text:
    Estate of Winifred H. Kinney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49582.
    Promulgated May 1, 1934.

      B. G. Gortner, for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined a deficiency in estate tax in the amount of $3,968.01. Two questions are involved, viz., (1) Whether the decedent at date of death had a vested interest in one-ninth of the corpus of a certain trust, and (2) the value of such interest at that date. The parties have filed a stipulation which the Board accepts. The material facts so agreed to may be summarized as follows:

Winifred H. Kinney, the decedent, died testate on December 6, 1927. This appeal is prosecuted by Sherwood Kinney and R. C. Gortner, as executors, both living in Los Angeles, California.

On October 28, 1918, Abbot Kinney, husband of the decedent, executed a trust indenture which included the following:

That Abbot Kinney of Los Angeles County, California, herein designated the trustee, does hereby covenant and declare that he has and holds the title to the following described property in trust for the uses and purposes hereinafter expressed, to-wit:
All shares of stock owned by and all shares outstanding in the name of Abbot Kinney on the books of the company in the Abbot Kinney Company, a corporation, organized under the laws of California, and which said title and ownership of shares includes all shares heretofore issued by said company, except three (3) shares.
That said trustee shall have the power to sell, transfer, convey and mortgage all or any of said property, and to receive the rents and profits from said property, and as incidental thereto to manage said property and vote all shares of stock, and to pay and apply said rents and profits for the support and maintenance of the following named persons, in the proportions hereinafter stated, to-wit:
To Thornton Kinney one-sixth (%) ; to Sherwood Kinney one-sixth (Ye) ; to Innes Kinney one-sixth (Ye); to Carleton Kinney one-sixth (%) ; to Winifred H. Kinney for the support and maintenance of herself, and for the support and maintenance of the two minor children of Abbott Kinney, to-wit: Helen Kinney and Clan Kinney, to be controlled and applied by said Wilfred H. Kinney, one-third (%); provided, however, that during the life of Abbot Kinney, trustee above named, he shall act as the sole trustee under this declaration of trust, and he being the sole trustor and maker of this trust shall have the power to revoke this trust at any time during his lifetime, and during his life time he reserves and shall have the right to receive and to apply one-half of all the rents, income and profits from the property above described for his sole use as he may determine. In case of the death, absence or inability to act, of said Abbot Kinney, trustee, such vacancy shall be filled by a board of directors composed of the following named persons, by proper transfers and declarations of trust; Thornton Kinney; Winifred H. Kinney; Sherwood Kinney, Innes Kinney and Carleton Kinney, and in case of death, absence or inability to act of either or any of said five, then such vacancy shall be filled by Clan Kinney and Helen Kinney, in the order named, and all such trustees, in turn, shall have and be possessed of all the power under this trust herein-before mentioned.
****** *
Upon the termination of this trust, unless revoked, the title to the whole of said property, so held in trust, shall immediately vest in the above named beneficiaries by title absolute, in the same proportions above named for rents and profits and the said one-third (Ya) above set forth for the support of Winifred H. Kinney, Helen Kinney and Clan Kinney, will pass to them in equal shares by absolute title.
*******
Winifred H. Kinney, wife of said Abbot Kinney, hereby joins in this instrument, and hereby declares that all of said property transferred in trust as aforesaid is the separate property and estate of said Abbot Kinney, subject to his disposition and control, and hereby renounces all claims to said property as community property or otherwise, and sets the same apart as the sole property and estate of said Abbot Kinney.

Abbot Kinney died in November 1920. The decedent bequeathed her interest in the trust to her two children, Clan Kinney and Helen Kinney Gerety. The other beneficiaries of the trust were children of the trustor by a previous marriage.

The net worth of the Abbot Kinney Co. on December 6, 1927, as reflected by the book values of its assets, was $1,814,103.93, and on June 30,1920, was $1,438,016.60. On July 1,1930, Innes Kinney sold a one-sixth beneficial interest in the trust to Carleton Kinney for $133,000. On August 5, 1930; Thornton Kinney sold a oné-sixth beneficial interest in the trust to Sherwood Kinney for $133,000.

It is stipulated that if called as witnesses, O. C. Hogan, trust officer, Security First National Bank of Los Angeles, would testify that in his opinion Mrs. Kinney could not have sold her interest in the'trust for more than 50 percent of the pro rata value of the capital stock of the corporation in 1927; that W. D. Newcomb, Jr., president of the First National Bank of Venice, California, would testify that the fair market value of Mrs. Kinney’s interest in the trust in 1927 was not in excess of 25 percent of the fractional worth of the corporation; and that Herbert Hertel, manager of the Venice Branch of the Security First National Bank of Los Angeles, would testify that in his opinion Mrs. Kinney’s beneficial interest was worth 33% percent of the fractional net worth of the corporation’s assets in 1927.

On the question whether or not the decedent at the time of her death owned a vested interest in the corpus of the trust, we must sustain the contentions of the respondent.

Construing the trust instrument from its four corners, it is clear that it created an executed trust which gave to the beneficiaries not only the income from the trust estate during its life, but a vested interest as remaindermen in the corpus, which became absolute at its termination. In Re Fair's Estate, 122 Cal. 523; 60 Pac. 442; Nobel v. Leonard, 153 Cal. 245; 94 Pac. 1047; Nichol v. Emery, 109 Cal. 323; 41 Pac. 1089.

The petitioner argues that because the language of the trust instrument provides that upon termination of the trust the title to the whole of the property “shall immediately vest” in the beneficiaries by title absolute, no title could vest in the beneficiaries until such time. It is obvious that in taking this position the petitioner has confused the decedent’s title to a vested remainder in the corpus of the trust with that of title absolute in the whole property after exhaustion of the trust. The remaindermen and the “ particular estate ” (trust estate here) are separate species of property, complement, however, to each other and created at the same time and by the same instrument. The title to both passed out of the owner at the time he created the trust; one going to the trustees, and the other to the remaindermen, they being in esse at the time. 23 R.C.D. 492; Doe v. Considine, 6 Wall. 458; Anderson v. Messinger, 146 Fed. 929; Bunting v. Speck, 21 Pac. 288.

The corpus of the trust here considered consisted of the capital stock of the Abbot Kinney Co., and in determining the value of the decedent’s interest in it at the time of her death respondent took as his base the agreed net worth of that company’s assets on that date and divided it by nine. The petitioner contends that in no event could the value of that interest have been equal to a one-ninth part of such net worth, because of the fact that possession and control were in the trustees, and seeks to establish the fair market value of such interest at the date of decedent’s death by showing sales made by two cobeneficiaries of their respective interests in the trust on or about June 30, 1930.

The alleged sales of interests, so referred to, being more than two years and six months after decedent’s death (December 6,1927), are too remote in point of time to serve as a guide in determining values on the basic date. A review of the sale agreements also shows that they were not cash sales, but mere contracts in which credits and washing out of accumulated advances formed the major part of the considerations involved. They, therefore, furnish us no useful guide in this inquiry and will be disregarded.

The parties have agreed what certain bank officials, if present, would testify respecting their individual opinion of decedent’s interest, expressed ,in percentages of and comparisons to the corporation’s assets. One opinion, so put into the record, suggests that decedent’s interest could not have been sold for more than 50 percent of the pro rata of one ninth of the corporation’s capital stock in 1927. Another is that the value of that interest was not in excess of 25 percent of the corporation’s net worth; and the other that the interest was worth 33ys percent of the net worth of the corporation’s interest in 1927.

