text:
    Ethel Weisser, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78606.
    Promulgated June 12, 1935.

      T. M. WilMns, Esq., for the petitioner.

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

Black:

This report deals with a motion filed by respondent to dismiss the amended petition of Ethel Weisser filed February 23. 1935. The grounds stated in respondent’s motion are as follows: “ In support of his motion the respondent represents that as this taxpayer did not sign or verify the petition filed on December 15, 1934, and no authority has been shown authorizing the one who did sign to bring an appeal for this taxpayer, the petition on February 23, 1935, must be regarded as the original petition of this taxpayer and this petition was filed 159 days after the deficiency notice was mailed, which is beyond the statutory period.”

Eespondent’s motion came on for hearing May 1, 1935. An examination of the facts of record shows that on December 15, 1934, a petition was filed with the Board, captioned “ Samuel J. Weisser, Ethel Weisser, Petitioner, v. Commissioner of Internal Revenue.” This petition, which was given Docket No. 78109 by the Board, is in words and figures as follows:

The above-named petitioner hereby petitions for a redetermination of the deficiency set forth by the Oommissioner of Internal Revenue in his notice of deficiency, IT: O: P-7, dated September 17th, 1934, and as a basis of his proceeding alleges as follows:
1. The petitioner is an individual, residing at 698 West End Avenue, in the Borough of Manhattan, City and State of New York.
2. The notice of deficiency (a copy of which' is attached and marked Exhibit A) was mailed to the petitioner on September 17th, 1934.
3. The taxes in controversy are:
Income taxes for the calendar year 1931 for $1,117.81
Income taxes for the calendar year 1932 for $725.55.
4. Tile determination of tax set forth in the said notice of deficiency is based upon the following errors:
The assessment herewith protested was based upon taxpayer’s liability as transferee of the assets of the Seth Realty Co., Inc., for deficiency due by said taxpayer.
5. The facts upon which the petitioner relies as the basis of this proceeding are as follows:
The taxpayer was a stockholder of the Seth Realty Co., Inc., as the result of an investment in said company. The Seth Realty Co., Inc., was a realty holding corporation, whose assets were foreclosed on April 1st, 1932, resulting in the loss of taxpayer’s investment in full. The taxpayer, under these circumstances, did not receive any assets of Seth Realty Co., Inc. and should not, therefore, be held liable as transferee.
Wherefore, the petitioner prays that this Board may hear the proceeding and abate the taxes herewith assessed.
[Signed] Abraham: Rappapart, C. P. A.
Counsel for Petitioner,
Office & P. O. Address, 122 East 42nd Street, New York City.
Samuel J. Weisser, being duly sworn, says:
That he is the petitioner above-named; that he has read the foregoing petition, or had the same read to him, and is familiar with the statements contained therein, and that the facts stated are true, except as to those facts stated to be upon information and belief, and those facts he believes to be true.
[Signed] Samuel J. Weisser, Ethel Weisser, Agent. (jurat)

On January 26, 1935, respondent moved to dismiss the foregoing petition because it was not verified as required by the Board’s rules. Respondent's motion came on for hearing February 23, 1935, on which date petitioner Samuel J. Weisser asked leave and was permitted to file an amended petition, properly verified under the Board’s rules. Whereupon, the Board entered an order denying respondent’s motion to dismiss as to Samuel J. Weisser, and granting respondent the usual time within which to answer or move in respect of the amended petition.

Nothing is now before us with respect to the amended petition of Samuel J. Weisser. Respondent has filed his answer thereto and the proceeding is on the Board’s general calendar for future hearing. On the same day, February 23, 1935, on which Samuel J. Weisser filed his amended petition, Ethel Weisser filed a document which she styled amended petition. This amended petition was given Docket No. 78606. It is regular in form and respondent urges no objection against it on that ground, but contends that prior to the filing thereof there was no appeal filed with the Board by Ethel Weisser and that this amended petition was filed 159 days after the notice of deficiency was mailed to her and was therefore too late. Respondent introduced in evidence copy of a mailing list which shows that deficiency notice was mailed to “Mrs. Ethel Weisser,” September 17,1934. There is no dispute on this point.

Petitioner Ethel Weisser, without objection, has offered in evidence an affidavit which reads as follows:

I, Ethel Weisser, of 698 West End Avenue, New York, New York, the petitioner in the petition to the United States Board of Tax Appeals, Docket No. 78606, which petition was originally filed on my behalf on December 15, 1934, which said petition was jointly filed on behalf of my husband, Samuel J. Weisser, and on my behalf and as originally filed bears United States Board of Tax Appeals Docket No. 78100. My petition has since been amended and separated from the joint petition of my said husband and now the Board has assigned to my said separate amended petition Docket No. 78606. The said joint petition was signed and filed on my behalf with the clerk of the United States Board of Tax Appeals on December 15, 1934, by my duly authorized agent, Abraham Bappaport, Certified Public Accountant of 122 East 42nd Street, New York, New York.
The said joint petition was so filed by the said Mr. Bappaport as aforesaid in accordance with my direct authorization, instruction and request, and in accordance with the authorization, instruction and request of my husband, the said Samuel J. Weisser.
The alleged liability of myself and my said husband from which we both jointly appealed in the said petition bearing Docket No. 78100 relates to our alleged liability as transferees of the Seth Bealty Company, Incorporated, for the calendar years 1931 and 1932 with respect to which the Commissioner of Internal Bevenue, under authority of Section 272 (a) of the Bevenue Act of 1934, addressed deficiency notices to me and to my said husband as such alleged transferees under date of September 17, 1934, determining deficiencies against us as transferees of the said Seth Realty Company, Incorporated, in the amount of $1,117.81 for the calendar year 1931 and $725.55 for the calendar year 1932. These same deficiencies were determined by the Commissioner of Internal Revenue against the said Seth Realty Company, Incorporated, for the calendar years 1931 and 1932, and inasmuch as the alleged liability of myself and my husband as alleged transferees of the said Seth Realty Company, Incorporated, was involved in each of the said deficiency notices mailed to me and to my husband on September 17, 1934, it appeared to be appropriate to my husband and to me that we file our petitions jointly to the United States Board of Tax Appeals in order to have the United States Board of Tax Appeals properly redetermine the s.aid deficiencies.
Since the said proper and authorized filing by the said Mr. Rappaport on December 15, 1934, of my said petition jointly on my behalf and on behalf of my husband, bearing Docket No. 78100, we have each caused to be filed separate amended petitions to conform to the rules of the United States Board of Tax Appeals. My amended petition bears Docket No. 78606 and my husband’s amended petition bears Docket No. 78100.
Attached hereto and marked “Exhibit A” is a true copy of the statement which was attached to the notice of deficiency dated September 17,1934, which the Commissioner of Internal Revenue mailed to this petitioner on that date. Attached hereto and marked “ Exhibit B ” is a true copy of the statement attached to the notice of deficiency mailed to my husband, the said Samuel J. Weisser-, by the Commissioner of Internal Revenue on September 17, 1934. Copies of these two said statements are attached for the purpose of showing that the alleged liabilities of this petitioner and her husband, the said Samuel J. Weisser, from which the said joint petition was filed on December 15, 1934, each relate to the identical alleged liability of the Seth Realty Company, Incorporated.
(jurat) [Signed] Ethel Weisser.

Abraham Rappaport, who signed the petition in Docket No. 78100, captioned “Samuel J. Weisser and Ethel Weisser v. Commissioner of Internal Revenue,” filed December 15, 1934, testified orally at the hearing on respondent’s motion to dismiss. His testimony fully corroborated the statements made by Ethel Weisser in .the foregoing affidavit.

We think that on this evidence it is clear that the petition in Docket No. 78100 filed December 15, 1934, and captioned Samuel J. Weisser and Ethel Weisser ”, was intended to be a joint petition, and while it did not comply with the Board’s rules of practice, it was the right of Samuel J. Weisser and Ethel Weisser to file amended petitions which would comply with the Board’s rules of practice and this we think they have done.

Under authority of Percy N. Powers, 20 B. T. A. 753, we think the amended petition filed by Ethel Weisser on February 23, 1935, dates back to the filing of the petition in Docket No. 78100, on December 15, 1934, and that respondent’s motion to dismiss for lack of jurisdiction must be denied. Cf. Jacob Held, Jr., 20 B. T. A. 863. Respondent relies on the Powers case as authority for granting his motion to dismiss in this proceeding. However, we think the Powers case is distinguishable on its facts from the facts in the instant case and when properly interpreted does not support respondent’s contention.

The facts in the Powers case were, briefly, that a petition was filed with the Board in which ten names appeared in the caption as petitioners. Only five of these petitioners signed and verified the petition. The Commissioner moved to dismiss the appeal of those whose names were in the caption but who did not sign or verify the petition. As grounds for his motion the Commissioner alleged that as these persons did not sign or verify the petition of January 31, 1930, and no authority had been shown authorizing those who did sign to bring the appeal for those who failed to sign, the petition filed on March 5, 1930, must be regarded as their original petition and this petition was filed 92 days after the mailing of the deficiency notices, which was beyond the statutory period.

