore’s account was 173,985 shares.

Respondent has vigorously assailed the weight to be given the testimony of John R. Moore, basing his attack upon discrepancies between Moore’s testimony and affidavits submitted to the respondent which were received in evidence. Such discrepancies, however, have been either explained or the mistake admitted, and petitioners are no longer relying thereon. Respondent stresses particularly Moore’s attempt to convince the Government that the transactions in Sunshine stock were personal rather than company transactions. We do not understand that petitioners have receded from this position; they merely admit that the record shows that some stock originally was issued to Watson-Moore Co., but was later transferred to Moore.

Moore’s unrefuted testimony is that he ordered the stock bought for his account, that it was bought for his account by the company, and that he paid for each purchase. The only contradictory evidence. in the record is the manner in which the Sunshine Mining Co. stock transactions were handled on the books of the Watson-Moore Co. Book entries, however, must give way before the true facts. Doyle v. Mitchell, 247 U.S. 179, 187.

It is our opinion, therefore, that respondent erred in determining that John It. Moore and his wife received a constructive dividend on December 31, 1927, in the amount of the fair market value of 110,939 shares of Sunshine Mining Co. stock, since the record shows that the stock was purchased for John E. Moore personally and was not the property of the Watson-Moore Co. In view of the conclusion here reached it follows that so much of the deficiency found by the respondent against the Watson-Moore Co. as is attributable to treating the stock as the property of that company at any time is disallowed.

The nest issue is the cost basis to be used in determining the profit realized by the Watson-Moore Co. on sales of Little Sunshine Mining Co. stock in 1927. Despondent has computed the gain according to the contract and has thereby determined that the first shares sold were from the first 200,000-share block purchased. Petitioner has taken the average cost for the full 600,000-share purchase.

The petitioner submits this question to the Board upon the theory that as a matter of law the contract called for the purchase of 600,000 shares at a total cost of $150,000, or an average cost of 25 cents per share. This theory completely ignores the plain wording of the agreement, which fixes the cost of the first 200,000 shares at 15 cents a share, the cost of the second block at 25 cents a share, and the third, at 35 cents a share. If the shares purchased could not be identified with respect to their sales, petitioner would still be unable to prevail because in that event the “ first in, first out ” rule would apply, which is the rule followed by respondent. Upon this issue, therefore, respondent’s determination must be approved.

The third question relates to a commission of $5,000 which respondent has added to 1928 income of the Watson-Moore Co. as an item due to it by the Little Sunshine Mining Co. The evidence is that the item never appeared on the books of the Watson-Moore Co. and no such commission was ever earned by or paid to petitioner. Despondent discovered an item on the books of the Little Sunshine Mining Co. of $5,000 as being due to the Watson-Moore Co. and by reason thereof added that sum to the income of the petitioner. There is no suggestion of any services having been performed by petitioner for the Sunshine Mining Co. which would call for the payment of the commission, and Moore testified he did not understand the reason for the entry in the books of the Little Sunshine Mining Co. In the face of direct evidence that the sum was neither earned by nor paid to the petitioner, the presumption of correctness attaching to respondent’s determination has been overcome. The action of the respondent in this particular is reversed.

The remaining issue is whether any part of the deficiencies asserted against the Watson-Moore Co. for 1927 and 1928 is due to fraud with intent to evade tax. Since the burden of proving fraud is placed by statute upon the respondent, he has affirmatively alleged in his answers the grounds upon which he has determined that petitioners acted fraudulently.

While respondent has set forth numerous allegations of fraud with respect to each deficiency, he has failed to offer proof on each allegation, preferring to rely only upon certain specific allegations of fraud to support his determination. Thus, the allegation of fraud relied on by respondent in so far as John B. and Alma Y. Moore are concerned, relates to their failure to report as income in 1927 the fair market value of 110,939 shares of Sunshine Mining Co. stock which respondent claimed was a dividend from the Watson-Moore Co. Our findings that these shares were at all times John It. Moore’s and not the Watson-Moore Co.’s eliminates this item from consideration as an element of fraud. No proof of fraud as to 1925 and 1926 having been offered, respondent’s determination as to these years must likewise be disapproved.

The allegations of fraud as to the Watson-Moore Co. upon which proof was offered by respondent were the concealment of facts relating to the purchase and ownership of Sunshine Mining Co. stock, the manner in which the General Motors account was handled on the Watson-Moore Co.’s books, and the overstatement of petitioner’s stock purchases for 1926 by $60,000.

The principal proof offered in support of the fraud allegations was the testimony of the revenue agent who audited the books of the Watson-Moore Co. The agent testified in detail regarding numerous adjustments that were necessary from the Government’s point of view in order to reflect correctly taxpayer’s income for 1927 and 1928. Some of these adjustments were brought to his attention by the Watson-Moore Co.’s representative, and some were made upon his own determination. Some of the agent’s adjustments petitioner conceded as obviously correct, while others were vigorously objected to as incorrect. The deficiency letter shows that taxpayer’s income for 1927 was increased by virtue of these adjustments in the amount of $359,618.47, and at the same time adjustments by way of deductions amounted to $270,356.67. Adjustments for 1928 amounted to additions to income in the amount of $169,350.93, and additional deductions of $120,941.13.

Our discussion of the constructive dividend of Sunshine Mining Co. stock as an element of fraud as to John B. and Alma V. Moore and our decision that no element of fraud was involved disposes of this allegation as to the Watson-Moore Co. for 1927. We have carefully considered the proof offered by respondent upon his other allegations, but we are not convinced that it established fraudulent intent on the part of this petitioner for 1927 and 1928. The fact that numerous adjustments were necessary and that some were complicated in nature, due to the method of bookkeeping used by petitioner, is insufficient to establish fraud.

The remaining question is the alternative issue raised by respondent’s answers in Dockets 62179, 64790, and 64791 that petitioners were negligent and the 5 percent negligence penalties provided by section 275 (a) of the Revenue Acts of 1924 and 1926, and section 293 (a) of the Revenue Act of 1928, should be imposed. In the appeal of John R. Moore, Docket 64791, the parties stipulated the deficiencies for 1925 and 1926, but left the fraud question for decision. The respondent, however, failed to offer proof to support his alternative allegation of negligence as to these years, and, therefore, for lack of evidence, we must deny his contention that the negligence penalty be imposed. In the appeal of Alma Y. Moore, Docket 64790, respondent has determined a negligence penalty for 1928, which petitioner has failed to overcome, and the penalty for that year is therefore approved. The affirmative allegation of negligence against all of the petitioners for 1927 and against the Watson-Moore Co. for 1928 is in our opinion supported by the evidence. The record shows that numerous adjustments to income and deductions, totaling large sums, were necessary in order to reflect correctly the taxable income of these petitioners. We are satisfied from the evidence that these changes and corrections were necessary primarily because the taxpayers were negligent in keeping their accounts and rendering their returns, and that the deficiencies, at least in part, resulted from their negligence.

The deficiencies should be recomputed, giving effect to the concessions and stipulations of the parties and to the determination herein of the controverted issues. As to those errors alleged in the petitions that have been entirely ignored by the petitioners, the determination of the respondent is approved and should be so reflected in the recom-putation.

Decision will ie entered under Rule 50.


author: McMahon :

text:
    N. G. Behles, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46557.
    Promulgated July 19, 1934.

      Samuel J. Morcm, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

McMahon :

We are here called upon to determine the amount of capital gain derived by the petitioner upon the disposition in 1926 of his stock interest covered by the agreement of January 15, 1913. There is no controversy as to the amount received upon its disposition. The petitioner received $100,000 in cash and 2,500 shares of stock of the Wrigley Co., which stock was worth $53.50 per share or a total consideration, including cash, of $233,750. Nor is there any dispute as to the amount of the cost of the stock interest to the petitioner, which was $21,550. The Commissioner in the deficiency notice used a figure of $21,500 as representing the cost, but concedes in his brief that that was in error and that the profit which he determined in the deficiency letter should be reduced by the amount of $50. The principal issue presented by the parties relates to the proper basis to be used in the determination of the gain. They have presented this issue upon the theory that we are governed by section 204 (b) of the Eevenue Act of 1926. The respondent held that the purchase price which was agreed to be paid by the petitioner for the stock interest on January 15, 1913, which he now admits was $21,550 instead of $21,500, establishes the value of the stock on March 1, 1913. The petitioner contends that the fair market value on March 1,1913, was $7,655 per share, or a total value of $191,375, as claimed by him in his return for the year 1926. It is his position that Shoup, in order to induce the petitioner to enter the employ of the Shoup Co., sold him the stock at a figure below its fair market value and that therefore that transaction does not establish the fair market value of the stock at March 1,1913.