It is obvious that these vague opinions in no sense constitute proof, and, even as arguments, they assign no reasons for the positions assumed. The first two are negative in character and attempt to say what price the decedent’s interest could not have been sold for on the basic date, and the other what that interest’s relative value was compared to the corporation’s net assets. These opinions, like the alleged sales hereinbefore mentioned, are not evidence, and we merely refer to them in this opinion to indicate the extent to which the petitioner has failed in giving us any proof to show that the respondent erred in his determination of the value of a one ninth interest in the trust in the amount of $201,567.10. Warren M. Horner, 5 B.T.A. 974; Wm. A. Pringle et al., Executors, 6 B.T.A. 299; English & Scottish Law Life Assurance Assn., 10 B.T.A. 454; G. S. Patterson, 17 B.T.A. 716.

Decision will he entered for the respondent.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    H. S. Paulus, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67394-67403.
    Promulgated May 2, 1934.

      Camden R. MoAtee, Esq., for the petitioners.

      John H. Pigg, Esq., and John W. Smith, Esq., for the respondent.

       Proceedings of the foUowlng petitioners are consolidated herewith: M. C. DriscoU; L. W. Sheekles; W. A. Carnes; Peck Welhausen; Woodring-Meyer Lumber Company; S. A Carnes; Celia Fetterly; C. C. Welhausen; and M. A. Meyer, Executor, Estate oí Lena R. Levy.

   OPINION.

Lansdon :

The petitioners contend that the sale here in issue was of their stock in the Yoakum Co. and not of the corporation’s assets. All written records of that transaction, including the deed, identify assets and not stock as the subject matter of sale, and these records are controlling here. George M. Brady, 22 B.T.A. 596; Southern Ice & Fuel Co., 10 B.T.A. 1213.

The petitioners make much of the terms of the agreement which gave the purchaser the right to require a transfer of all issued stock “ in lieu of ” the physical properties; but the record shows that that option was not exercised and also that in fact no stock certificates were transferred to the purchasing corporation. It also shows that the petitioners retained control of the Yoakum Co. and all of its affairs to the date of its dissolution; and that after dissolution they distributed its remaining assets among themselves.

Based upon the only competent evidence in the record, we hold that the petitioners are transferees of the assets of the Yoakum Co., within the provisions of section 311 of the Revenue Act of 1928, and affirm the determination of the respondent. John Gerosa, 21 B.T.A. 1234; Frank Shlaudeman, 21 B.T.A. 605; J. W. Oglesby, Jr., 16 B.T.A. 1191.

The petitioners next contend that the respondent has failed to show his inability to collect the tax from the defunct corporation. The record shows that at the time this tax deficiency was determined the Yoakum Co. had distributed its assets and ceased to exist. The petitioners, however, refer to the fact that some part of the corporation’s assets remained in the hands of their trustees at the time of and after the deficiencies were determined and argue that it was the respondent’s duty to levy on this fund on deposit 'in- the bank. We are unable to see how such action would have changed the status of the petitioners as transferees of their corporation’s assets. At the time referred to the corporation had vanished from the picture and the trustees in charge held its remaining assets for the sole benefit and use of the stockholders. There was no duty resting upon the respondent to pursue the method of collection suggested by the petitioners’ representative. We see no merit in this last-contention. The method followed by the respondent was in accordance with law and is therefore approved.

One other assignment of error, which all petitioners have pleaded in their petitions, remains to be disposed of. The substance of it is that the respondent was and is without right to make the disputed assessments against them because, as alleged in the pleadings, “respondent heretofore held there was no deficiency against said corporation and, consequently, none to be determined against this petitioner as alleged transferee.” The records show no effective closing of the dissolved coi’poration’s tax account prior to the final audit here complained of. Cf. James Couzens, 11 B.T.A. 1040; Oak Worsted Mills v. United States, 36 Fed. (2d) 529. The challenged deficiencies were timely determined and in accordance with the statutory provisions pertaining thereto.

Because of a prior adjudication in bankruptcy of petitioner M. C. Driscoll, Docket No. 67394, and stipulations made between attorneys for respondent and petitioners, the appeal in that case is dismissed from consideration in these proceedings.

Decision will be entered for the respondent.


author: Lansdon:

text:
    Ralph W. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert E. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Amy Tresner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Willis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66701-66703, 66718, 66766.
    Promulgated May 2, 1934.

      Albert L. McRill, Esq., for the petitioners.

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

Lansdon:

The redetermination of the deficiencies in question requires us to ascertain (1) the gross income which the Crews heirs realized from their oil and gas property in 1930, as the basis for the depletion allowance now claimed; (2) the net income of each petitioner in 1930, computed without allowance for depletion; and (3) the net taxable income of each' petitioner after the deduction of allowable depletion, if any.

On the facts it is clear that no accounting for tax purposes of any of the income here involved was possible prior to October 20, 1930. The rights of the Crews heirs to the proceeds of their own operations prior to that date and their share of the proceeds of operations of the Sinclair Oil Co. for the same period were being litigated in the courts and final settlement was made by compromise on that date. Under the terms of the settlement the heirs in the taxable year received $355,000 as their share of the proceeds from the operations of the Sinclair Oil Co. and became entitled to receive the balance in the escrow account. It was in that year that it first became possible to account for the income involved for Federal tax purposes. National Petroleum & Refining Co., 28 B.T.A. 569; North America Oil Consolidates v. Burnet, 286 U.S. 417. Since there was no liability for tax until the date of the settlement which released the impounded funds, it follows, of course, that all deductions in connection with the taxability of the income involved are allowable in the year of the release of the impounded funds. If the petitioners are entitled to any allowance, for depletion, the deduction therefor must be made in 1930 and in conformity with statutory provisions then effective. National Petroleum & Refining Co., supra.

The petitioners claim an allowance for depletion in the taxable year as authorized by section 114 (b) (3) of the Revenue Act of 1928. They contend that the gross income from their oil and gas property of the Crews heirs in that year was $1,817,504.02, that upon that amount as the basis the heirs are entitled to a deduction of 27% percent for depletion not in excess of 50 percent of their net income, and that each of them is, therefore, entitled to one sixth of such allowance in computing his taxable income.

There is no dispute over the amount of the production or the gross receipts realized from the sale thereof. The oil property of the Crews heirs was depleted by the removal of oil and gas that was sold for $1,817,504.02. This the respondent does not deny, but he has determined that the gross income from the property was not the amount for which the oil and gas was sold, but that amóunt reduced by the loss sustained by the petitioner through the failure of the escrow agent to pay over the balance of the impounded funds on demand in 1930. His position is that as the Crews heirs never received the amount lost through failure to recover from the escrow agent, such amount cannot be included in the computation of the gross income received from the property. In our opinion there is no merit in this contention. The Farmers State Bank received the proceeds of the sale of oil and gas produced from the property in question as the agent of the rightful owners. We are of the opinion that $1,817,504.02 is the correct basis for computing the depletion in question.

In computing allowable depletion under section 114 (b) (3) of the Revenue Act of 1928 all the limitations specified therein must be observed. The maximum amount of depletion that may be allowed on the facts herein is $499,813, or $83,302.16 for each of the six heirs, but the amount allowable is limited to 50 percent of the taxpayer’s net income, computed without regard to depletion. We have found that the net income of each of the petitioners in 1930 so computed was $54,805.24. It follows, therefore, that the deduction to which each is entitled is limited to 50 percent of such amount, or $27,402.62. The taxable income of each of the petitioners from the “Crews Estate Oil and Gas Producers ” in 1930 was $27,402.62. .