In granting respondent’s motion to dismiss the appeals of those whose names appeared in the caption of the petition but who had not signed and verified it, we did so on the ground that there was no evidence that they authorized the filing of the petition at the time it was filed. On that point we said:

In tliis proceeding nothing lias been shown which in any way indicates that the Empire Trust Co. had authority to execute and file a petition on behalf of any of the taxpayers. Counsel for petitioners made no attempt at the hearing on respondent’s motion to establish that such authority existed in the Empire Trust Co. Rule 5(g) of our rules of practice requires a verification of the petition by the petitioner. We have in a number of cases accepted imperfect petitions signed only by counsel for the taxpayer and allowed amendments to conform to the requirements of the rules, but this was on the theory that the person signing in the first instance was duly authorized to do so. In this case the name of counsel who appeared at the hearing was typed in the original petition, but he did not sign the petition.

In the instant case the name of counsel was actually signed in his own handwriting to the petition filed December 15, 1934, and this same counsel testified at the hearing, as has already been shown, that he was fully authorized by Ethel Weisser to file the petition for her. He is corroborated in that statement by the affidavit of Ethel Weisser, already set out herein in full.

In view of these circumstances we think it must be held that the petition filed in Docket No. 78100 on December 15, 1934, was a joint petition of Samuel J. Weisser and Ethel Weisser, that it was filed within 90 days from the mailing of the deficiency notice to each and that the amended petition filed by Ethel Weisser February 23, 1935, and docketed No. 78606, should be considered as properly filed, relating back to the filing of the joint petition on December 15, 1934, in Docket No. 78100, and that respondent’s motion to dismiss should be denied. Percy N. Powers, supra; Jacob Held, Jr., supra.

An order will be entered denying respondents motion to dismiss and granting respondent the usual time to answer or move with respect to the amended petition.


source: Caselaw Access Project

author: Aeundell:

license: Public Domain

text:
    The Highlands, Evanston-Lincolnwood Subdivision, First Addition, Trust No. 1546, Central Republic Trust Company, as Successor Trustee by Consolidation, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Highlands, Evanston-Lincolnwood Subdivision, Trust No. 1521, Central Republic Trust Company, as Successor Trustee by Consolidation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74464, 74465.
    Promulgated June 12, 1935.

      Franz W. Oastle, Esq., and Raymond A. Duggan, O. P. A., for the petitioners.

      B. M. Goon, Esq., and John W. Smith, Esq., for the respondent.
   OPINION.

Aeundell:

The salient facts concerning these two trusts may be briefly stated. The organizers of the Paramount Realty Corporation located two tracts of land available for subdivision. Not having sufficient funds of their own to handle the deals, they procured from a number of individuals sufficient funds to start the subdivision enterprises. In order to protect the individuals advancing the money, title to the land was placed in the trustee. Paramount Realty was appointed sales agent. Under the agency and trust agreements Paramount Realty collected and retained a portion of the initial payments made by the purchasers of lots. The amount over and above the part retained by Paramount Realty was paid to the trustee, which also collected all installments on deferred payment sales. The amounts so received by the trustee were received primarily for the benefit of those who advanced the funds necessary to start the projects. They were to receive stated amounts and any excess was to go to Paramount Realty.

The respondent has classified these trusts as associations and taxed them as corporations.

Section 701 (a) (2) of the Revenue Act of 1928 provides that “ The term £ corporation ’ includes associations, joint stock companies, and insurance companies.” The respondent has formulated regulations for the purpose of defining the term “ association ” and distinguishing associations from other organizations. See articles 1312, 1313, and 1314 of Regulations 74. The revenue act itself does not define what constitutes an association. The Supreme Court, in Hecht v. Malley, 265 U. S. 144, has partially defined the term as follows:

The word “association” appears to be used in the Act in its ordinary meaning. It has been defined as a term “used throughout the United States to signify a body of persons united without a charter, but upon the methods and form used by incorporated bodies for the prosecution of some common enterprise.” 1 Abb. Law. Diet. 101 (1890) ; 1 Bouv. Law Diet. (Rawle’s 3d Rev.) 269; 3 Am. and Eng. Enc. Law (2d Ed.) 162; and Allen v. Stevens, 33 App. Div. 485, 54 N. Y. Supp. 8, 23, in which this definition was cited with approval as being in accord with the common understanding. Other definitions are:
“ In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having tlie general form and mode of procedure of a corporation.” Webst. New Internat. Diet.
“ [U. S.] An organized but unebartered body analogous to but distinguished from a corporation.” Pract. Stand. Diet.

There have been, a great number of cases before us and in the courts involving the proper classification of groups of persons associated under instruments designated as trusts. None of the decisions lay down a definitive rule into which all cases can be fitted and accurately judged. In fact, in one of the recent cases, Coleman-Gilbert Associates v. Commissioner, 76 Fed. (2d) 191, it is said that “ the decisions are seemingly in a hopeless state of confusion.” The court there, after reviewing a number of decisions, had this to say:

Prom tbe decisions of the Board of Tax Appeals and the several; Circuit Courts of Appeals, it is impossible to mark out any definite pathway to follow in every ease. The only conclusion is that each case must depend on its own state of facts.

In view of the lack of comprehensive definition and the absence of any well defined trend of judicial decision, we must find the solution through the process of “ balancing the resemblances which petitioner bore to a trust, against those which it bore to a corporation, and considering also the facts as to what the petitioner, actually did.” Lucas v. Extension Oil Co., 47 Fed. (2d) 65; Commissioner v. Brouillard, 70 Fed. (2d) 154, 158.

The petitioner here was in form a trust. There was a grantor and a trustee, and there were beneficiaries. There wras but one trustee, who took title to the property for the benefit of the beneficiaries. The trustee was limited in its powers to deal with the property. In these respects the organization had the characteristics of a trust rather than that of a corporation. There was not present in the organization the control that corporate stockholders customarily may exercise. While under the more recent cases it is held that “ beneficiary control is not a requisite to the taxability of a trust as a corporation”, Morrissey v. Commissioner, 74 Fed. (2d) 803, still “the absence of such control is assuredly an element which should be taken into consideration.” Extension Oil Co., 16 B. T. A. 1028; affd., 47 Fed. (2d) 65.

About the only resemblance of this organization to a corporation was the issuance of certificates of interest to beneficiaries. This in itself does not necessarily classify it as a corporation. There was no group corresponding to corporate directors in duties or powers. The functions of the trustee were limited to seeing that sales contracts complied with the trust agreement; it had no power to exercise general supervision over sales or to determine policies as would a board of directors. This case differs from that of /Swanson v. Commissioner, 76 Fed. (2d) 651. In that case the organization was created for a definite period of time for the purpose of managing an apartment building. The trustee had broad powers including the power to exchange, reconstruct, remodel, sell or improve at their discretion, or to borrow money secured by the property. In this case, as pointed out above, the trustee had no such broad powers. Here the acts of the trustee were performed under direction of the trust agreements and supplements thereto and these were limited to such matters as were incidental to its administration of the trust rather than extended to the broad scope usually enjoyed by corporate directors as in the Swanson case.

The substance of the arrangement here in each case was to place title to a single tract of land in trust for the purpose of affording security to the group that advanced the money to enable the Paramount Eealty Corporation to subdivide and sell the .land. The organization bore little, if any, resemblance to a corporation in either structure or operation. In our opinion it should be classified as a trust and not as an association. Cf. Tyson v. Commissioner, 54 Fed. (2d) 29; Commissioner v. Duckwitz, 68 Fed. (2d) 629; Coleman-Gilbert Associates v. Commissioner, supra.

The second point has to do with the method of computing income from the sale of lots. The allegation of error, denied by the respondent, is: “Use of an improper accounting method to reflect taxable income or losses.” No evidence was introduced which will support any finding as to the method of keeping books. Two of petitioners’ witnesses were examined as to the Paramount Eealty Corporation’s method of bookkeeping. One of them testified that the 25 percent of the down payment retained by Paramount “ went into the Paramount Eealty Corporation’s general account ”, and, “ I imagine we carried it as a commission item.” The other witness stated: “ The twenty-five percent on our books was treated as the down payment, the first twenty-five percent was treated as a sales expense.” Further, on cross-examination, it [the 25 percent] was allocated to sales expenses, because it was all paid out for sales expenses, or for money that we had advanced for sales promotion or advertising.”

We gather from statements in the deficiency notice and the briefs of the parties that the respondent treated the commission retained by the Paramount Eealty Corporation as a deductible business expense rather than as a reduction of either the selling price of the lots or the initial payment thereon. This is in accordance with the long established practice of the Bureau. See I. T. 2305, C. B. V-2, p. 108; art. 352, Eegulations 74 and 77; art. 44-2, Eegulations 86. Petitioners’ claim, as we understand it, is that the net amount received after deducting the part retained by the Paramount Realty Corporation should be treated as the selling price. This would have the effect of throwing back into the earlier years some of the profit ultimately realized on the deferred payment sales. We know of no authority for this method of computing income. The gross amount which purchasers contracted to pay was the selling price and must be accounted for as such, regardless of bookkeeping or accounting methods. Commissions on sales are business expenses to be deducted in the years of accrual or payment, according to whether the taxpayer is on the accrual or cash basis, and are to be deducted in arriving at net income. This is the normal method of determining income and petitioners have not shown any reason for a departure therefrom. Some argument is made as to the lack of value of the sales contracts. We do not see what this has to do with the question presented; moreover, there is no evidence at all as to the value of the contracts.