The petitioner also contends that since the consideration received by him upon the disposition of his stock consisted in part of stock in the Wrigley Co., and in part of cash, the transaction comes within the provisions of section 203 (b) (1) and (d) (1) of the Eevenue Act of 1926, and that therefore only the cash received is taxable and that only if it exceeds the basis of the Shoup Co. stock. This contention of the petitioner is obviously without merit, since section 203 (b) (1) specifically excepts stock from its general application. The transaction is taxable to the extent that its fair market value exceeds the basis of the property disposed of. We therefore turn to a consideration of the March 1, 1913, fair market value of the petitioner’s interest in the Shoup Co. stock.

Under the agreement which we have set forth in our findings of fact, A. D. Shoup or the Shoup Co. had the option of purchasing this stock interest from the petitioner within 60 days from the date the petitioner ceased his employment with the Shoup Co. for any cause, at the then book value. By the terms of the contract of purchase the reservations on the stock in the petitioner’s hands were unlimited as to time. So far as we are informed the terms of the contract of purchase were not varied at any time. Thus at March 1, 1913, the stock was still subject to the same reservations. The proof does not show to whom the petitioner disposed of his interest in this stock.

Obviously we are concerned with the fair market value as of March 1, 1913, of the same property that was bought and later sold. James Couzens, 11 B.T.A. 1040, 1161. Therefore, we are concerned with the fair market value as of March 1, 1913, of the petitioner’s stock interest, subject to the reservations contained in the contract of purchase.

A fair sale of property when not too remote from the date of valuation is the best evidence of the value of such property. Andrews v. Commissioner, 38 Fed. (2d) 55; affirming Estate of Effie Andrews, 13 B.T.A. 651; Hazelton v. Le Duc, 10 App. D.C. 379; Ruppert v. McArdle, 42 App. D.C. 392; Belridge Oil Co., 26 B.T.A. 810; and Perfex Corp., 27 B.T.A. 120. Here the same stock interest was purchased by the petitioner about six weeks before March 1, 1913, on January 15, 1913, for $21,550. There is nothing to show that this was not a fair sale which correctly reflected the fair market value of what the petitioner actually received under the contract. This sale was not too remote from the date of valuation and in our opinion must be taken as establishing the fair market value at March 1, 1913, of the stock interest acquired by the petitioner. We have no other proof of the fair market value on that date of the precise stock interest which the petitioner then held, subject to all of the reservations contained in the contract.

The petitioner testified that at the time he purchased this stock interest from Shoup it was his opinion that the value of the stock was about $200,000. He testified further that the fair market value of the stock on March 1, 1913, was, in his opinion, formed at that time, about $200,000 and that it is now his opinion that on or about March 1,1913, the fair market value of the stock was about $200,000. He testified that his opinions were based upon the earnings of the company, the prospective earnings, the business conditions, the sales connections, the personalities of the officers, and their trade connections. The petitioner, in forming his opinion as to the value of this stock, thus apparently had in mind the stock free from the reservations which then existed. His testimony and his opinion therefore are of no aid to us in determining the fair market value on March 1, 1913, of the stock interest which he received, limited as it was by the contract of purchase. There is in the record evidence which tends to indicate that the stock freed from the burden of these reservations would have had a fair market value on March 1, 1913, considerably in excess of the amount which the petitioner agreed to pay for this stock interest on January 15, 1913. However, this is likewise of no aid to us in determining the fair market value on March 1, 1913, of the stock interest in question, subject to the reservations of the purchase agreement. As heretofore stated, there is no evidence whatever in the record from which we can determine the fair market value on March 1, 1913, of the identical stock interest which the petitioner agreed to purchase on January 15,1913, and later sold in 1926, except the evidence of the amount which the petitioner agreed to pay for such stock interest on January 15, 1913. In this situation the holding of the respondent, in so far as he holds that the fair market value of this stock interest on March 1, 1913, is established by the agreement of January 15, 1913, to purchase the same, must be sus tained. Upon the recomputation the proper basis to be used in the computation of gain is $21,550.

The principal case relied upon by the petitioner is James Couzens, supra. There the stock was not limited as to selling price. The owner was merely required to offer the stock to the other stockholders for sale at the best price obtainable. In these respects that case is clearly distinguishable, hfor are any of the other authorities cited by the petitioner governing. Here the petitioner is required by the agreement to sell at book value in the event that the reserved option is exercised; and there is no evidence whatever establishing the book value as of any date.

Both parties proceeded, in the trial and the argument, upon the assumption that the petitioner acquired this stock prior to March 1, 1913, and that the proper basis for the determination of gain or loss upon its disposition is its cost or fair market value at March 1, 1913, whichever is greater, under the provisions of section 204 (b) of the Revenue Act of 1926. In our opinion there is support in the record for the view that we are concerned with section 204 (a) of the Revenue Act of 1926, which deals with property “ acquired ” after February 28, 1913. The word “ acquire ” is defined in Black’s Law Dictionary as follows:

Acquihe. In the law of contracts and of descents; to become the owner of property; to make property one’s own. Wulzen v. San Francisco, 101 Cal. 15, 35 Pac. 353, 40 Am. St. Rep. 17.

It is our opinion that there is support in the record for the view that the stock was not acquired ” by the petitioner until January 12, 1914, the date it was “ fully paid for by dividends.”

The agreement contains the following;

* * * subject to the foregoing, that when said stock has been fully paid for by dividends [emphasis supplied] he will deliver the same to the said Nicholas &. B chics.

Hence, the stock was not to be delivered to the purchaser, the petitioner, until it was fully paid for. Such payment was a condition precedent. Too, it was to be thus paid for by dividends. There was no obligation on petitioner’s part to pay for it in any other manner. We consider it unnecessary to decide whether the seller could have been compelled to accept payment in any other manner. On the other hand, petitioner was expressly relieved from any other respon sibility or obligation to pay for i’t. If there had been insufficient dividends earned * * * and declared so that the stock could not have been fully paid for by dividends this would, under the terms of the agreement, never have occurred and there could have been no obligation on the part of the seller to deliver the same (stock), and the petitioner never would have acquired the stock pursuant to the provisions of the agreement. Furthermore, this contingent liability on the part of the seller to deliver the same (stock), when fully paid for by dividends was subject to the foregoing, which means subject to all of the “ foregoing ” provisions of the agreement. Among other things it was subject to the “ option within sixty days from the date such employment ceases, no matter from what cause ”, of the seller or the issuing corporation to purchase said shares of stock at its then book value. If petitioner had resigned or had been discharged and the seller or issuing corporation had exercised the option before the stock had been fully paid for by dividends, the stock would never have been delivered “ to the said ” petitioner, pursuant to the agreement, and he could never have compelled delivery pursuant to the same. Notwithstanding that the option continued in full force beyond the time when the stock had been fully paid for by dividends, entitling the petitioner to delivery of the same pursuant to the agreement., the petitioner “ acquired ” the stock on that date, January 12, 1914, but not before. He could not under all the facts and circumstances have compelled delivery of the stock before that date, pursuant to the agreement. From a careful consideration of the agreement it is our opinion that, under all the facts and circumstances, there was no intention on the part of the parties to it to transfer either title or possession of the stock to the petitioner before it was fully paid for by dividends, which occurred on January 12, 1914.

It is significant that the option is to purchase, not to repurchase, which is open to the inference that the parties appreciated that no purchase had been completed at the date of the agreement, which was before the stock was fully paid for by dividends.

It is true that the preamble to the agreement recites that the seller has “ sold ” the certificate for the shares to petitioner, but we must look to the whole of the agreement which follows the preamble and to all of the facts and circumstances to ascertain what occurred in this respect, and more particularly to ascertain when the stock in question was “ acquired ” by the petitioner. We are governed here by the construction of the agreement as a whole and more particularly by the provisions from which it derives its vitality.