Decision will be entered v/nder Rule 50.

       SBC. 114. (b) (3) PBItCENTAGB DEPLETION FOR OIL AND GAS WELLS.-Id tbe case Of oil and gas wells tbe allowance for depletion shall be 27% per centum oí the gross Income from tbe property during tbe taxable year. Such allowance shall not exceed 50 per centum of the net income of tbe taxpayer (computed without allowance for depletion) from tbe property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.


author: Artjndell :

text:
    Mildred M. Hubbard, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mildred M. Hubbard, formerly Executrix of the Estate of Edward Hubbard. Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mildred M. Hubbard, as Transferee of the Estate of Edward Hubbard, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63837, 63878, 67569.
    Promulgated May 2, 1934.

      Frank E. Hoknan, Esq., and William M. Allen, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Artjndell :

The main point at issue in these proceedings is whether the first blocks of stock sold in 1929 on order of the executrix were property of decedent’s estate alone or whether such stock was property in which she had a half interest by virtue of being the survivor of the marital community. In other words, could petitioner make a division of the stock between the estate and herself prior to the termination of administration of the estate? It is conceded that the stock was community property and that petitioner had a vested interest therein.

The argument of petitioner is that, under the laws of the State of Washington, when community property is not needed to pay community debts a division of the property can be made without formal order of the probate court, and upon such division either part can be sold without regard to the other. It is respondent’s position that, although the petitioner had a vested interest in the property, it was an undivided interest at all times prior to the decree of distribution, so that the profit on all sales during the period of administration belonged jointly to petitioner and the estate.

We do not understand that respondent questions the validity of the sale, but only the identity of the property sold. But to resolve any doubts as to this, we think it clear that the validity of the sale is beyond question. In the absence of a statute, an executor has full power to sell or dispose of personal assets of the estate and give good title without special provision of the will or order of . court. Williams v. Cobb, 242 U.S. 307. The statutes of Washington, §1492, Remington’s Compiled Statutes, provide that no sale “ of any property of an estate shall be made except under an order of the court, unless otherwise provided by law.” This provision, however, does not appear to be applicable to the administration of an estate under nonintervention wills. Sections 1462 and 1463, Remington’s Compiled Statutes, 1922, provide that where a testator directs administration without court intervention, and it appears that the estate is solvent, then the estate “ may be managed and settled without the intervention of the court.” In such cases the executor has full power to sell the property of the estate without court order and without notice, approval, or confirmation. While provision is made in §1462 for a decree of settlement, “ it is established that no final decree is necessary.” Schirmer v. Nethercutt, 157 Wash. 172; 288 Pac. 265. Nonintervention wills have been provided for by statute in Washington since 1868, and the right to administer under such wills without court intervention “ is not a limitation, but rather a grant of power to the executor.” In re Megreath's Estate, 142 Wash. 324; 253 Pac. 455; affirmed on rehearing, 256 Pac. 503. Upon a showing of solvency in a nonintervention case, the estate “passes from under the immediate jurisdiction of the court, and the court would have no jurisdiction to enter an order of sale.” Fulmer v. Gable, 73 Wash. 684; 132 Pac. 641. It is further said in that case:

* * * It has been the policy of this court to put a most liberal construction on these laws, to the end that the object intended (that is, the saving of costs and the burdening and clouding of title with court proceedings) could be avoided by those who have property subject to testamentary dispositions.

One of the statutory prerequisites to a nonintervention settlement of an estate is a decree of solvency by the probate court. It appears in the case before us that no such decree was obtained prior to the sale of the stock by petitioner, but we think that no valid objection can be raised on this ground in view of the stipulation that the estate of the deceased was at all times fully solvent, the decree of solvency during the course of administration, and the decree of the probate court of April 29, 1930, declaring the estate to be fully solvent. “ The only purpose of the adjudication of solvency is to determine whether the estate shall be administered according to the provisions of the [nonintervention] will or according to the provisions of the statute.” Strand v. Stewart, 51 Wash. 685; 99 Pac. 1027. A sale even prior to probate is in effect ratified by a subsequent probate of the will, Schouler on Wills, Executors, and Administrators, 6th ed., § 2365, In re Crim's Estate, 89 Wash. 395; 154 Pac. 811. The decree in this case goes further and approves the report of the executrix wherein she reports that she “ sold one-half, namely, 9,547 shares of said stock, which was the community interest of the deceased.” Legal title given under a decree of distribution “ relates back to the date of death.” Brewster v. Gage, 280 U.S. 327.

Family arrangements for the settlement of estates without court intervention are favorites of the law. Griffin v. Warburton, 23 Wash. 231; 62 Pac. 765. In Thatcher v. Capeca, 75 Wash. 249; 134 Pac. 923, upon the death of the wife the husband took out letters of administration and caused the estate, which consisted of community property, to be inventoried and appraised, but proceeded no further with administration in probate court. He made no formal settlement with the heirs, but turned over to them sums aggregating $52,000. In a suit arising out of the husband’s use of part of the funds retained by him, the court said:

In this state it is not essential to a valid partition of property of an estate between the persons entitled thereto that an order of the probate court be had for that purpose. If the heirs are adults, and the claims of creditors be satisfied, a valid partition can be made by agreement. Griffin v. Warburton, 23 Wash. 231, 62 Pac. 765.
And here we think there was a partition by agreement as to part of the property of the estate. It will be remembered that the administrator turned over to the heirs money in the sum of $52,000. If the estate was intact when this was done, and there is no showing to the contrary, the acceptance of this sum by the heirs implied an assent to the taking by the administrator of a like sum in his own right.

If a partition and distribution can be made as in Thatcher v. Capeca, supra, among several interested parties, we see no reason why the same thing may not be done by the survivor, who is also the executrix, by designation of parcels of the property where there are no adverse interests. Counsel for respondent says that an application of the principle of Thatcher v. Capeca, supra, to the present case would require a holding that only 3,546 shares of stock were partitioned and distributed to her. This argument is presumably based on that part of the probate court decree wherein it is set forth that the petitioner “ distributed to herself * * * 3,546 shares of common stock * * * and has on hand 6,000 shares of said stock.” We think this argument unsound. In the first place it would not be necessary for her to distribute to herself her full portion at one time; neither was it necessary that equal amounts be earmarked as property of the estate and as distributed to herself as a part of her community share. Secondly, and principally, we are not concerned with the portion distributed to petitioner as her community share, but with that part designated and sold as property of the estate of the decedent. The paragraph of the decree partially quoted above reads in full as follows:

That during the course of the administration of said estate said' executrix up to December 81, 1929 had distributed to herself, as the owner of a vested community one-half interest in all of the property coming into her hands, 3,546 shares of common stock of United Aircraft and Transport Corporation (formerly Boeing Airplane & Transport Corporation), and has sold one half, namely, 9,541 shares, of said stock, which was the community interest of the deceased therein, and has on hand 6,000 shares of said stock which are a part of her community one-half thereof. That on or prior to said date said executrix has also distributed to herself, as the owner of a community one-half interest $10,000 in cash. [Italics supplied.]