Decision will he entered under Rule 50.


author: Sternhagen :

text:
    Charles M. Thorp, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. W. Denning Stewart, Petitioner, v. Commissioner of Internal Revenue, Respondent. Earl F. Reed, Petitioner, v. Commissioner of Internal Revenue, Respondent. Roy G. Bostwick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53883-53886.
    Promulgated June 12, 1935.

      Charles M. Thorp, Jr., Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioners were partners in the practice of law. The deficiencies are in 1928 income tax, of $315.48 as to Thorp, $216.54 as to Stewart, $163.72 as to Reed, and $297.93 as to Bostwick. The controversy is common to all in that it involves the character for tax purposes of an amount received in 1928 by the firm, the petitioners urging that it was a dividend (Revenue Act of 1928, section 115) and hence free from normal tax (section 25), and the respondent, that it was an ordinary fee for professional services and hence subject to tax without the dividend credit. The facts are substantially all stipulated and need not, therefore, be specially found nor set forth in full.

The petitioners, before 1928, agreed with a client, Henderson, to conduct litigation for the recovery of 50,000 shares of Plymouth Oil. Co. stock from another, Farquhar, the fee to be $10,000 if unsuccessful, or 10 percent of the amount recovered, if successful. Pending the litigation on appeal, the shares were in 1926 placed in escrow with the approval of the court, “ with the right in Farquhar and Henderson to stipulate that the same or any part thereof may be sold, the proceeds of such sale or sales to be deposited with said trust company in place of the stock so sold.” Dividends were declared and paid by the corporation before 1928 and received by the trust company in escrow,, and retained until after the final termination of the litigation favorably to petitioner’s client, the Supreme Court of the United States having denied certiorari in 1927. The shares and accumulations were then delivered by the trust company to Henderson, and in 1928 petitioners received their agreed shares and accumulations. They claim that because they had an equitable interest in the escrow fund, the cash received by them must be regarded in their hands as dividends just as they undoubtedly were when distributed by the corporation.

This, in our opinion, is clearly not so. Strictly speaking, the amount received by petitioners in 1928, whether from Henderson or the escrow agent, was not, as section 25 expressly requires, an “ amount received as dividends (1) from a domestic corporation.” Nor was it, as section 115 requires, “ a distribution made by a corporation to its shareholders ”, although it had its earlier source in such a distribution. But at that earlier time petitioners were not shareholders of the corporation. When petitioners received it in 1928 it had lost its character as a corporate distribution and they received it only by virtue of their contract for services. To them it was compensation for services, and the Commissioner correctly treated it as such. Roscoe H. Aldrich, 3 B. T. A. 911; Albert Russel Erskine, 26 B. T. A. 147, 164; see Omaha National Bank v. Commissioner, 75 Fed. (2d) 434; Lansill v. Commissioner, 58 Fed. (2d) 512; cf. Schneider v. Duffy, 43 Fed. (2d) 642.

Judgment will be entered render Rule 50.


author: Matthews:

text:
    Western Maryland Dairy Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74017.
    Promulgated June 13, 1935.

      Henry 8. Wingate, Esq., for the petitioner.

      O. G. Holmes, Esq., for the respondent.
   OPINION.

Matthews:

Petitioner, a corporation, seeks the deduction in 1931 of $69,209.59, representing the total sum of reductions by petitioner of its employees’ indebtedness to it and actual cash payments by petitioner to its employees, both reductions and payments being intended to relieve hardship on its employees resulting from their purchase of its own stock. This is the sole issue. The deduction is claimed as an expense under section 23 (a), Revenue Act of 1928, or, failing that, as a loss under section 23 (f). Petitioner did not take this deduction in its income tax return, but now seeks on account thereof a refund for taxes erroneously paid in the amount of $8,069.95, and a denial of the deficiency determined by the respondent in the amount of $235.20.

Briefly summarized, the facts are that the president and other officers of petitioner devised a scheme in November 1928 by which it would secure the faithful cooperation of its key ” employees in its dairy business by financing the purchase by them of stock in the corporation. It was arranged, therefore, that petitioner’s president and another should act as trustees to hold the stock purchased by the employees until it should be fully paid for. It was then to be delivered to the purchasers. In the meantime, however, they were to reduce the principal obligation by as much as $10 a share a year and pay interest on the balance, but were to have credited to them any dividends declared. The money for the purchase was advanced by the corporation, the total being $132,706.59. Eighteen employees responded and bought stock through the corporation on credit.Three others bought in the open market at the suggestion of the president of petitioner. The trustees held the stock until February 4, 1931, when it was exchanged, pursuant to authorization by the directors and the employee-purchasers, for the stock of the National Dairy Products Corporation, share for share. Those employee-stockholders who by then had paid up for their stock and also those who had bought originally in the market came in under the same plan and made an exchange. The exchange was part of a plan by which the National Dairy Products Corporation was to absorb petitioner. Petitioner had in 1930 and 1931 about 75,000 shares of common stock outstanding while the National Dairy Products Corporation then had some 6,000,000 shares. On May 1, 1931, the directors of petitioner decided to make the reductions and cash payments in question, and did so on the basis of a cost of $48 a share. The then market value of the National Dairy Products Corporation stock was $43 a share. The reason for this adjustment, as Thomas, the petitioner’s assistant treasurer testified, was to relieve the hardship of the employee-stockholders who had been induced by the corporation to buy its stock, and thus to remove the general soreness and dissatisfaction toward petitioner which the fulfillment of their contracts of purchase with petitioner was causing. In other words, the interest of petitioner’s principal employees in the corporation which would nominally have resulted from stock ownership, had now, owing to the fall in market value of the stock, become a burden and, their purchases having been induced by the corporation, this burden a source of estrangement between the corporation and its employees.

It is not suggested that the credits and payments were in the nature of additional salary, and there is no indication in the record that the number of shares bought by a particular employee had any relation to his salary as such, except, naturally, that those with larger salaries had more money to invest and for the most part bought more stock than the lesser employees.

, Were these credits and cash payments either deductible expenses or losses? Petitioner made the credits and payments voluntarily and was under no legal obligation to do so. A gift made voluntarily is not in the category of losses, and we must conclude that they were not losses. It remains to examine the question whether such payments made on grounds of business expediency, to secure the good will of its employees, can be called “ ordinary and necessary expenses ” within the meaning of the statute. We do not question the avowed purpose for which the payments were made nor attempt to set aside petitioner’s judgment that it would in the long run be advantageous to it thus to remove the cause of disaffection of its principal employees. We are concerned only with the statutory definition which limits the deduction.

While it is clear that “ ordinary ” as used in the statute is not confined to what would be habitual in the experience of the particular taxpayer, it must be what is normal in the life of the group to which the taxpayer belongs, in the life of the community. Such an ordinary expense, for instance, would be counsel’s fees incurred in a lawsuit affecting the safety of the business. It is the expected method of defending the taxpayer from attack. This was made clear by the Supreme Court in Welch v. Helvering, 290 U. S. 111. The facts of that case set forth a situation closely paralleled by the situation here. There, the secretary of a corporation which had been adjudged an involuntary bankrupt and had had a discharge from its debts, in order to solidify his personal credit with former customers of the corporation, decided to pay the corporation’s debts so far as he was able, and accordingly made substantial payments over a period of years, which he sought to deduct as ordinary and necessary expenses. The Court pointed out that such conduct conformed to no known business practice, to no settled norm, for men do not ordinarily pay debts of others without legal obligation to do so. “ Indeed ”, said Cardozo, J., speaking for the Court, “ if language is to be read'in its natural and common meaning * * * we should have to say that payment in such circumstances, instead of being ordinary is in a high degree extraordinary.” It was assumed by the Court that the expenses were “ necessary for the development of the petitioner’s business, at least in the sense that they were appropriate and helpful.” “ But ”, the Court continued, “ the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary.” In the instant ease, therefore, even if we assume that the credits and cash payments by petitioner to its employee-stockholders were wholly desirable to promote its own interests, we can not say that the voluntary surrender of $69,000, without any legal compulsion, was an “ ordinary ” expense. On the contrary, we are of the opinion that it was quite extraordinary.

The cases upon which petitioner relies are clearly distinguishable. We may lay on one side the line of cases where the corporation has made contributions to charitable or educational institutions of the town where its works are situated in the expectation that it will reap a direct business advantage from the improved health or condition of its employees. American Rolling Mill Co. v. Commissioner, 41 Fed. (2d) 314 (C. C. A., 6th Cir.); Popular Dry Goods Co., 6 B. T. A. 78; Poinsett Mills, 1 B. T. A. 6; Holt-Granite Mill Co., 1 B. T. A. 1246; H. H. Bowman, 16 B. T. A. 1157; Corning Glass Works v. Lucas, 37 Fed. (2d) 298 (App. D. C.). On one side also we must leave those cases allowing the deduction of contributions made to combat dangers to the business itself. Alexander Sprunt & Son, Inc., 24 B. T. A. 599; George M. Cohan, 11 B. T. A. 743. Gifts made to a few individual employees are not expenditures for the benefit of all.