Under the provisions of section 204 (a), supra, the basis for the determination of gain or loss upon the disposition of property acquired after February 28, 1913, is its cost. The cost of this stock to the petitioner is shown to have been $21,550. Hence this view leads to the same result as the view presented by the respondent upon the assumption that the stock interest was acquired by petitioner on January 15, 1913, which has been heretofore discussed and disposed of herein.

Decision will be entered under Rude 50.

       Sec. 204. (b) Tbe basis for determining the gain or loss from tbe sale or other dis position of property acquired before March 1, 1913, shall be (A) the cost of such property (or, in the case of such property as is described in paragraph (1), (4), «or (5), of subdivision (a), the basis as therein provided, or (B) the fair market value of such properly as of March 1. 1913, whichever is greater. In determining thfe fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

       Sjbc. 203. (b) (1) No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment or if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.

        ******

      (d)(1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

       Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that — [exceptions immaterial].


author: Trammell : MuRdock,

text:
    John S. Woodard, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marjorie C. Langworthy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71961, 71962.
    Promulgated July 20, 1934.

      Geo. B. Furman, Esq., O. E. Frey, Esq., and P. R. Rogers, O.P.A., for the petitioners.

      James O. Maddox, Esq., for the respondent.
   OPINION.

Trammell :

Respondent originally determined that the transaction referred to in our findings of fact above constituted a reorganization, and computed the deficiency by including in income the gain derived by each of the petitioners upon the liquidation of the Lamination Co. only to the extent of the cash distributed to each. Respondent now contends that the transaction did not constitute a reorganization and that he erred in not computing tax upon the entire amount of the gain derived by each petitioner, and asserts claim for increased deficiencies accordingly.

Petitioners contend that there was a statutory reorganization, and that not only should the recognizable gain be restricted to the amount of cash distributed to each, but that so much of the recognizable gain as equals the ratable share of the surplus of the Lamination Co. distributed to each petitioner is subject to surtax as a dividend and not taxable as ordinary income.

So far as material here, the Revenue Act of 1928 defines the term “ reorganization ” as follows:

Sec. 112. (i) Definition of reorganisation. — As used in this section and sections 113 and 116'—
(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation or substantially all of the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the trans-feror or its stockholders or both are in control of the corporation to which the assets are transferred * * * .

The first question arising here is whether the transaction in 1930 effected a class (A) reorganization within the meaning of the quoted statute. There is no contention that it was a reorganization under clause (B), and obviously it was not, since immediately after the transfer neither the transferor nor its stockholders or both were in control of the transferee corporation. There is likewise no contention that under clause (A) there was a “ consolidation ” of the two corporations, or anything in the nature of a technical consolidation, as there was no new corporation organized to take over the combined businesses and assets of predecessors; nor did the Allegheny Co. acquire a majority of the stock of the Lamination Co. This leaves for consideration, then, only the question whether the transaction amounted in effect to a merger through the acquisition by one corporation of all the assets and business of the other, in the circumstances shown.

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599, the court held that reorganization of a corporation within the income tax statute does not embrace the mere purchase by one company of the assets of another; and that where a corporation transferred substantially all its properties to another corporation for cash and notes, and there was no continuity of interest on the part of the transferor corporation or its stockholders, there was no “ reorganization ” within section 203 (h) (1) (A), Revenue Act of 1926, which contains identically the same language as section 112 (i) (1) (A) of the Revenue Act of 1928, quoted above. In its opinion, the court said:

A merger ordinarily is an absorption by one corporation of tbe properties and franchises of another whose stock it has acquired. The merged corporation ceases to exist, and the merging corporation alone survives. * * *
When subdivision (h)(1)(A) included in its definition of “Merger or consolidation ” the “ acquisition by ime corporation of * * * substantially' all the properties of another,” it did this so that the receipt of property by the corporation surviving the merger might serve to effect a reorganization as does an acquisition of stock. Each transaction presupposed a continuance of interest on the part of the transferor in the properties transferred.

In Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, the Supreme Court approved the principles laid down by the Circuit Court in the above quoted opinion, saying:

The words within the parenthesis may not be disregarded. They expand the meaning of “merger” or “consolidation” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated either merger or consolidation. But the mere purchase for money of the assets of one company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation. Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes. This general view is adopted and well sustained in Cortland Specialty Co. v. Commissioner * * *. It harmonizes with the underlying purpose of the provisions in respect of exemptions and gives some effect to all the words employed.

It is plain that in the instant proceedings there was no technical merger, as defined by the court in the Cortland Specialty Co., case, supra, because the Allegheny Co. did not acquire any of the stock of the Lamination Co., but the effect of the transaction bears a real semblance to a merger. It partakes of the nature of a merger, although beyond the ordinary and commonly accepted meaning of that word. As in the case of a true merger, one corporation acquired all the assets and business of the other for the purpose of operating the combined businesses, while one corporation was dissolved and ceased to exist. Also there was a substantial continuity of interest on the part of the transferor, corporation’s stockholders in the transferred properties. Certainly, they acquired an interest in the affairs of the transferee company more definite than that incident to the ownership of “ short-term purchase-money notes.” After the transfer the former stockholders of the Lamination Co. owned a beneficial interest in the assets of the Allegheny Co., including the transferred assets, equal to 75 percent of the beneficial interest which they had previously owned in the properties of the Lamination Co.

In Minnesota Tea Co., 28 B.T.A. 591, we held that where one corporation transferred its assets to another corporation for stock and cash, and the transferor corporation continued in existence, distributing only the cash to its stockholders, there was no merger or consolidation, nor anything that partook of the nature of such, and hence no reorganization under section 112 (i). (1) (A), supra, although there was a continuity of interest in the transferred assets.

Thus, a mere continuity of interest alone is not sufficient under subdivision (A) to constitute a reorganization, unless coupled with a merger or consolidation, or something akin thereto. Continuity of interest alone through stock ownership is, of course, sufficient under clause (B) where such continuity amounts to control of the transferee corporation. The following extract from our opinion in the Minnesota Tea case has by analogy a reversed application to the instant case:

The parties to the transaction deliberately for their own purposes refrained from a merger. Furthermore they chose an arrangement which avoided the result of a merger. Instead of the shareholders of the Minnesota Co. owning shares of the Grand Union Co., as they would have if there had been a merger, they continued to own Minnesota shares; and instead of the Minnesota Co.’s disappearance as in a merger, its existence and powers continued, and as the owner of the Grand Union shares it brought about a freedom from immediate tax upon the dividends upon such Grand Union shares, since by section 23 (p.) such dividends are deductible by a corporation simultaneously with their receipt as gross income, while to an individual shareholder dividends are subject to surtax.
This decision does not restrict (A) to technical mergers. It still leaves room for a more expansive application of the statute. It might be suggested, for example, that by having the assets of the Minnesota Co. transferred to the Grand Union in exchange for shares and then having the Minnesota Co. promptly distribute such shares among its own shareholders in liquidation and dissolve, so that in all substantial respects the outcome would have been the same as if a true merger had occurred, the petitioners might properly have invoked part (A) of the definition.

In the present case, the effect or outcome of the transaction was in all substantial respects the same as if a true merger had occurred, and accordingly we hold that there was a reorganization within the purview of the quoted statute.

The respondent contends, however, that even if there ivas a statutory reorganization, the Lamination Oo. was not a party thereto, and hence the entire gain derived by the petitioners from the distribution in liquidation of that company is recognizable for tax purposes. This contention, we think, is without merit. The parties have specifically stipulated that the Lamination Co. exchanged its assets for stock and cash “in pursuance of the plan of reorganization ” and that the Allegheny Co. delivered to the Lamination Co. the specified stock and cash “ pursuant to the plan of reorganization ” ; and the agreement between the corporations, attached to the stipulation, shows that, pursuant to and as a part of the plan' of reorganization, the Lamination Co. agreed to liquidate and dissolve “ at the earliest practicable date.” Thus, the Lamination Co. was clearly a party to the contract which resulted in the reorganization ; it was a party to the plan of reorganization and acted pursuant thereto. These facts alone, we think, are sufficient to justify the conclusion that this corporation was also a party to the reorganization, as that term is commonly understood.