From this, and from other facts established, namely, the detailed steps taken to partition the stock, the sale of it and treatment of the proceeds as property of the decedent, and the approval of the court having jurisdiction, it is difficult to see what more could be needed to make a valid partition. We are of the opinion that it was valid and the stock sold in January and February 1929 was stock belonging to the estate of the decedent to the extent of 9,546% shares. The profit on that number of shares should be taxed accordingly, and the profit on the balance sold in 1929 should be taxed to petitioner as sales of her individual property.

Decision will be entered, under Bule SO in each proceeding.

       § 1462. Settlement ’Without Court Intervention — Order of Distribution — Mismanagement — Citation.
      In all cases where it is provided in the last will and testament of the deceased that the estate shall be settled in a manner provided in such last will and testament, and that such estate shall be settled without the intervention of any court or courts, and where it duly appears to the court, by the inventory filed, and other proof, that the estate is fully solvent, which fact may be established by an order of the court on the filing of the inventory, it shall not be necessary to take out letters testamentary or of administration, except to admit the will to probate and to file a true inventory of all the property of such estate and give notice to creditors and to the state board or person having charge of the collection of inheritance tax, in the manner required by existing laws. After the probate of any such will and the filing of such inventory all such estates may be managed and settled without the intervention of the court, if the last will and testament shall so provide. But when the estate is ready to be closed the court, upon application, shall have authority and it shall be its duty, to make and cause to be entered a decree finding and adjudging that all debts have been paid, finding and adjudging also the heirs and those entitled to the same, such decree to be made after notice given as provided for like decrees in the estates of persons dying intestate. * * * L. ’17, p. 666; § 92.
      § 1463. Powers of Nonintervention Ewecutors.

      Executors acting under wills such as are mentioned in the last preceding section shall have power, after the filing of an inventory of the estate, if the said estate has been adjudged solvent, to mortgage, lease, sell and convey the real and personal property of the testator without an order of the court for that purpose and without notice, approval or confirmation, and in all other respects administer and settle the estate without the intervention of the court. [L. ’17, p. 667, § 94.]


author: Seawell:

text:
    Robert S. Farrell, Petitioner, v. Commissioner of Internal Revenue, Respondent. G. A. Olson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54294, 54295.
    Promulgated May 2, 1934.

      Robert T. Jacob, Esq., for the petitioners.

      Owen W. Bwecher, Esq., for the respondent.
   OPINION.

Seawell:

The record shows that the petitioners, Robert S. Farrell and G. A. Olson, as stockholders in the Deep River Logging Co., received on December 28, 1928, as distributions from the company, $25,750 and $18,750, respectively. It is contended by petitioner Farrell that the respondent erroneously added to his income for 1928, subject to surtax, $18,769.18, and petitioner Olson insists respondent likewise erroneously added to his taxable income for that year $13,666.87.

It is argued on behalf of the petitioners that no portion of the sums of $18,769.18 and $13,666.87 added to the 1928 incomes of Farrell and Olson, respectively, is taxable to them, because the distributions, it is insisted, were not from earnings or profits accumulated after February 28,1913, but out of the earnings prior to March 1, 1913.

In our opinion, under the applicable law the contention of the petitioners is not sustained by the record, as the following brief computation made therefrom shows, bearing in mind that the “ timber appreciation” is, as stated in our findings of fact, a “realized appreciation.”

March 1, 1913, surplus_$605, 534.28

December 31, 1915, in paying the dividend of $144,000, the Deep Kiver Logging Co. used all its earnings (including “ timber appreciation ”) accumulated since February 28, 1913, and in addition thereto the amount of- 70,894.00

Balance March 1, 1913, surplus_ 534, 640.28

December 31, 1926, necessary to take care of losses for that year_ 25, 904.41

Balance March 1, 1913, surplus_ 508, 735.87

December 31, 1927, all losses for 1927_ §9,147.92

Balance March 1, 1913, surplus on hand on December 31, 1927_ 479, 587.95

It is apparent from the foregoing and the record that all that the company had with which to pay the dividend of $75,000 on December 28, 1928, was the above balance of March 1, 1913, surplus, and the current 1928 earnings of $54,667.50, from which it is evident that 72.89 percent of the $75,000 distribution, as determined by the respondent, would be taxable as a dividend and the balance or 27.11 percent would be paid from March 1, 1913, surplus and would be nontaxable. We are, therefore, of the opinion and hold that the respondent did not err in adding to the 1928 incomes of petitioners Farrell and Olson, subject to surtax, $18,769.18 and $13,666.87, respectively, those sums being 72.89 percent of the $25,750 and the $18,750 received by petitioners, respectively, from the $75,000 distribution made to stockholders on December 28,1928, by the Deep River Logging Co.

Our determination herein is in accord with and controlled by the principle enunciated in Helvering v. Canfield, 291 U.S. 163. Cf. Louise Glassell Shorb, 22 B.T.A. 644, and Arthur C. Stifel, 29 B.T.A. 1145.

Judgment will be entered in fa/oor of respondent in each of the dockets.


text:
    First National Bank in Mobile, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 63732.
    Promulgated May 2, 1934.

      Geo. E. H. Goodmer, Esq., and W. K. Smith, Esq., for the petitioner.

      Thomas F. Callahan, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has determined a deficiency in income tax for the year 1929 in the amount of $599.75. The petitioner is a national banking corporation, with its principal office at Mobile, Alabama. The issues are: (1) Insufficient depreciation allowance on an annex to its bank building constructed in 1929; (2) erroneous computation of allowance for depreciation of its mechanical equipment; (3) disallowance by respondent as ordinary expense of an amount alleged to have been expended for necessary repairs on its old bank building; (4) disallowance of deduction representing certain donations; and (5) overstatement of profit realized from the sale of securities in 1929. It introduced no evidence in support of its second contention and at the hearing the respondent admitted error as to the fifth cause of action. Accordingly, the respondent is affirmed in his determination as to the depreciation of petitioner’s mechanical equipment in 1929, and is reversed in the matter of profits from the sale of securities in the same year, which reduces the petitioner’s profit thereon in the amount of $3,976.41. This leaves for our consideration only alleged errors (1), (3), and (4).

The annex to petitioner’s bank building was completed late in 1929. It is a steel and concrete eight-story office building which the respondent has determined has a. useful life of 50 years, and upon which a depreciation deduction for the last two months of the taxable year, based on a rate of 2 percent per annum has been allowed in the amount of $1,866.33. Petitioner contends that the useful life of the building is not in excess of 40 years and asks for depreciation allowance at a rate not less than 2% percent per annum. This contention is based on section 23 (k) of the Revenue Act of 1928. This Board and the courts have many times held that depreciation, including obsolescence, is a matter of fact to be established by evidence.

In support of its contention for a higher rate of depreciation, petitioner introduced three witnesses. Its vice president testified that the erection of the annex and of a new building just across the street by the Merchant’s Bank caused the loss of a number of tenants of its old building and that, in his opinion, the erection of new office buildings in the future would shorten the economic life of the annex. The operating manager of the building in question testified that in his opinion the economic useful life of such buildings erected in 1929, or earlier, is not more than 35 years. He based his opinion on his knowledge of improvements in the construction of office buildings that are constantly being made. He enumerated improved high-speed elevators and heating and air-conditioning systems as^bmng placed in new buildings, which cannot be economically installed in completed structures. To the same effect was the testimony of an architect in no way connected with the petitioner and also that of the architect who designed and supervised the construction of the building here involved. The respondent adduced no evidence on this point.