More nearly akin to the situation here was that prevailing in Blackwell Oil Gas Co. v. Commissioner, 60 Fed. (2d) 257 (C. C. A., 10th Cir.), where the corporation was denied the deduction of gratuitous payments to stockholders in settlement of disputes between them. Harris & Co. v. Lucas, 48 Fed. (2d) 187 (C. C. A., 5th Cir.), cited by petitioner, is similar, but distinguishable both on its facts and its ratio decidendi. There a department store compromised with its creditors by paying 50 cents on the dollar. It lost its credit thereby, and found, after several years’ experience, that it could not profitably carry on its business on a cash basis. As it deemed absolutely necessary a return to its old credit basis and believed it could not effect it' otherwise than by voluntarily assuming and paying the unpaid remainder of its extinguished obligation, it did so; and this amount was allowed as a deduction by the Circuit Court, reversing this Board, 16 B. T. A. 705. The court states in its opinion, one of the three judges dissenting, that the words “ ordinary ” and “ necessary ” in the statute were not to be read conjunctively, a view which the Supreme Court has since, as we have seen, repudiated in Welch's case. The facts are also distinguishable. The corporation in that case knew by trial and error that the payments were at least necessary, for it had tried for several years to do business on the new basis before yielding to the alternative; here, the asserted necessity is only a matter of opinion 'held by petitioner’s officers. Again, the corporation there was paying obligations for which it felt itself morally liable (if moral compulsion may be said to act on corporations) and for which it had once been legally liable. Here, the petitioner bestowed a simple gratuity, paid something for which it had never been legally liable, and for which, so far as the record reveals (and unless strong pressure had been brought on unwilling employees to make them buy its stock, which is not suggested), the petitioner was not morally liable. A falling market was common to practically all corporation stocks in the years in question, but it can not therefore be called usual conduct for a corporation voluntarily and of grace to relieve the resulting hardships on its stockholders.

We hold that the deduction should not be allowed.

Judgment will be entered for the respondent.


author: Murdock:

text:
    Swiss Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60177, 61002, 63088, 70998.
    Promulgated June 14, 1935.

      John E. MeClwre, Esq., and R. N. Miller, Esq., for the petitioner.

      H. A. Cox, Esq., for the respondent.
   OPINION.

Murdock:

The affirmative issue raised by the Commissioner will be discussed first. The parties have vigorously contested this point in able and extensive briefs. Section 201(c) of the Revenue Act of 1926 provides that “ amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock ” and “ 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.” None of the exceptions contained in section 203 applies. The general rule of section 203 (a) is that the entire amount of the gain determined under section 202 shall be recognized. That gain is the excess of the amount realized from the exchange of the stock over the cost of the stock. The amount realized is the fair market value of the property received. Sec. 202 (a) and (c). Thus, if the petitioner bought the Union stock and paid no more than $5,000,000 for it, it realized a taxable gain of $2,906,043.32 in 1926 from the liquidation of Union.

The Commissioner has the burden of proving that the petitioner realized a gain in 1926 from the liquidation of Union which should be included in the petitioner’s income for 1926. The petitioner became the sole stockholder of - Union and received in liquidation of Union the assets of that corporation subject to its liabilities. The parties have stipulated that the value of the net amount of property received in the distribution was $7,906,043.32. The Commissioner contends that the excess of this amount over the cost of the Union stock to the petitioner was taxable gain for 1926. He concedes that the cost of the stock was $5,000,00o, but claims that it was no more than that amount. He therefore subtracts the cost of $5,000,000 from the amount realized, $7,906,043.32, to show a gain of $2,906,-043.32. He has fully sustained the burden of proof on this issue.

The petitioner has advanced a number of arguments in opposition to the tax. First it contends that the purchase of the stock and the liquidation of Union must be disregarded for tax purposes because they were but parts of a single transaction which had for its purpose the acquisition of the assets of Union. It argues that its intention to acquire the properties of Union is shown by the following facts, among others: It needed new properties to make its business profitable; the old stockholders of Union were allowed to take out a substantial amount of the assets of Union which were not desired by the petitioner; and the petitioner dissolved Union and took over its assets at the earliest possible date under the contract to purchase. It relies very strongly upon the case of Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309. The collector was there contending that the properties were acquired in connection with a reorganization and Prairie was not entitled to a stepped-up basis for depletion of cost to it, but had to take the same basis as applied to Olean. See also Warner Co., 26 B. T. A. 1225. Here neither party is contending that there was a reorganization and it is clear that there was none. Cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462. The contract in the Prairie case was between Prairie, as buyer, and Olean and its stockholders, as sellers. The purchase price was paid to agents of the selling corporation and its stockholders. The contract there recited that its purpose was to transfer the leases owned by Olean for cash. Delivery of the physical properties was to be made as of a date five days before the contract was signed. Alternative methods of effecting the transfer of the physical properties were provided for — one by the transfer of the properties themselves, the other by a transfer of the corporate stock within 25 days. For reasons not disclosed by the record, the sellers transferred the stock of Olean. That corporation then made a formal transfer of its properties to Prairie, and on the same day dissolved. The question in that case was not the amount of gain or loss upon the liquidation of Olean, but was whether Prairie was entitled to depletion deductions based upon the amount it had paid out. The court held that it was entitled to such depletion deductions. In deciding that there was no reorganization to deprive Prairie of this basis, the court said that the acquisition of the properties by Prairie should be treated as an entire transaction, citing Warner Co., 26 B. T. A. 1225.

There are substantial reasons in the present case why the separate transactions should not be disregarded for tax purpose and why the whole chain of events should not be regarded as a single transaction entered into for the purpose of acquiring certain properties of Union. Cf. E. F. Simms, 28 B. T. A. 988, 1013, et seq.; William H. Mullins, 14 B. T. A. 426. Although courts have a tendency at times to “ look through form to substance ”, they nevertheless have laid down the rule that tax liability must be determined by considering what the taxpayer did, not what it intended to do, or what it might have done. Weiss v. Stearn, 265 U. S. 242; United States v. Phellis, 257 U. S. 156; Clemmons v. Commissioner, 54 Fed. (2d) 209; Pugh Co. v. Helvering, 70 Fed. (2d) 776. Combs was originally authorized to negotiate for the purchase of either the assets or the stock of Union, but the contract which he actually entered into was with the stockholders of Union and provided for the purchase of the stock. The Union corporation, the owner of the assets, was not a party to and had nothing to do with the negotiations. It neither sold nor received anything. Cf. United States v. Board, 14 Fed. (2d) 459; E. H. Nielsen Co., 26 B.T. A. 223; W. H. Reisner Manufacturing Co., 13 B. T. A. 841. The parties to this proceeding are agreed that the petitioner became the owner of the stock of Union on February 2,1925. Dissolution of Union was not contemplated at that time. It was to continue for some indefinite time, at least until tlie amounts called for under the contract were paid from its earnings. Thereafter it was to mortgage its properties and deliver its notes to its old stockholders. It actually continued to hold and operate its properties for almost a year after February 2, 1925, and at the end of that time mortgaged its properties. In the meantime, the petitioner, as sole stockholder, received all dividends and benefits from the earnings of the corporation. If the petitioner was not the owner of the stock during that period, then it was not entitled to the dividends amounting to more than a million dollars which were declared during that period and transferred to the sellers of the Union stock and, consequently, that million dollars could not be a part of the cost of the stock to the petitioner. Union was a separate taxpayer during all of 1925 and joined with the petitioner in a consolidated return for a part of that year because the petitioner was the owner of all of its stock. After the petitioner had paid for the stock in full, it dissolved Union and for the first time took over the properties. The facts in the present case serve to distinguish it from the Prairie and Warner cases cited by the petitioner on this point. It is more like W. S. Dudley, 15 B. T. A. 570. The petitioner purchased the stock of Union and acquired the assets in the dissolution of Union. Those facts can not be disregarded for tax purposes. The distribution in liquidation was a taxable transaction. Cf. Vonnegut Hardware Co., 28 B. T. A. 784; Simms Petroleum Co., 28 B. T. A. 1107, 1127; affd., 74 Fed. (2d) 561; Dolomite, Inc., 28 B. T. A. 1271.

The petitioner’s next argument is that the cost of the Union stock was equal to the amount received in liquidation of Union and, therefore, it had no profit from these transactions, even if its purchase of the stock and the liquidation of Union may not be disregarded for tax purposes. The parties have stipulated that the value of the Union stock on February 2, 1925, was $7,906,043.82. The petitioner states that it acquired assets worth $9,656,043.32 (Union stock and $1,750,-000 in cash) and paid therefor $5,000,000 under the contract and $4,000,000 par value of its notes and stock to Pynchon & Go. It therefore argues that “ $2,000,000 par value of the Swiss Oil stock must be regarded as having been issued for $2,906,043.32 value of Union Gas & Oil Company stock ” and the total cost of the Union stock to it was $7,906,043.32.