The statute does not define the term “ a party to a reorganization ”, but section 112 (i) (2) provides that the term inchides a corporation resulting from a reorganization, and includes both corporations in the case of an acquisition by one corporation of a majority of all the capital stock of another corporation. However, we think this provision can not be construed as restricting the meaning of the term “ a party to a reorganization ” exclusively to the two classes of corporations mentioned. It merely includes such corporations therein, just as the preceding subdivision (1) of the same section does not restrict the meaning of the term “ reorganization ” to a merger or consolidation, but includes therein the acquisition by one corporation of a majority of the capital stock or substantially all the properties of another corporation.

If one of the corporations here involved had acquired a majority of all the capital stock of the other, then by express statutory direction the Lamination Co. would be “ a party to a reorganization.” This is not what occurred. The Allegheny Co. acquired all the properties of the Lamination Co. for stock and cash. Since the latter company does not fall within either of the two classes of corporations which the statute expressly includes within the term “ a party to a reorganization ”, we must then consider whether the Lamination Co. may otherwise be said to have been a party to the reorganization.

This question, in our opinion, must be answered in the affirmative. We are dealing here with what amounts in effect to a merger of one corporation into another. A merger must involve not less than two corporations, and where one corporation merges into another, it would seem to be elementary to say that both corporations are parties to the merger. It is also the merger which constituted the reorganization in this case, and both corporations being parties to the merger, both must be regarded as parties to the reorganization. Each took a vital and essential part in the transaction without which there would have been no reorganization, and each was, therefore, a 'party to the reorganization, notwithstanding only one of the corporations was reorganized. Having reached the conclusion that the transaction in question constituted a reorganization, it is our opinion that the Lamination Co. was a party thereto.

The petitioners in this case exchanged their stock in the Lamination Co. for cash and stock in the Allegheny Co., and the question is to what extent the profit derived by each is recognizable for tax purposes. The pertinent provisions of the 1928 Act are as follows:

SEC. 112. RECOGNITION OE GAIN OR LOSS.
(a) General rule.- — -Upon the sale or exchange of property, the entire amount, of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) Exchanges solely in hind.-—
* * ■■>.< * * * *
(3) Stock: eok stock on beiokganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
•1: * * Ü: * * *
(c) Gam from exchanges not solely in hind.—
(1) If an exchange would be within the provisions of subsection (b) * * *
(3) * * * of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

The petitioners derived gain from an exchange not solely in kind, having exchanged their stock in one corporation a party to the reorganization for cash and stock in another corporation a party to the reorganization, and so come within the precise provisions of subsection (c) (1), supra. The transaction would be within the provisions of subsection (b) (3) if it were not for the fact that the property received in exchange consisted not only of stock permitted by (b) (3) to be received without the recognition of gain, but also of money. Hence, the gain is recognizable, but in an amount not in excess of the money.

The remaining issue is whether the recognizable profit derived by the petitioners is taxable as a dividend, subject to the surtax and exempt from the normal tax, under section 112 (c) (2) of the 1928 Act, to the extent of the ratable share distributed to each petitioner of the surplus of the Lamination Co. accumulated after February 28, 1913, or whether the whole amount is to be treated as ordinary income, subject to both normal and surtax. The amount of surplus has been stipulated and set out in our findings of fact.

Petitioners contend that an equivalent amount of the recognizable gain is so taxable, while respondent contends that the entire amount is taxable as ordinary income, substantially on the theory that there was no reorganization. Since we have reached the. contrary conclusion, that there was a reorganization, respondent’s argument on this point falls.

However, in view of the statutory provisions relating to the taxation of ordinary and liquidating dividends, some of which provisions standing alone appear more or less ambiguous, it is believed that a brief discussion of these provisions, and the decisions thereunder, will be helpful.

The Revenue Acts of 1913, 1916, and 1917 made dividends taxable as income, and further provided for the taxation, as ordinary dividends, of distributions in liquidation to the extent of earnings and profits accumulated since February 28, 1913. The Revenue Act of 1918 also made dividends taxable as income, and in section 201 (a) defined the term “ dividend ” as follows:

Sec. 201. (a)-That the term “dividend” when used in this title * * * means (1) any distribution made by a corporation * * * to its shareholders or members, whether in cash or in other property * * * out of its earnings or profits accumulated since February 28, 1918 * * *.

This definition of the term “ dividend ” contained in the 1918 Act is substantially the same as that contained in the prior acts, but Congress added subdivision (c) to section 201, reading in material part as follows:

* * * Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.

Under this provision of the 1918 Act we held that it was the intention of Congress to exclude liquidating dividends from its broad definition of a dividend as contained in section 201 (a), even though such dividends included earnings accumulated since February 28, 1913, and that it was the intention of Congress to subject to both normal and surtax any gains derived from such distributions in the same manner as other gains. John K. Greenwood, 1 B.T.A. 291; J. H. Morrow, Administrator, 1 B.T.A. 1148; S. B. Quigley, 2 B.T.A. 159; George Shapiro, 2 B.T.A. 620. To the same effect, see also Helmich v. Hellman, 276 U.S. 233.

The Revenue Act of 1921 likewise included dividends in taxable income, and defined the term substantially the same as in the prior acts.

It is significant to note, however, that subdivision (c) of section 201 of the 1918 Act, quoted above, which subjected liquidating dividends to both normal and surtax, was deliberately omitted from the 1921 Act, as finally passed, after consideration of this specific point by Congress. Thus, Congress eliminated the distinction between liquidating dividends and ordinary dividends which it had recognized in the 1918 Act, and declared anew its intent to tax as ordinary dividends all distributions of earnings accumulated since February 28, 1913, whether the dividends were in liquidation or otherwise, as was the case under the 1916 and 1917 Acts. Frank D. Darrow, 8 B.T.A. 276, cited with approval and followed in Philetus W. Gates, 9 B.T.A. 1133 (reviewed by the Board), and Erie A. Pearson, 16 B.T.A. 1405.

As we said in the Darrow case,

The intention of Congress to remove the distinction between liquidating dividends and other dividends, and to make its definition of the term in section 201 (a) comprehensive and all-inclusive so far as earnings or profits accumulated since February 28, 1913, are concerned, appears even more clearly from the history of the 1921 Act in process of enactment. The House bill provided, in section 201 (c), for the treatment of liquidating dividends in the identical language of the 1918 Act. The Senate amendment eliminated the provision entirely and substituted as subdivision (c) the provision as to stock dividends appearing as subdivision (d) in the Act as passed. The House accepted the amendment with an amendment which appears as subdivision (c) in the Act as finally passed. * * *
There would seem to be no doubt that Congress intended its definition of “ dividends ” to include liquidating dividends to the extent of earnings accumulated since F'ebruary 28, 1913.
It is our conclusion that the term “ dividends ” as defined in section 201 of the Revenue Act of 1921 includes distributions in liquidation to the extent of the earnings or profits accumulated since February 28, 1913, contained therein, and that to the extent of those earnings such distributions are taxable as dividends, subject to the Surtax and exempt from the normal tax.

Substantially the same definition of the term “ dividend ” contained in section 201 (a) of the 1921 Act, quoted above, appears as section 201 (a) of the 1924 and 1926 Acts, and as section 115 (a) of the 1928 Act.

The doctrine applied in the Darrow case, then, must be applied and the same conclusion reached in the instant case under the 1928 Act, unless the latter act contains some provision amounting to a change of the law and a reversion to the policy adopted by Congress under the 1918 Act. Section 201 (c) of the latter act provided that “ amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares.” This provision was omitted from the 1921 Act, but a similar and somewhat enlarged provision appears in section 201 (c) of the 1924 Act, reading as follows:

Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. * * *

The same provisions in substance were reenacted in the 1926 Act as section 201 (c) and in the 1928 Act as section 115 (c).

Section 203 (d) (1) of the 1924 Act provides that if an exchange of property for other property would be within the nonrecognition provisions of subdivision (b) of that section if it were not for the fact that the property received in exchange consists not only of property permitted to be received without the recognition of gain but also of other property or money, then the gain, if any, shall be recognized, but in an amount not in excess of such money and the fair market value of such other property.

And paragraph (2) of the same section provides that if a distribution made in pursuance of a plan of reorganization is within the provision of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. Only the remainder, if any, of the recognizable gain may be taxed as gain from the exchange of property.