It is now generally known that the economic usefulness of office buildings is shorter than their physical life. In a similar controversy in Robert H. McCormick, 2 B.T.A. 430, where the respondent disallowed petitioner’s claim for a 40-year useful life on office buildings in Chicago, the Board overruled his determination and allowed the computation of depreciation on the basis of 40 years of useful life. In our opinion petitioner’s allowance for depreciation, including obsolescence, in the building here involved, should be made on the basis of 40 years of economic useful life. Central Savings Bank, 10 B.T.A. 1408; United Business Corp. of America, 19 B.T.A. 809. Cf. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648.

The first section of the old bank and office building of the petitioner was erected in 1903, the second in 1913. In 1928 a fire in that building disclosed the necessity for somewhat extensive replacements in the electrical wiring system made in 1929 at a cost of $4,907.18, which amount the petitioner deducted from its gross income in that year as an ordinary and necessary expense. Such deduction was disallowed by the respondent, who held that the amount claimed was a capital expenditure. The evidence indicates that the expenditure in question was incurred in the installation of a completely new assemblage of electrical equipment. The old wiring and material had been used for 15 years before any necessity for other than ordinary repairs was discovered. In our opinion the replacement of the old wiring and other equipment was not for incidental repairs, but was in the nature of an additional capital expenditure which the petitioner is entitled to recover ratably over the remaining useful life of the building. On this issue the determination of the respondent is affirmed. Parkersburg Iron & Steel Co., 17 B.T.A. 74; aff'd., 48 Fed. (2d) 163; Lycoming Silk Co., 11 B.T.A. 523.

In the taxable year the petitioner made contributions and donations as follows:

Petitioner contends that all the donations set out above are deductible from income in 1929 as ordinary and necessary expenses. To prevail on this issue it must show that they were paid out for necessary purposes of its business. E. G. McCauley, an active vice president of the petitioner, testified as to the purposes for which the larger contributions were made. His evidence may be summarized as follows: Gifts to the Community Chest of Mobile doubtless added to the good will which petitioner enjoyed in that city. Such contributions are necessary in order to retain business and to assist in securing new clients. The contribution to secure a meeting of the American Legion Convention in Mobile, in the amount of $245, was made for the purpose of securing more business. Spring Hill College is a Catholic educational institution located in Mobile, which has a large Catholic population, many of whom, as well as the college, are customers of the petitioner. The amount of $1,000 contributed to the American Eed Cross was in response to an emergency call for flood relief in Southern Alabama, in a district in which the petitioner had many customers. The testimony is that refusal to make this donation would have aroused resentment among the customers of the bank and would have caused more criticism than failure to make any other contribution on the list.

In Adam, Meldrum, & Anderson Co., 29 B.T.A. 419, the Board considered claims for deductions very similar to the contentions of the petitioner. In our report therein, we said:

It is our opinion that contributions of this character do not fall within the classification of “ordinary and necessary expenses” as that phrase is used in the revenue laws, unless it is clearly shown that the expenses bear some direct relation to petitioner’s business. They rather fall within the charities enumerated in section 23 '(n) of the Kevenue Act of 1928. Congress bas provided that such expenditures are, within certain limitations, deductible by individual taxpayers, but not by corporations. Such contributions if made public may have some advertising value, but they can hardly be classed as “ ordinary and necessary” expenses of advertising. The respondent is sustained as to this issue.

In Welch v. Helvering, 290 U.S. 111, the Supreme Court, speaking through Mr. Justice Cardozo, said:

Unless we can say from facts within our knowledge that these are ordinary and necessary expenses according to the ways of conduct and forms of speech prevailing in the business world the tax must be confirmed. But nothing told us within this record or within the sphere of our judicial notice permits us to give that extension to what is ordinary and necessary.

While the Welch case did not involve contributions, it did require a definition of the statutory concept of “ ordinary and necessary expenses.” There is nothing in the record upon which we can base a finding that the contributions in question were such expenditures as are commonly regarded either as ordinary or necessary in the conduct of a business. The testimony is that some of the gifts could not have been denied without provoking resentment on the part of customers of the bank, but there is no evidence that any of the beneficiaries of the petitioner’s largess increased their volume of business with the bank by reason thereof or that any would have discontinued their business relations with the petitioner had any or all the contributions been withheld. There is no showing that petitioner was directly benefited by the donations claimed. In this situation the deductions claimed must be denied.

Reviewed by the Board.

Decision will he entered under Rude 50.

GoodRich concurs in the result.

Smith dissents on the question of donations.

       Sac. 23. (k) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of property held by one person for life with remainder to another person, the deduction shall be-computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held In trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.


author: Matthews :

text:
    Walker Products Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Three Rivers Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pittsburgh Melting Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Continental Legal & Protective Association, Petitioner, v. Commissioner of Internal Revenue, Respondent. Allegheny Garbage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket Nos. 44856-44860, 48880.
    Promulgated May 4, 1934.

      H. A. MiMLls, O.P.A., for the petitioners.

      James K. Polk, Esq., and Ha/rold F. Noneman, Esq., for the respondent.
   OPINION.

Matthews :

In the brief filed on their behalf the position of the. petitioners is stated to be that the combined net loss sustained by the affiliated corporations in 1924 and 1925 should be carried forward as a unit and applied against the taxable net income of the affiliated group for 1926, and that the combined net loss sustained by the affiliated group in 1925 should be carried forward against the consolidated net income of the affiliated group for 1927 to the extent that it was not absorbed in being carried forward as a net loss deduction against income for 1926.

We cannot agree with the petitioners’ contention. The record discloses that there was no taxable net income of the affiliated group until 1926, and that none of the companies sustaining a net loss in 1925 had any net income for 1926 or 1927, with the exception of the Continental Legal & Protective Association, which had a net loss of $86.55 in 1925 and a net income of $666.15 in 1926. This Board and the courts have repeatedly held that the statutory net loss of a corporation can be applied only to the income of that corporation and that this is as true in respect of affiliated corporations as of independent corporations. The principle is well established that net losses sustained by members of an affiliated group for a prior year may enter into the computation of consolidated net income only to the extent that the net loss is allowed as a deduction in determining the net income of the member entitled to claim the deduction. Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436; Swift & Co. v. United States, 38 Fed. (2d) 365; Commissioner v. Ben Ginsburg Co., 54 Fed. (2d) 238. Thus, in the instant case, the net loss attributable to any one of the affiliated companies for 1925 may not be used as a deduction in 1926 beyond the point where there is income of that company to absorb it; that is, it may not be used to produce a loss which would enter into the computation of consolidated net income. Although the citation of cases in support of. this principle may be multiplied, it will suffice to refer to Woolford Realty Co. v. Rose, 286 U.S. 319; and Delaware & Hudson Co., 26 B.T.A. 520; aff'd., 65 Fed. (2d) 292; certiorari denied, 290 U.S. 670. Under the ruling laid down in Kaiwiki Sugar Co., Ltd., 21 B.T.A. 997; aff'd., 63 Fed. (2d) 822, we hold that the portion of the consolidated statutory net loss assignable to the Continental Legal & Protective Association should be applied against that company’s net income for 1926, which would bring about a slight reduction in the consolidated income of the affiliated group for 1926.