There are several different reasons why this argument is unsound. It is based, in part at least, upon the false premise that the cost of property obtained by the issuance of stock is the value of the property obtained, rather than the value of the stock paid for it. Where a corporation acquires property by issuing its stock for the property, the cost of the property is the fair market value of the stock. The important thing is to determine the value of the stock paid for the property. Hershey Manufacturing Co., 14 B. T. A. 867, 872; affd., 43 Fed. (2d) 298. Where a corporation having no assets and no liabilities issues all of its stock for property and there is no better way of determining the value of the stock, that value is sometimes determined by assuming that the total value of the stock is the equivalent of the total value of the property back of it. Simms Oil Co. v. Commissioner, 74 Fed. (2d) 561; Ida I. McKinney, 32 B. T. A. 450; Pierce Oil Co., 32 B. T. A. 403 (part V); Holmby Corporation, 28 B. T. A. 1092; Ambassador Petroleum Co., 28 B. T. A. 868; Fifth Street Building, 24 B. T. A. 876; Reliance Investment Co., 22 B. T. A. 1287; Mead Realty Co., 21 B. T. A. 1062; Bay City Fuel Co., 20 B. T. A. 450; L. H. Philo Corporation, 16 B. T. A. 130; Realty Sales Co., 10 B. T. A. 1217. Cf. MacCallum Gauge Co., 32 B. T. A. 544; Commissioner v. Swenson, 56 Fed. (2d) 544; Patterson v. Commissioner, 42 Fed. (2d) 148. Under such circumstances the value of the property purchased is taken as evidence of the value of the stock paid for it. But where a corporation, having assets, liabilities, and outstanding stock, issues some new stock in exchange for some property, the situation is very different and there is much less reason to apply the above rule. Pierce Oil Co., supra.

The sellers of the Union stock received only $5,000,000 for their stock. If the cost of the stock to the petitioner exceeded that amount, the additional cost must result from the payments to Pynchon & Co. The petitioner is contending that it acquired the contract for purchase of the Union stock from Pynchon & Co., together with $1,750,000 in cash, for which it paid Pynchon & Co. $4,906,-043.32, represented by $2,000,000 par value of its notes and $2,000,000 par value of its common stock. Ordinarily the cost of property purchased with cash is the amount of cash paid for it. Although the cost of a contract to purchase may form a part of the cost of the property purchased under that contract, still the cost of obtaining cash can not be added to the cost of property purchased with the cash in a separate transaction. Therefore, it becomes important to determine, first, whether or not the petitioner obtained the contract to purchase the Union stock from Pynchon & Co., and, if it did, second, to determine how much it paid Pynchon & Co. for that contract.

The Commissioner is contending that the petitioner did not acquire the contract to purchase the Union stock from Pynchon & Co. under the agreement of January 26, 1925, because the contract of July 29, 1924, had never been assigned to Pynchon & Co. but still belonged to the petitioner on January 26, 1925. There is evidence tending to support this contention of the Commissioner, yet the record as a whole does not justify a definite finding of fact that the contract was not transferred from Pynchon & Co. to the petitioner. On the other hand, it does not justify a finding that it was so transferred. The consequences, if any, of this uncertainty must be suffered by the Commissioner, who has the burden of proof on this issue. However, the point is immaterial for the record shows that even if the contract was transferred by Pynchon & Co. to the petitioner, the petitioner paid nothing for it.

The fact that the petitioner paid nothing for the contract to purchase the Union stock is demonstrated by a “ before and after ” comparison. Prior to the transaction with Pynchon & Co. the petitioner was the owner of an option to purchase the Union stock, it needed cash with which to purchase the Union stock, and it had the inherent power to issue its notes and stock. Pynchon & Co., at that time, had $1,750,000 but had no desire to acquire the option for itself. After the transaction, the petitioner had a right to purchase the Union stock under the contract of July 29, 1924, just as it had prior to that transaction. It had obtained $1,750,000 in cash and had parted with $2,000,000 par value of its notes and $2,000,000 par value of its stock. Pynchon & Co. had parted with $1,750,000 in cash, and had obtained $2,000,000 par value of the petitioner’s notes and $2,000,000 par value of the petitioner’s stock.

The fact that the petitioner paid nothing for the contract is also demonstrated by consideration of the motives and acts of the parties. After Martin had stated that his company might be willing to furnish $1,750,000 in cash in exchange for $2,000,000 par value of the petitioner’s notes and $2,000,000 par value of the petitioner’s common stock, the general counsel of the petitioner suggested for the first time the plan of having the option exercised on behalf of Pynchon & Co. and then having the latter transfer the contract to purchase the stock to the petitioner, together with the cash. His thought was that in this way it might appear that the petitioner had received something of value over and above the $1,750,000 in cash for its notes and stock and there would be no violation of the laws of Kentucky. The Circuit Court of Appeals for the Sixth Circuit was of the opinion that the transfer over and back was an unnecessary gesture which added nothing to the validity of the stock issuance. Lamprecht v. Swiss Oil Corporation, 32 Fed. (2d) 646. It certainly had no effect upon the real consideration passing between the parties. The petitioner had a valuable option on which it had paid $75,000. Pynchon & Co. never paid the petitioner anything for the option and was not to acquire any valuable rights under the contract of July 29, 1924. The parties at all times intended that only the petitioner should benefit from the contract and only the petitioner should purchase the Union stock. Cf. Frank J. Vlchek, 7 B. T. A. 1244. If the contract of July 29, 1924, ever passed to Pynchon & Co., it passed without consideration and subject to an obligation to return it immediately with $1,750,000 in cash so that the petitioner could complete the initial payment. If the contract to purchase passed back to the petitioner, it likewise passed without consideration and in accordance with a prearranged plan. Those transfers were not intended to have and did not have any effect upon the amount of cash or consideration which Pynchon & Co. was to furnish the petitioner nor upon the amount of securities which the petitioner was to issue to Pynchon & Co. Thus in no true sense was a transfer of the contract to purchase the Union stock a part of the consideration moving from Pynchon & Co. to the petitioner for the issuance by the petitioner of its notes and stock and no part of the consideration paid by the petitioner was paid for a transfer of the contract to purchase the Union stock.

The fact that the petitioner paid nothing for the. contract is also shown in another way. Assume that the contract passed to the petitioner from Pynchon & Co. in the same transaction in which the petitioner obtained $1,750,000 in cash from Pynchon & Co. The cost of the property thus obtained was paid in the petitioner’s notes and stock, and was measured by the fair market value of those securities. Clearly $1,750,000 in cash should cost $1,750,000. Any additional cost attributable to the cost of the contract would have to be based upon an excess of the fair market value of the securities over $1,750,000. The petitioner, reasoning in this way, contends that the notes were worth par, the stock was worth $2,906,043.82, and the excess of their total value over the amount of cash obtained represents cost of the contract. The evidence in the case shows, however, that the total fair market value of the $2,000,000 par value of notes and $2,000,000 par value of stock issued to Pynchon & Co. was not more than $1,750,000 at the time of issuance. The finding of fact that the fair market value of the notes and stock’ issued to Pynchon & Co. was $1,750,000 at the time of issuance is fatal to the petitioner’s contention that the cost of the Union stock was more than $5,000,000. The $2,000,000 par value of common stock not only was not worth $2,906,043.32, but in fact was worth only a small percentage of its par value at that time. The principal value of the securities issued to Pynchon & Co. was in the bonds. Yet they were not worth par even when an equal amount of the par value of the stock accompanied them as a bonus. If the petitioner had obtained the $1,750,000 in cash by selling its securities to the public at fair market value, nothing would have been added thereby to the cost of the Union stock. Consequently it is not surprising that the effect of the sale of these securities to a banker was no different. Thus on no theory that has been' suggested could the transaction which the petitioner had with Pynchon & Co. have had any effect upon the cost of the Union stock to the petitioner.

Another argument advanced by the petitioner is that the Commissioner is now estopped to deny that the stock and bonds issued to Pynchon & Co. were a part of the cost of acquiring the stock of Union. Its reason is that the Commissioner did not allow the petitioner a deduction for amortization of the discount on the notes for the year 1925, but stated at that time that the stock and the alleged discount should be capitalized as a part of the cost of the Union stock. An estoppel must be pleaded and proven by the party relying upon it. It is based upon the misrepresentation or concealment of some material fact. The effect of an estoppel is that the fact is conclusively presumed to be as the innocent party believed it to be. Tide Water Oil Co., 29 B. T. A. 1208. The facts in this case do not establish any estoppel. The petitioner had full knowledge of the facts of its own case in 1925. If it failed to have its tax liability for 1925 correctly determined, that is not a sufficient reason for having the 1925 error corrected by an erroneous determination of its tax liability for some later year or years. Cf. Boyne City Lumber Co., 7 B. T. A. 36, 50; Basil Robillard, Executor, 20 B. T. A. 685, 689; affd., 50 Fed. (2d) 1083; certiorari denied, 284 U. S. 650; Seeley v. Helvering, 77 Fed. (2d) 323. The petitioner also argues that there is no proof that a profit of $2,906,043.32 from the liquidation of Union has not been included in its income in the determination of the deficiency, and, further, that the prayer in the amended answer does' not assert a claim for an increased deficiency as contemplated by the statute. These two arguments are mentioned merely for the purpose of indicating that they have not been overlooked. They are refuted by the facts in the case.

The only suggestion of a reason why the petitioner would not be entitled to have its deductions for depletion computed upon the stipulated valu'e of the properties at the time it received them in the liquidation of Union, comes from its own contention that in reality it bought the assets of Union. If it did buy them, it paid no more than $5,000,-000 for them and would not be entitled to depletion deductions based upon any larger figure. However, the contention that it purchased the assets of Union has been rejected, and since it has been taxed with a profit represented by the excess of the value of the properties over the cost of the stock, it is entitled to depletion deductions for the years 1926 to 1930, inclusive, computed upon the basis of the stipulated value of the depletable properties on the date they were received by it in the liquidation of Union. The Commissioner concedes the correctness of this holding, provided he is sustained upon the issue which he raised.

Decision will be entered wider Rule 50.