The same provisions are contained in sections 203 (d) (1) and (2) of the 1926 Act, and sections 112 (c) (1) and (2) of the 1928 Act.

From the foregoing we think it is clear that, since the enactment of the 1921 Act, it has been the settled, consistent policy of Congress to treat liquidating dividends as ordinary dividends to the extent of the corporate earnings accumulated since February 28, 1913, subject to surtax and exempt from normal tax.

While it is true that section 115 (c) of the 1928 Act, appearing as section 201 (c) of the 1926 and 1924 Acts, requires that liquidating distributions shall be treated as in part or full payment in exchange for the stock, yet such provision can not be construed as subjecting a liquidating dividend in connection with a reorganization to tax as ordinary income to the extent of corporate earnings included thereim, which were accumulated since February £§, 1913, in view of the express provisions of section 112 (c) (2), supra, that such distribution “ shall be taxed as a dividend ” to the extent of each distributee’s ratable share of the accumulated earnings and profits.

The provisions of section 112 (c) (2) of the 1928 Act first appeared in the revenue laws as section 203 (d) (2) of the 1924 Act. From 1921 to 1924, liquidating dividends to the extent of accumulated earnings were taxable as ordinary dividends subject to surtax, or at the rate applicable to capital net gain. The House Ways and Means Committee and the Senate Finance Committee in their official reports on the Revenue Bill of 1924 made the following explanation of the new provisions of section 203 (d) (2) :

There is no provision of the existing law which corresponds to paragraph (2) of subdivision (d). This paragraph provides that any amount distributed by a corporation in connection with a reorganization which has the effect of a taxable dividend shall be taxed as a dividend.
The necessity for this provision may best be shown by an example: Corporation A has capital stock of $100,000, and earnings and profits accumulated since March 1, 1913, of $50,000. If it distributed the $50,000 as a dividend to its stockholders, the amount distributed will be taxed at the full surtax rates.
On the other hand, corporation A may organize corporation B, to which it transfers all its assets, the consideration for the transfer being the issuance by B of all its stock and $50,000 in cash to the stockholders of corporation A in exchange for their stock in corporation A. Under the existing law, the $50,000 distributed with the stock of corporation B would be taxed, not as a dividend, but as a capital gain, subject only to the 1214 per cent rate. The effect of such a distribution is obviously the same as if the corporation had declared out as a dividend its $50,000 earnings and profits. If dividends are to be subject to the full surtax rates, then an amount so distributed should also be subject to the surtax rates and not to the 12y2 per cent rate on capital gain.

As before stated, the provisions of section 203 (d) (2) were reenacted in the 1926 Act under the same section number, and in the 1928 Act as section 112 (c) (2). So far as concerns the question of taxing liquidating dividends, to the extent of accumulated earnings, as ordinary income, it is immaterial that the primary purpose of Congress in enacting section 203 (d) (2) was to prevent the taxing of such distributions at the capital gain rate. The fact remains that Congress has provided that they “ shall be taxed as a dividend ”, subject to the full surtax rates, and not otherwise. We may not, therefore, read into the statute the requirement that accumulated earnings distributed as a liquidating dividend shall be taxed at the full surtax rates, and also, in addition thereto, at the normal tax rate.

The conclusion herein reached is entirely in harmony with the settled and long continued general policy adopted by Congress for the taxation of corporate earnings. Section 25 (a) of the 1928 Act provides that an amount received as dividends by an individual stockholder shall be subject only to the surtax, and section 23 (p) provides that dividends received by a corporation shall be allowed as a deduction from gross income; that is, the amount is included m gross income and immediately deducted, so that it is not taxable to the corporate stockholder. It is then taxed at surtax rates when distributed to the individual stockholders. Similar provisions are contained in the prior acts.

These provisions unmistakably indicate the intention of Congress to subject corporate earnings to normal tax but once. The corporation which derives the earnings and profits is required to pay a normal tax thereon, and thereafter the stockholders pay only the surtax when distributed as dividends.

Section 112 (c) (2), supra, consistently applies this same scheme of taxation to distributions in liquidation which embrace corporate earnings accumulated after February 28, 1913. Such distributions are not technically dividends for the reason that they are not recurrent, nor made in the ordinary course of business, but to the extent of the accumulated earnings it is apparent that they have “ the effect of the distribution of a taxable dividend,” and therefore must be taxed at the same rates as dividends, that is, at the full surtax rates only.

In George Woodward, 23 B.T.A. 1259, we held that a distribution in liquidation which included surplus of the merged corporation accumulated after March 1, 1913, had “the effect of a distribution of a taxable dividend under section 203 (d) (2) of the Revenue Act of 1926,” and was taxable as a dividend at surtax rates only, and not as capital gain.

In T. W. Henritze, 28 B.T.A. 1173, 1176, we held that a liquidating dividend, to the extent of the accumulated surplus, must be taxed as a dividend under section 112 (c) (2), supra, and not as either ordinary income or capital gain.

In J. T. Owens, 27 B.T.A. 469, we held that a distribution in liquidation, to the extent that it represented surplus and profits accumulated subsequent to March 1, 1913, was “ taxable as a dividend within the provisions of section 112 (c) (2) of the Revenue Act of 1928 * * * at surtax rates only.”

The latest judicial expression on this question is contained in the opinion of the Circuit Court of Appeals for the Fifth Circuit, rendered March 17, 1934, in Commissioner v. Owens, 69 Fed. (2d) 597, affirming 27 B.T.A. 469, supra, as follows:

The Board of Tax Appeals held that there was an exchange of stock for stock and money within the meaning of §112 (c) (1) of the Revenue Act of 1928, so that so much of the cash received as represents the surplus of the North Texas Bank is to be treated as a dividend not subject to normal tax while the remainder is fully taxable gain realized in the transaction. The Commissioner contends that all is gain.
The Board is right. * * * The cash which they (stockholders of the liquidating corporation) received was all gain from their investment taxable under § 112 (c) (1), but so much of it as might before consolidating have been declared by their corporation as an ordinary dividend out of its profits is by (c) (2) to be so taxed. It is true that the money was not distributed by the North Texas Bank, and thus was not literally a dividend of that bank. But the statute speaks of a. distribution which “has the effect of the distribution of a dividend.” This pro rata payment to all stockholders of the North Texas Bank, whether assenting or dissenting, certainly has that effect.

It may be noted in this connection that the respondent’s regulations are in harmony with the foregoing construction of the statutes (see art. 575, Regulations 74, Revenue Act of 1928), and, as we understand, his contentions in the present case are not contrary thereto.

For the reasons indicated, and on authority of the decisions cited, we here hold that so much of the recognizable profit derived by the petitioners as represents their respective ratable shares of the undistributed earnings of the Lamination Co. accumulated after February 28,1918, is taxable as a dividend at surtax rates only.

Reviewed by the Board.

Judgment %oill be entered under Rule 50.

MuRdock,

dissenting: No part of the profit derived by these petitioners from the disposition of their Lamination Co. stock is taxable to them as a dividend. The distribution in question was in complete liquidation of the Lamination Co. Section 115 (c), a general provision covering the ordinary case, provides that “ amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.” The gain, if any, from such a distribution would be taxable normally, not as a dividend, but as an ordinary gain. Section 112 (c) (2) is a special provision which applies only when a number of stated circumstances concur. The legislative history of that provision shows that it was intended to prevent taxpayers having large incomes from avoiding surtax on dividends through corporate reorganizations. The prevailing' opinion states that “ to the extent of the accumulated earnings it is apparent that they [liquidating distributions] have ‘ the effect of the distribution of a taxable dividend.’ ” In other words, every distribution by a corporation having earnings accumulated after February 28, 1913, has the effect of the distribution of a taxable dividend. If the legislators had so intended a simple statement in the act would have made their intention clear. The meaning of the words “ has the effect of the distribution of a taxable dividend ” must be determined. These words and the-example given in the Committee reports, quoted in the prevailing opinion, indicate that section 112 (c) (2) does not apply unless an examination into the particular transaction discloses some close resemblance between the distribution in question and an ordinary dividend distribution. Cf. sec. 115 (g), Revenue Act of 1928; Annie Watts Rill, 27 B.T.A. 73; aff'd., 66 Fed. (2d) 45. Normally a liquidating dividend does not have the effect of a taxable dividend, i.e., a dividend taxable-at surtax rates only, and section 112 (c) (2) was intended to apply to such a dividend only in the exceptional case.