One of the affiliated companies, the Allegheny Garbage Co., is entitled to deductions from its income for the years 1925 and 1926 in the respective amounts of $2,428.05 and $1,172.40 on account of losses incurred through the disposition of horses used for delivery purposes. We accordingly hold that the sum of $1,172.40 should be deducted from that company’s income for 1926, which deduction will also reduce the consolidated net income of the affiliated group for 1926. The sum of $2,428.05 is likewise deductible from that company’s income for 1925 and this deduction will increase the consolidated net loss of the affiliated group for 1925. No deficiencies have been asserted for 1925, for which year there was no taxable income of the affiliated group, and since we have held that the consolidated net loss for 1925 cannot be carried forward as a deduction, under the circumstances presented herein, the deduction of $2,428.05 to which the Allegheny Garbage Co. is entitled for 1925 will have no effect upon the recomputation of the deficiencies for 1926 except to increase slightly that portion of the consolidated statutory net loss for 1925 which is assignable to the Continental Legal & Protective Association, which corporation alone had a net loss in 1925 and a net income in 1926.

One issue remains for our determination. The amended petition filed in Docket No. 48880 contains the allegation that the respondent erred in failing to allow the loss of $114,848.91 sustained in 1927 by the Pittsburgh Melting Co., one of the affiliated corporations, on account of closing out the business of its subsidiary, the Charles R. Luker Co. The loss claimed represents the difference between the sum of $167,624.63, which was the cost to the Pittsburgh Melting Co. of the entire capital stock of the Charles ft. Luker Co., and the amount of $53,275.72, representing an account receivable from the Pittsburgh Melting Co. to the Charles R. Luker Co. This alleged loss was not deducted on the consolidated income tax return filed by the Three Rivers Securities Corporation for the year 1927 and has not been allowed by the respondent.

The Charles R. Luker Co. was incorporated in November 1919 and, like the Pittsburgh Melting Co., was engaged in the business of gathering scraps from butchers, turning them into tallow, and rendering them to make cracklings which were resold or ground into chicken feed. The Charles R. Luker Co. never paid any dividends. Its books show an operating profit of $14,728.76 for the period January 1 to June 30,1920, but it sustained a loss of $40,435.44 for the next six-month period. The company continued to operate at a loss and in June 1924 its plant located at Altoona, Pennsylvania, was sold to persons not connected with the company or its affiliated companies. The Charles R. Luker Co. conducted little business after the sale of this plant. One of the officers of the Pittsburgh Melting Co., who was the only witness at the hearing of these proceedings, testified with respect to closing out the business of the Charles R. Luker Co.:

Each, year we would send a man out to see where we could locate a new plant, the New England states, New York, Ohio, Indiana, or some other place. We kept this Luker Company, figuring we were going to use it for one of these plants we would open up, but in 1927 we decided not to open any plants on the outside, and that was the end of the Luker Company.

It was testified that upon the sale of its plant in June 1924 the company took a purchase money mortgage of $6,000 on the property sold and that there was a balance of $3,000 due on this mortgage in 1927. One of the officers of the company had advanced more than $7,000 of his own money, for the benefit of the company and the mortgage was turned over to him in 1927. The Altoona plant had sold for $22,000 and the proceeds of the sale, over and above the amount of the mortgage, were turned over to the Pittsburgh Melting Co. Apparently this cash payment was treated as an advance to the Pittsburgh Melting Co., for it is stated in the brief filed on behalf of the petitioners that the account receivable of $53,275.72 on the books of the Charles R. Luker Co. consisted of advances made to the Pittsburgh Melting Co., together with charges for services rendered or supplies furnished, and it was testified that any advances to the Pittsburgh Melting Co. would have been included in this account receivable. Since the company had no assets in 1927 except this account receivable and the above mentioned mortgage and they were both disposed of during that year, it would seem that the company was completely liquidated in 1927, even though it does not appear to have been dissolved. A formal dissolution of the subsidiary company is not essential to establish the loss of the parent corporation growing out of the subsidiary’s liquidation in the taxable year. Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544. And for years prior to 1929 the liquidation of a subsidiary during the period of affiliation is not considered as an intercompany transaction. G.C.M. 11676, C.B. XII-1, p. 75. The case of Ilfeld Co. v. Hernandez, 292 U.S. 62, relates to the loss on the liquidation of subsidiaries in 1929 and is therefore not in point. We are of the opinion that the Pittsburgh Melting Co. sustained a deductible loss in 1927 on account of its ownership of the capital stock of the Charles B. Luker Co. The deduction to which the Pittsburgh Melting Co. is entitled is measured by the cost of its investment in the capital stock of the Charles R. Luker Co., or $167,624.63, less the amount received by the Pittsburgh Melting Co. on the liquidation of the Charles B. Luker Co., or $53,275.72 (the amount of the account receivable which the subsidiary held against the parent corporation), and the loss thus arrived at should be adjusted on account of any operating losses of the Charles B. Luker Co. during the period of affiliation which are reflected in the consolidated income for such period, as set out in the stipulation entered into between the parties hereto. W. M. Bitter Lumber Co., 30 B.T.A. 231. The losses of the Luker Co. during the period of affiliation, which are to be taken into consideration, are $17,759.13 in 1921 and $4,493.20 in 1922, and that portion of the loss of $783.85 in 1923 which was used as an offset against the income of the companies having income in that year and which is not reflected in the consolidated net loss for the year. In Kaiwiki Sugar Co., supra, we held that the statutory net loss assignable to each member, which, considered separately, sustained a net loss, is the same proportion of the consolidated net loss which the net loss of the member is to the sum of the net losses of all the members sustaining net losses. The difference between the net loss sustained by the Luker Co. in 1923 and that portion of the consolidated net loss assignable to it is the amount which has been offset against the income of the companies having income, and this amount should be added to the losses of 1921 and 1922, which were deducted from income of those years.

Beviewed by the Board.

Judgment will be entered wnder Bule BO.


author: Smith : Adams,

text:
    The Ballwood Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66312.
    Promulgated May 4, 1934.

      /S. Leo Buslander, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Smith :

The respondent has determined that the exchange by the petitioner of all the capital stock of the Fabricating Co. for a portion of the capital stock of the Midwest Co. resulted in a taxable gain to the petitioner, measured by the difference between the cost to it of the Fabricating Co. stock and the fair market value of the shares of the Midwest Co. stock received in. exchange therefor. The petitioner contends that the exchange in question was a nontaxable exchange made pursuant to a plan of reorganization under section 112 (b) (3) of the Revenue Act of 1928.

The pertinent provisions of the statute read as follows:

SEO. 112. RECOGNITION OF GAIN OR LOSS.
(a) General rule. — Upon tiie sale or exchange of property the,entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) Bteolumges solely in Mnd,.—
*******
(3) Stock foe stock on eeoeganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(4) Same — Gain of corporation. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganizatiton.
* * * * * * *
(i) Definition of reorganization. — As used in this section and sections 113 and 115—
(1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) 'a transfer b«y a corporation of all or a part of its assets to another corporation if immediately after the transfer the trans-feror or. its stockholders or both are in control of the corporation to which thd assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
(j) Definition of control. — As used in this section the term “control” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

We are in accord witb the respondent’s contention that the several transactions which took place in the performance of the agreement between the petitioner and the Midwest Co. must be viewed separately for the purpose of determining whether the exchanges made in such transactions are taxable under the quoted provisions of the statute. For instance, the first step in carrying out the agreement was the exchange by the petitioner of a part of its assets for all of the capital stock of the Fabricating Co. Unquestionably this transaction viewed separately constituted a reorganization within the meaning of section 112 (b)- (4) and (i) (1) (B) and (i) (2) resulting in no taxable gain to the petitioner. This is admitted by the respondent and we understand that the respondent has not sought to tax the petitioner upon any gain resulting from the exchange. The second step was the exchange by the petitioner of all the capital stock of the Fabricating Co. for a portion of the stock of the Midwest Co. It is this exchange upon which the respondent has determined that the petitioner realized a taxable gain, measured by the difference between the cost of the Fabricating Co.’s stock and the value of the Midwest Co.’s stock received in exchange. The respondent contends that this exchange was not in itself a statutory reorganization or an exchange made in pursuance of any plan of reorganization.