       The $2,500,000 of notes which Union issued was no part of the cost of the Union stock to the petitioner, but this fact is immaterial here since the Commissioner concedes that the cost was $5,000,000 and since the petitioner assumed payment of the notes and eventually paid them.

         The “ cost ”, according to the petitioner’s figures, was $250,000 more than the value of the assets received.

       In that case the court affirmed the decision of the lower court dismissing a hill in equity by one of the old stockholders of the petitioner for cancellation of the notes and stock issued to Pynchon & Co. The court held that the transaction with Pynchon & Co. was for the best interests of the petitioner and its stockholders because the petitioner was thereby permitted to buy the valuable Union stock at a bargain price and the stockholders were benefltted rather than wronged. The question there before the court was a very different one from the question here.


author: Matthews :

text:
    Nibley-Mimnaugh Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17527.
    Promulgated June 14, 1935.

      Allan A. Smith, Esq., and John B. Peery, Esq., for the petitioner.

      Elden McFarland, Esq., and W. S. Limes, Esq., for the respondent.
   OPINION.

Matthews :

From the Board’s decision in this proceeding, following the opinion of September 13, 1932, 26 B. T. A. 978, the respondent filed a petition for review in the Court of Appeals for the District of Columbia. That court remanded the proceeding on May 7, 1934, Commissioner v. Nibley-Mimnaugh Lumber Co., 70 Fed. (2d) 843, with instructions “ to set aside the order appealed from and to rehear the matter on the single question whether respondent was on the cash or accrual basis.” The mandate further directed that “ if the Board shall find it was on the accrual basis, the order heretofore entered shall be reinstated; if it shall determine respondent was on the cash basis, a final order in favor of the Commissioner shall then be entered.”

Pursuant to the mandate, the Board, by order of May 15, 1934, set aside its decision of March 17, 1933, and a rehearing of the single question therein.directed to be reheard was held on September 15, 1934.

In 1923 petitioner kept its books in accordance with the method of accounting regularly employed in prior years. It made no change in that method in 1923. It computed net income in its 1923 return in accordance with the method of keeping its books. As a part of that method, petitioner maintained, among others, the following accounts: accounts receivable, bills receivable, accounts payable, bills payable, inventory, and reserve for bad debts. The financial operations evidenced by all of those accounts were included in the computation of net income on the books. Except for the two relatively unimportant items of interest on receivables and taxes, income was accounted for when earned, whether received or not, and all expenses were accounted for when incurred, whether paid or not.

Based upon the foregoing, we find as a fact that petitioner’s books of account were kept on an accrual basis.

In accordance with the court’s mandate directing that the decision of the Board be reinstated, if the Board finds that petitioner was on an' accrual basis,

Judgment will be entered of “Deficiency or overpayment, none; and unpaid assessment to be abated, $JtS,526.91.,’>


author: Sternhagen:

text:
    O. H. Himelick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74722.
    Promulgated June 17, 1935.

      Jachson V. Blair, Jr., Esq., for the petitioner.

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

Sternhagen:

The Commissioner determined a deficiency of $917.25 in petitioner’s income tax for 1931, based upon six adjustments. Four of these are not assailed. The second and fourth are related and can be considered together. The petition seeks further to establish an additional deduction for loss of investment in corporate shares, which is not .dealt with in the notice of deficiency.

Stripped of its unimportant facts, the evidence shows that Hime-lick had, before 1931, been the principal shareholder of a retail furniture corporation which went into bankruptcy in 1930. The petitioner’s brother bought its accounts receivable and petitioner in turn bought them from him. These accounts had a face value of $21,317.09, and petitioner paid $5,245 for them. They included accounts which were due, overdue, and not yet due. Some were protected by a lien on furniture. Whether any, or how much, of them were liquidated in 1930 is not shown. In 1931 petitioner collected $10,347.26, and, by a mathematical process which is not described in the evidence, he treated $3,690.75 thereof as income on his return.

The Commissioner recomputed this by using the ratio of 2x317 09 or 24.6 percent as the cost of the accounts recovered in 1931, thus finding the gain to be $7,801.83. The petitioner also, in 1931, charged off $3,056.96 face value of these receivables, and the Commissioner reduced this deduction to the 24.6 percent cost, or $752.

The petitioner urges, as a matter of law, that the accounts purchased must be regarded as a single asset, the gain or loss remaining in suspense until the entire cost is recovered. As an abstract rule there is no authority for this; and furthermore it is contrary to petitioner’s own treatment and hence not in accordance with his method of accounting. He himself charged off specific accounts and computed gain on others. Presumably still others remain for collection. The Commissioner’s method was not improper and his determination is sustained. Weser Bros., Inc., 12 B. T. A. 1394; Santa Maria Gas Co., 10 B. T. A. 1412.

Petitioner’s second claim is for a deduction for loss alleged to be sustained in 1931 of 531% shares of stock in the Home Furniture Co. But, even if it be assumed that the cost were shown, the evidence establishes clearly that the shares had become worthless in 1930, and petitioner had no right to postxmne the deduction until 1931. Patten & Davies Lumber Co. v. Commissioner, 45 Fed. (2d) 556; Wheeler, Fisher & Co. v. Commissioner, 54 Fed. (2d) 294; Paul N. Myers, 7 B. T. A. 1072; Independent Brick Co., 11 B. T. A. 862, 867.

Judgment will be entered for the respondent.


author: Seawell:

text:
    The American Laundry Machinery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75721.
    Promulgated June 17, 1935.

      John Weld Peck, Esq., and John Colville Taylor, Esq., for the petitioner.

      O. W. Swecker, Esq., for the respondent.
   OPINION.

Seawell:

The petitioner, an Ohio corporation, kept its books and filed its income tax return for the calendar year 1931 on the accrual basis. In 1932 it paid to the State of Ohio a tax of $9,352.35 upon its manufacturer’s inventory, 'and a further tax of $632.16 upon taxable securities converted into nontaxable securities. The petitioner deducted these amounts in its return for 1931 as taxes accrued within that year. In his determination of a deficiency of $3,543.42 in income tax against the petitioner for 1931 the respondent disallowed the amounts as deductions on the ground that no part of the taxes accrued within the taxable year. Whether the taxes accrued within the year 1931 is the sole question in issue.

.We have heretofore held that state taxes accrue for income tax deduction purposes when they become liabilities of the taxpayer. H. H. Brown Co., 8 B. T. A. 112; Crown Willamette Paper Co., 14 B. T. A. 133; Arcade Department Store, Inc., 18 B. T. A. 1172. In other cases we have held that ownership of the property on the date specified in the governing state statute is the event which determines the liability for the tax, even though the amount may not be ascertainable on that date. Leamington Hotel Co., 26 B. T. A. 1004; Grand Hotel Co., 21 B. T. A. 890; Texas Coca-Cola Bottling Co., 30 B. T. A. 736; California Sanitary Co., Ltd., 32 B. T. A. 122.

The statutes of Ohio relating to the taxation of personal property were amended effective June 29, 1931, to the extent applicable here. The tax of $9,352.35 was determined pursuant to the provisions of sections 5385 and 5386 of the amended act. These sections require a manufacturer such as the petitioner to include in its personal property tax return the average value of its inventory of goods “ which, from time to time, he has had on hand during the year next previous to listing day annually, if he has been engaged in such manufacturing business so long, and if not, then during the time he has been so engaged.” The average value of the inventory is ascertained by dividing the value of the inventory at the close of each month by the number of months the manufacturer was engaged in business during the year. The remaining tax of $632.16 was paid pursuant to the provisions of section 5366 of the amended act, which provides that the term “ taxable property ” includes:

* * * tlie monthly average amount or value for the time the taxpayer held, or controlled them within the year preceding the date of listing, of all taxable property within that time invested in or converted into bonds or other securities not taxed, and of all other taxable property within that time invested in or converted into bonds or other securities not taxed, and of all other taxable property within that time converted into deposits, to the extent he may hold or control such bonds, securities or deposits on such day * * *.

Prior to the effective date of the amendatory statute, taxpayers of Ohio were required to.return personal property for taxation between the second Monday of April and the first Monday of May, annually. Excepting the inventories of manufacturers, ownership of the property as of the day preceding the first filing date was made the basis for listing the property. Secs. 5366, 5366-1, 5370 and 5385, Page’s Annotated Ohio General Code. These provisions of the statute were construed by the Commissioner as permitting an accrual of personal property taxes for Federal income tax deduction purposes as of the day preceding the second Monday of April. G. C. M. 8218, C. B. IX-2, 106.

The new act altered both the basis and time of filing returns. Section 5368 provides, among other things not important here, that “ Excepting as otherwise provided in this chapter all taxable property shall be listed with respect to ownership or control, valuation and taxing districts as of the beginning of the first day of January, annually * * One half of the tax is payable at the time the return is filed and the balance on September 20. Secs. 2656 and 5671-1. All personal property subject to taxation may be seized and sold for taxes and personal property taxes become a lien on real property of the taxpayer charged therewith on December 1. Secs. 5671 and 5694. Another section provides that excepting property of public utilities “ the assessment of all such personal property * * * so made in the year 1931, are hereby cancelled and annulled; * * *” and that “ The first assessment of taxable property of the kinds and classes mentioned in this act shall take place in the year 1932 at the times and in the manner provided in this act.” Sec. 5403-2.