The reorganization involved in this case was not designed for the purpose of permitting the Lamination stockholders to receive a dividend from their corporation. The Allegheny Steel Co. (unlike corporation B in the example) was not organized to take over all of the assets of the other company and distribute its surplus. Not only was the reorganization for a wholly different purpose, but the final result was quite different from what it would have been had the Lamination Co. merely declared and paid a dividend of its surplus. The assets of two corporations were commingled and two sets of former stockholders were united with common interests in but one corporation. This distribution did not have the effect of the distribution of a taxable dividend. Instead its effect was just about as different from that of a taxable dividend as well could be in the case of a distributor having earnings accumulated after February 28,1913. Since there is no reason to tax the gain in any but the ordinary way, the gain recognized under section 112 (c) (1) is subject to both normal tax and surtax.

SteRnhagen and Goodeich agree with this dissent.


author: Seawell :

text:
    Clara B. Parker, Executrix, Estate of George D. Parker, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28374, 32369, 44396.
    Promulgated July 20, 1934.

      Thomas R. Dempsey, Esq., A. OcMer MaeJeay, Esq., Arthur McGregor, Esq., and Wm. G. Kottema/rm, O. P. A., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Seawell :

The deficiencies in income tax as determined by the respondent and contested by the petitioner are for the years 1921 to 1926, both inclusive. In each of the three dockets involved numerous errors are assigned, raising many issues for our determination.

One issue, applicable to all the years involved, is the question of fraud, the respondent having asserted penalties in each of the years on the ground that there was no bona fide five-party partnership and that the decedent made false and fraudulent returns on the assumption that such partnership was bona fide, and did so to evade income taxes. As a determination of this question may dispose of a number of the errors assigned, we will consider it first.

The petitioner insists that in each of the years involved there was a bona fide partnership existing between George D. Parker, Clara B. Parker, his wife, her mother, Catherine Barr, and C. E. Brown and Blanche G. Brown, his wife, which partnership was carried on in the name of the George D. Parker Co.

Respondent through counsel has admitted that a partnership under the name George D. Parker Co., between George D. Parker and C. E. Brown, existed in all the years in issue. Prior to the hearing herein respondent did not recognize any partnership between George D. Parker and C. E. Brown for the years 1921 and 1922, though doing so for the other years in issue.

The voluminous evidence, consisting of oral testimony given at the hearing and dozens of exhibits filed, makes up a record not altogether consistent with the contentions of either petitioner or respondent. We have endeavored to set forth quite fully and fairly the facts established by the record. It shows that the decedent, George D. Parker, prior to 1921 consulted an attorney in reference to forming a partnership and an oral understanding or agreement was had between the decedent, Parker, and C. E. Brown, their wives, and Parker’s mother-in-law, the five persons heretofore named, that they would constitute a partnership known as George D. Parker Co. Afterwards written articles of copartnership between them were prepared in 1921 by a lawyer and were signed by the five persons heretofore named. It was contemplated that the alleged partnership would acquire and hold the valuable Nestle Food Co. contract for supplying it with box shook and box shook was accordingly so supplied it, though the record does not disclose any formal assignment of the contract to the George D. Parker- Co. partnership.

Considerable sums of money were advanced to the Parker Lumber & Box Co. by the George D. Parker Co., for which the Parker Lumber & Box Co. executed its notes, some of which were distributed to certain members of the firm of George D. Parker Co. and some retained by the partnership.

The lawyer who drew the articles of partnership and the five persons alleged to constitute the partnership considered that a bona fide partnership had been formed. One of the five persons, Blanche G. Brown in 1928 instituted suit for an accounting in the Superior Court of the State of California, Riverside County, against George I). Parker and his wife, Clara B. Parker, individually and as administratrix of the estate of Catherine Barr, deceased, as set forth in our findings of fact. Mrs. Barr died in- 1923 and her death worked a dissolution of the partnership (California Civil Code [1927, Deering] sec. 2450 (3)), but did not, in a sense, absolutely terminate it, the evidence indicating that at the time of the hearing herein the affairs of the five-party partnership had not been wound up and Mrs. Barr’s estate was still open and undetermined.

Some facts and circumstances shown appear, as heretofore stated, unusual and somewhat inconsistent with the idea of a bona fide five-party partnership between the persons alleged to constitute the same. We think such may reasonably be accounted for, however, when the partnership is viewed in the light of the business and family relationship existing between the parties as shown by the record. George D. Parker and C. E. Brown had been closely associated in business for years. Parker was very desirous of keeping Brown connected with him in business and, after being advised by his attorney that it would be advisable to form a partnership with Brown, proceeded to form one with Brown and the persons heretofore named, on the basis stated in our findings of fact. The partnership was somewhat in the nature of a two-family business arrangement, Parker and his wife and mother-in-law on the one side and Brown and his wife on the other, the two men continuing actively to carry on the business, the women partners being satisfied to have their interests looked after by the men. This character of partnership we think largely accounts for the manner in which the business was conducted and book entries made with respect to the business.

Upon a careful consideration of the entire record we are of the opinion and hold that the charge of fraud is not sustained, that there was a bona fide partnership between the five persons asserted by the petitioner to have constituted the firm of George D. Parker Co., and that it continued to exist after the death of Mrs. Barr for the purpose of winding up its affairs.

Having, on the record presented, determined that the respondent’s allegations of falsity and fraud with respect to the asserted partnership and the tax returns based on same, made by the decedent in the years in issue, are not sustained, it follows, and we so hold, that the fraud penalties imposed were not warranted and may not be assessed and collected.

It is conceded by counsel for respondent, and properly so, that in order to sustain the deficiencies in income tax proposed and assess and collect the same for the years 1921 (Docket No. 32369) and 1923 (Docket No. 44396) it is incumbent upon the respondent to prove fraud, as otherwise the statute of limitations pleaded would operate as a bar to assessment and collection. The record shows that the deficiency notices were mailed after the four-year period prescribed by the applicable sections of the Eevenue Acts of 1921 and 1924; that no consent in writing extending such period for assessment is shown to have been executed by the decedent or the petitioner, who has pleaded the bar of the statute of limitations. It is our opinion, therefore, and we so hold, that the assessment and collection of the deficiencies alleged in the aforesaid dockets for the years 1921 and 1923 may not be made, being barred by the statute of limitations.

Notwithstanding our determination that the deficiency proposed by the respondent for the year 1921 is barred by the statute of limitations, it is necessary for the issues raised by the assignment of errors in respect to the year 1921 be determined by us in view of the fact that the petitioner asserts that the respondent failed to allow as a deduction in 1922 a net loss of at least $6,361.58 sustained in 1921.

The first error assigned with respect to the deficiency asserted for 1921 is the failure of the respondent to exempt from that year’s income tax $3,012.50 interest received by the decedent on certain United States bonds, referred to in the testimony as “ 6 percent United States Certificates ” but not further specifically described. The petitioner apparently a'ssumed that because the amount stated, $3,012.50, represents interest on the aforesaid securities such interest is necessarily tax-exempt. The obligations or certificates in question are shown to have been purchased in 1919 or 1920. Under the Eeve-nue Act of 1921 the interest on certain securities is exempt from tax. However, it is provided in section 213 (b) (4) of that act that:

* * * In the ease of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income, war-profits and excess-profits taxes.

The petitioner insists that aforesaid interest should be excluded in computing decedent’s net income, but in our opinion, and we so hold, the evidence adduced is not sufficient to warrant such determination. The petitioner not having shown the specific character of the United States obligations or certificates, nor when they were issued, and that the interest is exempt under the terms of the section of the statute quoted, and the respondent’s determination being presumptively correct, we approve the same on this issue.