While the exchange in question, the so-called second step, was made pursuant to the original agreement, the terms of which are stated in the letter of February 19, 1929, we do not think that the agreement as a whole must be considered “ a plan of reorganization merely because it was so designated by the parties. Conceivably an agreement entitled “ a plan of reorganization ” might be drawn up that would involve a series of statutory reorganizations, each taxable or nontaxable in its execution according to its own conditions. Or there might be an agreement involving a plan of reorganization as only a minor feature. Certainly we would not say that every separate transaction taking place under such an agreement was made “ in pursuance of the plan of reorganization.” See E. F. Simms, 28 B.T.A. 988. The reorganization contemplated by the statute, or the plan of reorganization, is the one of which the exchange sought to be taxed formed a necessary or vital part. In Edison Securities Corp., 29 B.T.A. 483, we said:

As above indicated, the statute does not, as a general proposition, require that whenever a reorganization is found to have at some time occurred, all transactions in the shares before and after shall be embraced within the reorganization, so that losses and gains may not be recognized. * * *

In its usage in the statute under consideration we think that the term “in pursuance of the plan of reorganization” should not be construed to mean following merely in point of time (see Humble v. St. John, 234 Pac. 475), but in the sense of the definition quoted, that is, in consequence or prosecution of some definite plan.

Our question then is whether the second step, that is, the exchange by petitioner of the shares of the Fabricating Co. for shares of the Midwest Co. constituted in itself a statutory reorganization. If so, it was a reorganization under subdivision (A) of section 112 (i) (1) :

* * * a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.

We have held in several cases, following Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, and Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599, that mere acquisition by one corporation of a majority of the stock, or all the assets, of another corporation does not constitute a reorganization where such acquisition takes the form of a purchase and sale and does not result in or bear some material resemblance to a merger or consolidation. See Minnesota Tea Co., 28 B.T.A. 591; John J. Watts, 28 B.T.A. 1056; Central Nat. Bank of Lincoln, Nebr., 29 B.T.A. 719; A. L. Miller, 29 B.T.A. 1061. In Pinellas Ice & Cold Storage Co. v. Commissioner, supra, it was stated:

The paragraph in question directs: “ The term ‘ reorganization ’ means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation).” The words within the parenthesis may not be disregarded. They expand the meaning of “merger” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. But the mere purchase for money of the assets of one company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation: Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes. This general view is adopted and well sustained in Cortland, Specialty Co. v. Commissioner of Internal Revenue, (C.C.A.) 60 F. (2d) 937, 939, 940. It harmonizes with the underlying purpose of the provisions in respect of exemptions and gives some effect to all the words employed.

Although the facts in the instant case show a situation well outside of that described in the Pinellas Ice & Cold Storage Co. case, said not to come within the statute, where there was a “ mere purchase for money of the assets of one company by another ” and where the selling corporation acquired no interest “in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes,” we are, nevertheless, of the opinion that the transaction did not constitute a “ reorganization ” within the contemplation of section 112 (i) (1) of the taxing statute. The history of the reorganization provisions of the income tax acts is stated by the Circuit Court of Appeals in Helvering v. Gregory, 69 Fed. (2d) 809, as follows:

* * * It [the section] first appeared in the Act of 1924, (section 203, (h) (1)(B)), and as the committee reports show, (Senate Keport 398), was intended as supplementary to section 112 (g), (then section 203 (c)) ; both in combination changed the law as laid down in U.S. v. Phellis, 257 U.S. 156, arid Rockefeller v. U.S., 257 U.S. 176. In the House Report, (No. 179, 68th Congress 1st Sess.), and in the Senate Report, (No. 398), the purpose was stated to be to exempt “from tax the gain from exchanges made in connection with a reorganization in order that ordinary business transactions will not be prevented.” * * *

The facts in the instant case show that the petitioner desired to sell or exchange a portion of its assets constituting only 29 percent of its total assets to the Midwest Co. for certain shares of stock in that company. It was apparently appreciated that if the exchange had been made directly with the Midwest Co. the petitioner would be under a large income tax liability. Apparently also to .minimize such tax liability the Ballwood Pipe Fabricating Corporation was created, to which the petitioner transferred these assets in exchange for all of the capital stock of that corporation. Upon the receipt of such shares the petitioner transferred them to the Midwest Co. for shares of stock of that company which had a fair market value of $500,000. The shares of stock of the Midwest Co. received were only about 18 percent of the total number of shares of that company. The petitioner was not then in control of the Midwest Co. Shortly thereafter the petitioner distributed the Midwest Co. shares received to its sole stockholder as a dividend. We are not concerned with this latter transaction.

The proceeding before us bears a close resemblance to that of John J. Watts, supra, in which we held that the acquisition by one corporation of all of the stock of another was not of itself sufficient to constitute a “ reorganization ” if the transaction was not “ of the nature of a merger or consolidation.” We think that our opinion in that case is dispositive of the proceeding at bar.

The facts in this proceeding also bear a close resemblance to those involved in Helvering v. Gregory, supra. The court there held that no reorganization was effected by the transfer by an existing corporation to a newly formed corporation of certain investment shares of stock which the old corporation owned under an agreement whereby the new corporation issued all of its shares to the sole stockholder of the old corporation. In that case it was admitted that the new corporation was formed for the purpose of minimizing the income tax of the stockholder who wished to acquire the investment shares of stock held by the corporation without paying the surtax on the distribution of such shares. The new corporation was liquidated three days after its formation and upon surrender of its shares the stockholder received the investment stock. Although the transfer between the corporations came under the wording of section 112 (i) (1) (B) of the 1928 Act defining a reorganization as “ a transfer by a corporation of * * * a.part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred,” the court held that it was not the purpose of Congress to recognize as a reorganization a transaction which was no part of the conduct of the business, but was an added gesture made in an effort to save taxes. While sanctioning the legitimate minimizing of taxes, the court declared that “ To dodge the shareholders’ taxes is not one of the transactions contemplated as corporate ‘ reorganizations.’ ” Although there are points of difference between the instant proceeding and the Gregory case in that the record contains no admission on the part of the petitioner that the creation of the Fabricating Co. was for the purpose of minimizing taxes, and the Fabricating Co. still remains in existence, we think that the points of difference are not material. The Fabricating Co. was an inactive corporation from the time of its organization and never transacted any business. It simply held the legal title to the assets transferred to it for the benefit of the Midwest Co.

We sustain the respondent’s contention that the transaction in question was not a reorganization within the contemplation of the statute and that the petitioner is liable to income tax in respect of the difference between the cost basis of the assets transferred to the Fabricating Co. and the fair market value of the shares of the Midwest Co. received in exchange.