As we interpret the state statute, section 5403-2 thereof operated to relieve the petitioner of tax on the property in question for 1931. This construction of the provision is supported by a photostatic copy of a tax receipt made a part of the stipulation of facts, which is headed:

Butler County
1932 — CONCLUDING PAYMENT TAX RECEIPT — 1932
Classified and General Personal Property Tax

See also I. T. 2632, C. B. XI-2, 74, quoting a letter from the tax commission of Ohio, to the effect that property such as that involved here will not be taxed for 1931. Having been relieved of all liability for tax on the property for 1931, there was no liability to accrue for that year for Federal income tax deduction purposes.

We do not think the result should be different because the statute bases the tax, in part, upon ownership in the preceding year. While the inventory tax is based upon values of property on hand at the close of each month in the preceding year, .the necessity for listing the property for taxation is conditioned upon a duty to file a return for personal property used in business. Had the petitioner discontinued business prior to the close of 1931, it would not have been required to file a return in 1982 based upon its inventory for 1931. Opinions of the Attorney General of Ohio, 1920, vol. 1, p. 632.

The tax on property invested in or converted into nontaxable bonds or other securities is limited to the value thereof held or controlled on the return date. If the petitioner prior to the close of 1931 had sold the nontaxable property on account of which the tax of $632.16 was paid, it would not have been under any duty to list such property with the state in 1932 for tax purposes.

In our opinion the taxes in question did not constitute liabilities of the petitioner at any time within 1931, and the respondent committed no error in refusing to permit the deduction of the amounts in question as taxes accrued within the taxable year.

Decision will be entered for the respondent.


author: Leech:

text:
    Earl Groth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74965.
    Promulgated June 18, 1935.

      Earl Groth pro se.

      James H. YeaPman, Esq., for the respondent.
   OPINION.

Leech:

The respondent determined a deficiency in income tax against petitioner in the sum of $337.50 for the calendar year 1931. The only error assigned is the action of the Commissioner in refusing to classify as earned income of the' petitioner, the sum of $22,000 received by him in the taxable year from Kresge Department Stores, Inc. The facts were stipulated.

On April 30, 1927, the petitioner entered into a contract with Kresge Department Stores Corporation covering his services as senior vice president and general manager for a period of five years' commencing June 1, 1927, and ending June 1, 1932. The petitioner was to receive a salary of $40,000 a year for the first three years, and $50,000 for the last two years. In a supplemental agreement executed by the parties on May 24, 1927, provision was made for termination and cancellation of the agreement dated April 30, 1927, by the Kresge Stores Corporation at any time during the term thereof by it giving the petitioner sixty days’ notice of its intention so to do and paying him the sum of $50,000. The petitioner remained in the employ of the Store Corporation from April 20, 1927, to on or about August 1, 1929, when that corporation terminated the agreement of April 30, 1927, and dispensed with petitioner’s services.

In 1931 the petitioner accepted from the Store Corporation the sum of $22,000 in compromise and full settlement of his claims against it under these agreements. In the fall of 1929 the petitioner acquired a controlling interest in the capital stock of the Rurodes Dry Goods Co., and thereafter up to and including the year 1931 was employed by such company as president on a salary basis.

The sole issue here is whether the payment of $22,000 so received by petitioner constituted earned income'within section 31 (a) (1) of the Revenue Act of 1928, which provides as follows:

(a) Definitions. — For the purposes of this section—
(1) “Earned income” means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.

The agreement of April 30, 1927, and supplemental agreement of May 24, 1927, constituted petitioner’s contract of employment by the Kresge Department Stores Corporation. Such contract, by its terms, provided for cancellation by that Stores Corporation upon sixty days’ notice and the payment of $50,000 on termination of the agreement. The contract contains no statement as to what the $50,000 will represent if and when paid. It does not characterize that item as additional compensation for services already rendered, liquidated damages due petitioner or a penalty imposed upon the corporation for its cancellation of the contract. But such specific description is not necessary to give such item the legal effect of liquidated damages or a penalty. Where, as here, a contract of employment contains a provision for cancellation upon notice and a payment of a specified sum, such provision limits the liability of the party having the right to cancel, and the fixed sum to be so paid, for the cancellation privilege, constitutes liquidated damages to the other party to the contract. Worth v. Liebovitz, 179 N. Y. 200; 71 N. E. 734; Fletcher v. Elliott-Fisher Co., 153 N. Y. S. 885; Dallas v. Murry, 75 N. Y. S. 1040; McGregor v. Gilmore, 54 N. Y. S. 589; De Vere v. Gilmore, 54 N. Y. S. 587; Brisco v. Litt, 42 N. Y. S. 908; Watson v. Russell, 149 N. Y. S. 388; 44 N. E. 161; Fisher v. Monroe, 21 N. Y. S. 995; Derry v. Board of Education, 61 N. W. 61. This is so, certainly, unless it might be said that the damages flowing from the breach of this contract are easily ascertainable, or, as fixed by the agreement, are plainly disproportionate to the injury resulting from the cancellation of the contract. Mosler Safe Co. v. Maiden Lane Safe Deposit Co., 199 N. Y. 479; 93 N. E. 81; Eikenberry v. Thorn, 61 Ind. A. 468; 112 N. E. 112; Sun Printing & Publishing Association v. Moore, 183 U. S. 642.

Petitioner contends the contested $22,000 he received in compromise of his claim, under the $50,000 item, merely increased his compensation earned under his contract. We can not agree.

It seems obvious from a consideration of the present contract in the light of the above principles that the intent of both parties thereto, which must control us here (Sun Printing & Publishing Association v. Moore, supra), was not to provide an increase in salary for services rendered under the contract. That construction would imply that the increased payment was to be made for services performed by petitioner under the contract, whereas, in fact, the disputed item was not intended to cover any services petitioner performed, under the contract or otherwise. The questioned item was premised upon a termination and cancellation of the contract. It was intended to and did represent liquidated damages due petitioner upon cancellation of the contract by the Stores Corporation, or a penalty due petitioner from that corporation upon such cancellation.

In 1931 petitioner compromised this claim for such liquidated damages or penalty for the sum of $22,000. Such amount was therefore received by petitioner not as compensation but as liquidated damages or a penalty.

In neither event is such sum “ wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered ”, which the quoted statute defines as “ earned income.” A. M. Johnson, 32 B. T. A. 156; Permanent Homes Land Co., 27 B. T. A. 142; cf. E. Phillips Oppenheim, 31 B. T. A. 563.

Decision will be entered for respondent.


author: Muedock:

text:
    William P. Clyde, Jr., Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74533-74536.
    Promulgated June 20, 1935.

      Francis L. Dwrh, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Mabel C. Hin-shaw; Ethel Clyde; and Marshall H. Clyde.

   OPINION.

Muedock:

The Commissioner determined the following deficiencies in income tax of the petitioners for the year 1931:

There is but one issue in each of these cases and that is whether or not the petitioner is entitled to deduct for 1931 a capital loss of $14,-041.41. The cases have been consolidated and the facts have been stipulated. A brief statement of the facts will suffice for present purposes.

William P. Clyde, the father of the petitioners, died on November 18,1923, a resident of the State of New York. His estate was a large and valuable one, most of which was placed in trust for his six children and their families. He owned at the time of his death a family residence in New York City and certain furniture, fixtures, and household property therein contained. The real property was valued for Federal estate tax purposes at $400,000 and the personal property contained therein at $40,941.35. The decedent was survived by his wife, Emeline F. Clyde, and six adult children, including the four petitioners. Emeline F. Clyde was then 82 years of age. She died on February 3,1931, survived by the same six children. Article XIII of the decedent’s will is in part as follows:

I give and devise my residence in the borough of Manhattan, city of New York, known as 1 West 51st Street, together with the furniture, fixtures, and household effects therein, to my wife, Emeline F. Clyde, during her life and direct that the same shall only be sold or exchanged upon her request and in the event of sale of the real property a trust of the proceeds shall be created and set apart and the income thereof applied to the use of my said wife during her life.
Upon the death of my said wife I direct that the said property shall be sold and the proceeds thereof, or the principal of the above trust fund in event of a prior sale, divided in equal .shares among my then surviving children and the issue of any deceased.

The executors of the decedent sold the real and personal property mentioned above in the year 1931 immediately after the death of Emeline F: Clyde. The proceeds of the sale were distributed by the executors to the six children, including the four petitioners. The net proceeds from the sale of the real estate amounted to $282,809.19. The net proceeds from the sale of the personal property amounted to $17,391.96. The Commissioner disallowed the loss claimed by each petitioner on account of the sale above described.

The petitioners contend that the first sentence of section 113(a) (5) of the Revenue Act of 1928 applies and gives them as a basis for gain or loss upon the disposition of the residence and its contents the value of their interest in the property at the timé of their father’s death. The respondent contends that the third sentence of section 113(a) (5) applies and each petitioner’s basis is the fair market value of 'the property at the time of the distribution. The two provisions of section 113(a)(5) in the order in which they appear in the statute, are as follows:

If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, tbe basis shall be tbe fair market value of tbe property at tbe time of the death of tbe decedent. * * * In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer.

The petitioners concede that if they did not receive a vested interest at the death of their father, but received only a contingent interest which did not vest until their mother died, the determination of the Commissioner is correct. Cf. Lane v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644. Discussion will be limited to the question of whether or not the petitioners took a vested interest at the death of their father.