The respondent has conceded that he committed error as asserted in assignments 2 and 5 for the years 1921 and 1922, respectively, and we so hold. :

The decedent, George D. Parker, for the year 1921 reported $4,249.68, or one fourth of the George D. Parker Co. partnership income ($16,998.71) as taxable, on the theory that the George D. Parker Co. was a bona fide five-party partnership in which the decedent’s interest was only one fourth, and such we have already held. The respondent, however, at the time of his original determination and the mailing of deficiency notice, determined there was in fact no partnership, but that the entire business of the George D. Parker Co. was owned by the decedent, and therefore added to his taxable income for 1921 the difference between the aforesaid two amounts or the sum of $12,749.03 (see fourth assignment of error for year 1921), which action on the part of the respondent we are of the opinion and hold was error.

The petitioner also assigns as error (5) the action of the respondent in adding to net taxable income for 1921 the sum of $10,000 paid George X. Wendling under the circumstances stated in our findings of fact.

In behalf of the petitioner it is insisted that the payment of the $10,000 to Wendling by the decedent was an ordinary and necessary expense of doing business and should be allowed as a proper deduction in computing net income in the year 1921, when the obligation to pay accrued — the decedent’s books being kept and his returns made on the accrual basis — or in the year 1922, when the payment was made. The record shows that the $10,000 payment made to Wendling by George D. Parker was for services rendered in connection with the consolidation of certain businesses of the decedent and Fred Stebler and the organization of a corporation for such purpose. In the circumstances described, we are of the opinion and hold that the payment did not constitute an ordinary and necessary expense of carrying on business within the meaning of the applicable section of the Eevenue Act of 1921 and the respondent did not err in failing to allow such as a deduction in either 1921 or 1922 in computing the net taxable income of the decedent. Surety Finance Co. of Tacoma, 27 B.T.A. 616.

• With respect to the year 1922, Docket No. 28374, the first error assigned is the failure of the respondent in computing net income to allow as a deduction an alleged net business loss of at least $6,361.58 sustained in 1921. This question of the deductibility of any alleged net loss for 1921 from the net income for 1922 will be disposed of under Eule 50, after proper effect is given to the issues heretofore considered and decided by us relative to the year 1921.

The second assignment of error, relative to the failure to allow as a proper deduction when computing net taxable income for 1922 certain taxes paid in the amount of $233.49, respondent concedes is error and we so determine. The third and sixth errors assigned relative to 1922 we already have determined in favor of the petitioner.

The fourth assignment of error relative to the year 1922, that the respondent added to the taxable income of the decedent Parker $39,338.83 which he did not receive and to which he was not entitled, is in our opinion, and we so hold, well taken. The record shows that the net income of the partnership of George D. Parker Co. as returned for 1922 was $52,451.78 and that the respondent in computing decedent’s net taxable income did not recognize any partnership as existing between decedent Parker and C. E. Brown or other persons and therefore included the entire amount of $52,451.78 as taxable income, whereas in accordance with petitioner’s contention and our already expressed determination the George D. Parker Co. was a five-party partnership, the decedent’s net income from such partnership being only his proportional share of its income, which was one fourth, or $13,112.95 as returned by the decedent.

The respondent concedes the fifth error assigned, and we approve his action in so doing.

With respect to deficiencies determined for the years 1923 to 1926, both inclusive, the respondent concedes he erred in adding to decedent’s income for each of those years $600 as salary, as alleged in the first assignment of error, and we so determine.

We have heretofore determined that the respondent erred in failing to recognize for the years in issue the five-party partnership constituting the George D. Parker Co. and in asserting fraud penalties, which determinations dispose of assignments of error numbered 2 and 8 for the years 1923-1926, inclusive.

The amounts set forth in the third assignment of error respecting the years 1923 to 1926, inclusive, which were added by the respondent to the decedent’s net taxable income for the years and in the respective sums stated, represent, as determined by the respondent, income received by the decedent in the several years mentioned in that assignment and not returned by him. Such determinations by the respondent were made on the theory that the partnership of George D. Parker Co. was composed of only two members, the decedent, Parker, as the owner of a two-thirds interest and C. E. Brown, the owner of a one-third interest. We already have determined herein that the partnership was a five-party partnership with interests owned by certain persons in the proportions stated in our findings of fact, and the respondent’s determination and allocation of partnership interests otherwise in said years was, in our opinion, error and should be corrected on the basis of thé five-party partnership, and we so hold. Any deficiency for 1923 we have held is barred.

The amount of net income received by the partnership for the years in issue is not in dispute, except as to the true net. income for 1925, the lack of agreement as to which is due to the respondent’s disallowance of the bad debt deduction claimed by the partnership in the sum of $45,628.91. The record shows that the alleged bad debt, claimed as a deduction in 1925 and then charged off as such by the partnership of George D. Parker Co., represented a portion of the notes (amounting to $149,256.67) which the corporation, Parker Lumber & Box Co., executed to the partnership for.money advanced or loaned it as set forth in our findings of fact. The record further shows that none of the notes so executed were ever paid; that the corporation was never operated successfully, but always at a loss; that it was in very bad financial condition as early as 1923, and that in 1925 its liabilities far exceeded its assets. While such appears from the evidence to have been the situation in 1925, other facts are also shown, to wit: That cash and accounts receivable were approximately doubled at the end of 1925 over 1923 and 1924; miscellaneous current assets remained about the same; the merchandise inventories were decidedly better than in 1924; that land, buildings, and equipment at $234,898.38 constituted a substantial increase over 1924, such assets amounting to more in 1925 than they had in any previous year except 1923. The large increase of liabilities in 1925 over 1924 was due to the $100,000 mortgage heretofore described. Furthermore, the advances of cash to the Parker Lumber & Box Co. did not cease in 1925, advances of cash being also made in 1926. It is true the financial condition of the corporation from the date of its organization was never satisfactory, but, upon the whole evidence on that subject, we are of the opinion that the corporation’s financial condition was not any worse, nor ascertained to be so, in 1925 than in 1924, and we are further of the opinion and hold that the charge-off by the partnership in 1925 of the sum of $45,628.91 as a bad or worthless debt and the claim of that amount as a deduction by the partnership was not justified by the record. In view of the fact that the partnership was a five-party partnership instead of being composed of only two members as respondent determined, the respondent was not warranted in adding the amount of $30,290.40 to the decedent’s net taxable income for 1925, assigned as error in the third and eleventh assignments. In our opinion, and we so hold, only to the extent of the decedent’s partnership interest in the alleged bad debt should his net taxable income for 1925 be increased.

The petitioner concedes, and we so determine, that the respondent did not commit error as alleged in assignments 4 and 10.

We have heretofore herein held that the statute of limitations bars the assessment and collection of any deficiency for 1923, which disposes of assignments of error 5 and 6.

Relative to the seventh assignment of error, with respect to respondent’s increasing decedent’s net taxable income for 1924 by alleged dividends from the Tehmescal Oil Co. in the amount of $8,334.50, in our opinion, and we so hold, the record shows that the distributions made by that company in 1924 and 1925, in the respective amounts of $8,334.50 and $8,459.50, and received by the decedent Parker and his wife, Clara B. Parker, in the proportions set forth in our findings of fact, were made in liquidation.

The decedent is shown to have received of such liquidating dividends $6,709.50 in each of the years 1924 and 1925, or the total sum of $13,419. The respondent, as shown, has agreed to accept $4,981 as the amount of income derived from liquidating dividends on which the petitioner is taxable in 1925, the amount being approximately the difference between the amount of dividends actually received by the decedent in 1924 and 1925 and the cost ($8,500) of the shares, as alleged in the petition, purchased and owned by the decedent. In view of the unsatisfactory condition of the record with respect to the correct number of shares purchased and owned by the decedent and his wife and the concession and acceptance by respondent’s counsel that approximately the difference between $8,500 and the amount ($13,419) of liquidating dividends received by decedent, or the sum of $4,981, is all that the petitioner should in 1925 be taxable on as income from the liquidating dividends, we are of the opinion and hold that the actual difference between the alleged cost of shares to decedent, $8,500, and the liquidating dividends actually received by him, $13,419, or the sum of $4,919, was profit on liquidation and constituted capital gain. The record shows that decedent in 1925 reported $3,856 as received from these dividends, understating his capital gain by the difference between the latter two sums in the amount of $1,063. We are further of the opinion and hold that the $6,709.50 received by decedent as a liquidating dividend in 1924 was a return in part of the $8,500 investment and $1,790.50 of the liquidating dividend received in 1925 was likewise a return of invested capital, leaving subject to tax of 12y2 percent, in accordance with the provisions of section 208 of the Revenue Act of 1926, the sum of $4,919 as capital gain.