The question of whether the petitioners acquired vested or contingent interests in the property in question upon the death of their father must be determined under the laws of New York, since the property in question was situated in the State of New York and the courts of that state had jurisdiction over it. That law makes no distinction between remainder interests in personal property and remainder interests in real property; that is, the rules of law relating to vested and contingent remainders of real property apply also to bequests of personalty. See ch. 41, sec. 11, Consolidated Laws of New York; McKinney’s Consolidated Laws of New York, Annotated, Book 40, p. 9, et seq., and Book 49, p. 54; Stringer v. Yoimg, 191 N. Y. 157; 83 N. E. 690. The following statutory provision relating to real property is found in chapter 50, section 40, of the Consolidated Laws of New York (see McKinney, Book 49, p. 53) :

When future estates are vested; when contingent. A future estate is either vested or contingent. It is vested, when there is a person in being,.who would have an immediate right to the possession of the property, on the determination of all tlie intermediate or precedent estates. It is contingent while the person to whom or the event on which it is limited to taire effect remains uncertain.

There are a number of canons of construction designed to aid in the interpretation of wills, but “ the primary one, to which all others are subordinate, [is] that the intention of the testator is to be sought .in all his words, and, when ascertained, is to prevail.” In re Beuchner, 226 N. Y. 440; 123 N. E. 741. The petitioners argue that each' of them was in being at the time of the decedent’s death, each would have had at that time an immediate right to the possession of the property had the precedent estate, the life estate of the mother, suddenly terminated, and therefore they had a vested interest. If the statutory definition of a vested interest stood alone, their argument would have greater force. However, it does not stand alone, but is followed by a definition of a contingent interest. The latter provides that an estate is contingent while the person to whom or the event on which it is limited to take effect remains uncertain. Thus, in order for a remainder to vest, there must not only be a person in being who would have a right to the possession should the particular estate immediately determine, but the person in being must be one whose right ultimately to enjoy the remainder is fixed and certain during the pendency of the particular estate. Where the person entitled to take the remainder can not be ascertained until the termination of the precedent estate, the remainder is contingent under the laws of New York. In re Beuchner, supra.

The testator disposed of the remainder interest in the property in question in the second paragraph of article XIII of his will. The words which he used in that paragraph are of particular significance. The only gift to the children lies in the direction to distribute the proceeds of a sale at a future time, to wit, “ upon the death of my said wife.” The words of gift are that the proceeds of the sale “ shall be * * * divided in equal shares among my then surviving children and the issue of any deceased.” The testator used words of survivorship in defining the class of persons who were to share in the remainder. He made the class consist of his “ then surviving children and the issue of any deceased.” If, by the use of the word then ”, he meant to refer to the date of his own death, there was no uncertainty at that time as to the persons to whom the remainder was limited to take effect. If, however, by the use of the word “ then ” he intended to refer to the death of his wife, the life tenant, the petitioners took no more than contingent interests in the remainder, since, in that event, the persons who were intended to take the remainder remained uncertain until she died.

The word “ then ” in the second paragraph of article XIII of the decedent’s will was intended to refer to the words upon the death of my said wife.” After he had given the life estate in this particular property to his wife, the testator next contemplated and mentioned the contingency of her death. The remainders to the children were in terms limited upon that event. The class of persons who were to take the remainder interests was to include only those children who survived the testator’s wife. Until she died the persons who were given an interest in the remainder remained uncertain. The language expresses a clear intention that there should be no immediate vesting in any of the children at the death of the testator. An examination of the rest of the will strengthens this view. This residential property was apparently but a relatively small part of a large estate which had belonged to the testator during his life. In other parts of his will he made elaborate and precise provisions for each of his children and for any spouse or issue of any child who might predecease the testator. The will as a whole clearly indicates that in article XIII the testator did not intend to make any provision for a child who should die without issue prior to the death of the testator’s wife, but intended that the remainder interest in this particular property should vest at the death of his wife in such of his children and issue of deceased children as should survive the testator’s wife. He thus annexed futurity to the substance of the gift of the remainder and brought within the statutory definition of a contingent remainder the gifts to his children. Cf. In re Beuchner, supra; In re Crane, 164 N. Y. 71; 58 N. E. 47; Hall v. La France Fire-Engine Co., 158 N. Y. 570; 53 N. E. 513; Bryer v. Finnen, 165 N. Y. S. 805; In re Bendheim's Estate, 209 N. Y. S. 141; Carmichael v. Carmichael, 43 N. Y. 346. The intention of the testator can not be overlooked. The Commissioner made no error in determining the deficiency. Cf. Lane v. Corwin, supra. See also Anderson v. Wilson, 289 U. S. 20.

The case of Connelly v. O'Brien, 166 N. Y. 406; 60 N. E. 20, other cases cited by the petitioners, certain canons of construction referred to in those cases and in the petitioners’ brief, and rulings of the Bureau of Internal Eevenue cited by the petitioners, have not been overlooked in the decision of this case. Early vesting of estates is favored in the law. Likewise the law favors the construction of a will which will avoid the disinheritance of remaindermen who may happen to die before the termination of a precedent estate. Courts have said that adverbs of time should be construed to relate either to the time of the death of the testator or to the time of the enjoyment of the estate, not to the time of its vesting in interest. But such a rule must not be invoked to misread the plain meaning of words or to defeat the intent of a testator. The petitioners were in being at the time of their father’s death and at that time they would have had an immediate right to the possession of the property had the precedent estate terminated. They thus seek to paraphrase the definition of a vested interest contained in the New York statute. However, when the definition of a contingent interest is considered, it is perfectly clear that the question of which kind of an estate they received depends upon whether the class of remaindermen was fixed as survivors of the father or as survivors of the mother. Cf. In re Beuchner, supra; In re Crane, supra; Doe v. Considine, 73 U. S. 458. The language used by the present testator is different from the language used by the testator in the case of Connelly v. O'Brien. The court there pointed out that the remainders to the testator’s children were not in terms limited upon the death of the widow, the contingency of her death was not mentioned in the will, and the only precedent event to which the word “ then ” in that case could refer was to the death of the testator. Although the court there held that the enjoyment, but not the vesting, of the remainders was postponed until the termination of the life estate, nevertheless that case is not in conflict with the present case. In each the decision is made to depend upon the intention of the testator.

Decision mil he entered for the respondent.


author: Moeris :

text:
    D. F. Strickland, Petitioner, v. Commissioner of Internal Revenue, Respondent. Olive R. Strickland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59749, 59750.
    Promulgated June 21, 1935.

      G. B. McAtee, Esq., for the petitioners.
    <7. A. Ray, Esq., for the respondent.
   OPINION.

Moeris :

The first question for determination upon the merits is the respondent’s refusal to exempt the compensation received under contracts with the Hidalgo County Water Improvement District No. Two. Respecting this issue the petitioner pleads a former proceeding before this Board between the same parties, D. F. Strickland, and Olive B. Strickland, 16 B. T. A. 419, involving the same question for the calendar years 1923 to 1926, inclusive, in which it was finally determined that such compensation was not subject to tax and, therefore, since said decision was not appealed the same has become final and is an effective estoppel against any further litigation upon the same subject matter. Consequently our first consideration must be directed to the plea of res judicata.

Since different taxable periods are involved in the instant case from those in the former proceedings we are concerned with different canses of action, Tait v. Western Maryland Ry. Co., 289 U. S. 620, and Charles P. Leininger, 29 B. T. A. 874; therefore, as we said in the latter case, “ the earlier judgment is conclusive only as to the precise facts, rights, questions or issues adjudicated in the earlier case that are again the facts, rights, questions or issues presented for adjudication in the second case.” The issue presented in the former proceeding as to the years governed by the Revenue Act of 1926 was identical with that involved herein. The contracts under which Strickland rendered services to the district for the years involved in the prior proceeding, however, are not the same contracts now before us. Under the law the petitioner was obligated to execute a new contract each year. Although the provisions thereof may have remained substantially the same, there has been no adjudication by the Board of the taxable status of the amounts received under the contracts in force during the taxable years involved in this proceeding. The question must therefore be determined in the light of those new contracts and can not be concluded as res judicata on the basis of a decision involving different contracts.

While the facts in the instant case are as favorable to the petitioners’ contention as those in the former proceeding and the Board is desirous of adhering to precedent, considering the question in the light of the more recent pronouncements of the Board and the courts, we are satisfied that the former opinion was erroneous. In Richard F. Burges, 25 B. T. A. 1191; affd., 69 Fed. (2d) 609, we held that the salaries of Burges as general counsel for three irrigation districts, two of which were located in Texas, were subject to Federal income tax, and specifically overruled Richard F. Burges, 17 B. T. A. 275, which relied on the earlier Strickland opinion, among others. The material facts in the instant proceeding are not distinguishable from those in the Burges case. We therefore hold that the compensation received in the taxable years in question by the petitioners under contracts with the Hidalgo County Water Improvement District No. Two is not exempt. See also Buckner v. Commissioner, 77 Fed. (2d) 297, affirming 31 B. T. A. 84.

Upon the second issue, pertaining to the exemption of fees as receiver under appointment by the Seventy-ninth Judicial District Court of Texas, we find the record here no stronger than in Edward H. Wright, 29 B. T. A. 1267, and Gardner Abbott, 30 B. T. A. 227, and consequently the conclusion there reached, that such fees are not exempt, must be followed.

Reviewed by the Board.

Judgment will be entered for the respondent.