With respect to the ninth assignment of error, alleging the respondent erred in computing the earned income credit allowable for the years 1924, 1925, and 1926, it may be remarked that aside from the concession made by respondent that for each of those years he erroneously added $600 to the decedent’s admitted annual salary of $6,000, there is no error insisted upon in petitioner’s brief nor shown in the record relative to respondent’s determination of the decedent’s earned income or credit allowable on account therof. A recomputation of earned income credit allowable, in our opinion, and we so hold, should be made and disposed of under Rule 50, after giving effect to our determinations herein.

Judgment of no deficiency will be entered as to the years 1921 and 1923, and v/nder Buie 50 as to 1922, 1921/,, 1925, and 1926.


author: Leech:

text:
    William E. Steinback, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61944.
    Promulgated July 20, 1934.

      Sidney I. Prager, Esq., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Leech:

Petitioner seeks redetermination of an income tax deficiency in the amount of $8,618.67 for the calendar year 1929, asserted by respondent due to his disallowance of a claimed loss deduction amounting to $60,024.27.

Respondent, by his answer, affirmatively avers that one item of income reported in the return in the amount of $71,524.90 as gain from the sale of real estate in 1929, should be increased to $94,024.96 and asserts claim for an increase in the above mentioned deficiency. Petitioner’s reply to the answer denies such averment. At the hearing respondent conceded the correctness of petitioner’s return as to this item of income and no evidence has been submitted thereon.

Petitioner is an individual residing at Brooklyn, New York.

During 1924 or 1925 petitioner purchased 51 percent of the outstanding stock of the Algonquin Electric Co. of New York at a cost of $60,024.27 and became president and general manager of that corporation, hereinafter referred to as the New York corporation. That corporation encountered financial difficulties and in 1926 an equity receiver was appointed. The petitioner secured a composition agreement with the corporation’s creditors for the purpose of effecting a reorganization. Under such agreement the corporation executed notes in an amount equal to about 60 percent of the creditors’ claims. In 1926, the reorganization was effected through the incorporation of the Algonquin Electric Co. of Delaware, hereinafter referred to as the Delaware corporation.

Due to such reorganization, the petitioner, in 1926, received 10,000 shares of stock of the Delaware corporation in exchange for his shares of stock of the New York corporation. He was not in control of the Delaware corporation and he did not become an officer thereof. Emil Potter became president of the Delaware corporation and his wife owned the controlling stock interest.

On January 23, 1928, Emil Potter as complainant filed in the U.S. District Court, Southern District of New York, an application for an equitj'- receivership for the Delaware corporation. Thereafter, in the same month, certain creditors of the Delaware corporation filed a petition in bankruptcy, but such petition was denied and the equity receiver remained in possession of the corporation’s assets. A creditors’ committee was then granted permission to intervene in the equity receivership proceedings and after a trial of the issues involved, including that of insolvency, the court, in March 1928, rendered judgment that the Delaware corporation was insolvent. Subsequently, during 1928, the Poughkeepsie Trust Co. obtained leave, in the equity receivership proceeding, to commence foreclosure proceedings on the mortgages, which it owned, on the Delaware corporation’s plant located at Poughkeepsie, New York. The foreclosure suit was not terminated until January or February 1929, and the property was sold in that year. The receivership proceedings were not finally terminated until 1933.

At the time the equity receivership proceedings were commenced in January 1928, the Delaware corporation owed the members of the creditors’ committee approximately $120,000, including the total amount due under the previous creditors’ composition of 1926. The record does not disclose whether such amount was the corporation’s total indebtedness in January 1928. There is no proof of the Delaware corporation’s assets.

The petitioner believed that his stockholdings had a prospective value if a reorganization could be effected and during 1928 and up to the time of the sale, under foreclosure, of the plant in 1929, he endeavored to engineer a reorganization. He interviewed the creditors and the attorney for the Poughkeépsie Trust Co. and had a reasonable hope of their aid providing he could work out a satisfactory plan. Petitioner’s plan was to raise about $250,000 new capital and secure a contract with the Sachs Bearing Co. of Germany to manufacture ball bearings at the Poughkeepsie plant. However, he made no progress in his plans during 1928, for he could not raise additional cash capital until he consummated some definite program for the manufacture of ball bearings and, on the other hand, the Sachs Bearing Co. would make no definite agreement unless petitioner secured the additional capital. Other contemplated plans failed to materialize.

Petitioner was one of about fifteen stockholders of the Delaware corporation and he did not secure the cooperation of any of the others in his plans for a reorganization. He was not on good terms with Emil Potter - and his wife, who owned the controlling stock interest. In fact, Potter and his wife had organized another corporation. Petitioner endeavored to have the equity receivers bring suit against the Potters for the recovery of the value of certain property alleged to have been taken from the Delaware corporation. Petitioner also endeavored to have suit brought against the members of a syndicate for the recovery of an amount of $120,000 alleged to be due under a contract between the syndicate and the New York corporation. Neither suit was instituted. When the Poughkeepsie plant was sold in 1929 petitioner abandoned all hope of effecting a reorganization.

In his return for 1929, petitioner deducted the cost of his stock as a loss. Respondent disallowed the deduction and determined that the loss was sustained in 1928 when the stock became worthless as conceded by the majority stockholders of the Delaware corporation.

Section 23 (e) of the Revenue Act of 1928 provides for a deduction of “ losses sustained during the taxable year.” Without question petitioner’s loss on his Delaware corporation stock was sustained in the year in which such stock became worthless. Forbes v. Commissioner, 62 Fed. (2d) 571. Thus, the real issue before the Board is, in which year did the stock actually become worthless and not in which year did petitioner, in his own opinion, become convinced of the utter worthlessness of his stock.

Petitioner’s case has been presented on the theory that he individually had hopes all during 1928 and the early part of 1929, of effecting a reorganization and that if accomplished his stockholdings would have some prospective value. Petitioner’s testimony was directed chiefly to his efforts to reorganize and his hopes of accomplishing that purpose. He did not lose hope until the Poughkeepsie plant was actually sold, under foreclosure, in 1929. However, with respect to establishing the worthlessness of a stock investment for the purpose of securing a loss deduction from gross income, the Supreme Court, in United States v. White Dented Mfg. Co., 274 U.S. 398, said that a loss “ may be complete enough for deduction without the taxpayers establishing that there is no possibility of an eventual recoupment.” In other words, if in fact stock becomes worthless in a taxable year, the taxpayer’s entertainment of a hope that by some turn of events he may recoup the apparent loss, does not form a basis upon which the loss deduction may be denied in that year. Conversely in the present proceeding, petitioner’s hopes and his efforts to bring those hopes into being during 1928 are not a sufficient basis upon which to conclude that his stock was not worthless during that year, if in fact the stock was worthless in 1928.

The record discloses that in March 1928, the Delaware corporation was adjudged insolvent. Petitioner has failed to establish the extent of such insolvency. Was the corporation so hopelessly insolvent that it was self-evident that in 1928 the stock was absolutely worthless ? Or, did the corporation on December 31, 1928, have assets of a value which, compared with its liabilities, would necessitate a conclusion that the stock was not then worthless? We do not know the answers to those questions for petitioner has not proved the facts relative thereto. On the other hand, respondent has determined that the stock became worthless in 1928 and that the loss was sustained in that year. In the recent case of Taylor v. Commissioner, 70 Fed. (2d) 619, the court discussed the extent of the burden of proof resting upon the taxpayer in proceedings before this Board. Although the full import of that decision would seem to lighten the burden of proof heretofore placed upon the taxpayer by numerous decisions by this Board and the courts, it was stated therein without qualification that the taxpayer had the burden of proving that the Commissioner’s determination was wrong. In this proceeding the Commissioner’s determination rests upon a finding that petitioner’s stock in the Delaware corporation became worthless during the taxable year 1928 and such finding and the determination of tax liability thereon is prima facie correct. Petitioner has failed to prove sufficient facts to establish that his stock was not worthless in 1928. Accordingly the respondent’s determination must be approved.

Judgment will be entered for the respondent.