Keviewed by the Board.

Judgment will he entered for the respondent.

SteeNhageN concurs in the result only.

Black concurs in the result.

TRAMmell and Leech dissent.

Adams,

concurring: While concurring in the result reached in the opinion in this case, I do not think the transactions here must be considered as two separate transactions. The offer to the Midwest Co. which was submitted by Edward J. Hughes, who was the president and the owner of all the common stock of petitioner, clearly indicates the purpose of the transaction to be as follows:

The Ballwood Company (hereinafter called “Ballwood”) hereby submits to your Company (hereinafter called “Midwest”) its proposal for an exchange of securities under a reorganization plan, of which the following is a part.

This purpose was accomplished by the circuitous route defined in the so-called “Reorganization Plan.” The organization of the “Ballwood Pipe Fabricating Corporation ”, the exchange of certain assets of petitioner for all its stock and the exchange of this stock for stock of the Midwest Co. were but steps in a single transaction— the exchange by petitioner of a part of its assets for stock of the Midwest Co.

In my opinion, the transaction must be viewed as a whole and when so viewed it results in a transaction on which gain or loss may be realized.


author: Morris :

text:
    Mrs. A. B. Hurt, Joel Hurt, Jr., and Continental Trust Company, Executors, Estate of Joel Hurt, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28099.
    Promulgated May 8, 1934.

      William A. Sutherland, Esq., and Elbert P. Tuttle, Esq., for the petitioners.

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

Morris :

The respondent has determined deficiencies in income taxes of $7,429.49, $14,936.16, and $5,323 for the years 1922,1923, and 1924 against the above entitled estate and it is for the redetermination thereof that this proceeding is brought.

It is alleged that the respondent erred (a) in disallowing certain deductions claimed by the decedent during the taxable years aforesaid in the defense of a suit brought against him for the recovery of $250,000 and interest, and (b) in disallowing as deductions for 1922 and 1923 amounts claimed on account of an alleged net loss suffered in 1921 upon the bankruptcy of the Pratt Engineering & Machine Co.

The petitioners are the duly appointed and acting executors of the estate of Joel Hurt, deceased.

The decedent, Joel Hurt, was, prior to his death on January 9, 1926, a resident of the city of Atlanta, Georgia. During the years 1918 to 1921, inclusive, the decedent was the majority stockholder and a director of the Pratt Engineering & Machine Co., a Georgia corporation, having acquired his stockholdings in that corporation, amounting to approximately 80 per centum, prior to and/or during the year 1914, at a cost of $229,925.

The Pratt Engineering & Machine Co. was a subcontractor under a United States Government contract with the Everly N. Davis Chemical Corporation. Under the terms of that contract, the Pratt Engineering & Machine Co. received the sum of $250,000 to be used solely in the construction of a picric acid plant at Picron, Arkansas. This money was lost in the operations of the Pratt Engineering & Machine Co., and the corporation was adjudicated a bankrupt in the year 1921. No corporate funds remained after satisfying claims of creditors and bondholders. During the year 1922 the United States Government instituted suit in the District Court of the United States for the Southern District of New York against the decedent and the other directors of the Pratt Engineering & Machine Co., seeking to recover from them, individually, the sum of $250,000, plus interest, on the ground that the aforesaid sum of $250,000 had been misappropriated, and that the directors of the corporation were, therefore, liable under the trust fund doctrine. This suit was discontinued by stipulation and consent of counsel, on January 11,1926, without prejudice.

In connection with the litigation as set forth above the decedent paid attorney fees and court costs, as follows: $2,364.65 in the year 1922; $13,124.82 in the year 1923; and $7,023.99 in the year 1924. In the income tax returns filed by the decedent for the years 1922, 1923, and 1924, the aforesaid amounts were claimed as deductions from gross income for the years in which paid. In his determination of the deficiencies involved in this proceeding, the respondent disallowed the deductions so claimed, on the ground that they did not represent ordinary and necessary business expenses within the meaning of section 214 (a) (1) of the Revenue Acts of 1921 and 1924.

The stock of the Pratt Engineering & Machine Co., which the decedent acquired at a cost of $229,925, as above set forth, became worthless during the year 1921. The decedent’s net income for the year 1921, computed without any deduction for or on account of the loss sustained by him by reason of his stock in the Pratt Engineering & Machine Co. having become worthless in that year, was $48,395.92. The excess of the loss so sustained by the decedent over the income so received by him in 1921 is $181,529.08.

The income tax returns filed by the decedent for the years 1922 and 1923 disclosed no tax due, by reason of the fact that deductions were claimed on each of said returns for a portion of the aforesaid amount of $181,529.08. These deductions were claimed by the decedent on the ground that the loss sustained by him by reason of his stock in the Pratt Engineering & Machine Co. having become worthless in the year 1921 was a net loss within the meaning of section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924. In his determination of the deficiencies involved in this proceeding for the years 1922 and 1923, the respondent disallowed the deductions so claimed. The decedent’s net income for the year 1922, computed without any deduction for or on account of the attorney fees herein involved, and without any deduction for or on account of the loss sustained fin connection with the stock of the Pratt Engineering '& Machine Co., is $57,098.40.' His net income for the year 1923, computed in like manner, is $87,131.22.

In addition to the foregoing stipulated facts the parties reduced to writing what the testimony of the son of the decedent would have been had he been called to testify regarding his father’s business career. In the beginning, many years ago, he was engaged in the real estate business, operating under a partnership form. It was at or about that time that he organized the first building and loan association known to that section of the country. In or about 1882 he was instrumental in organizing one of the first fire insurance companies to be organized in the South, he becoming secretary of the company, in which capacity he continued until about 1900, when he acquired the controlling interest and became its president. In or about 1915 that company was sold to another and the stockholders thereof received stock of the new company in exchange for their holdings in the old.

What was probably his largest undertaking was the organization of a company in 1887 for the development and sale of real estate and the promotion of a street railway. He became the president of the company and owned $500,000 of the total $600,000 capitalization of the company. Having sold practically all of its land prior to 1912, the company ceased to be active. It successfully developed a large subdivision and built the first electric street railway in Atlanta.

At the time of the organization of the street railway just referred to there were several separate horse-car lines operating on the streets of Atlanta, being owned by different companies. Shortly thereafter one or two other small electric lines were started. Just prior to 1900 the decedent consolidated practically all of the street railway lines in the city of Atlanta and in or about 1902 he disposed of his holdings in that enterprise.

The same company just referred to built in 1890 what was then regarded as the largest office building in the South, which within a few years thereafter was sold to another' company.

In 1891 the decedent purchased all, or at least 80 percent, of the stock of a savings bank then enjoying an exceptionally advantageous charter. The capital stock of that institution was gradually increased and finally the decedent disposed of his holdings, retiring from the presidency thereof in or about 1904.

The decedent reorganized a company engaged in the iron and coal mining business in 1901, acquiring 8,705 of the 4,000 outstanding shares thereof. The assets of that company were sold in 1906 to another corporation and finally, by virtue of the ownership of mortgage bonds upon those properties, and the foreclosure thereupon, they were repossessed by the. decedent and later sold to another corporation.

In 1890 the decedent organized another company, of which he was vice president, for the purpose of developing and selling real estate. Finally, in 1908, be having then acquired control thereof, all of the company’s properties were sold to other interests.

In 1909 the decedent built a theatre building costing approximately $150,000, which he leased to others and finally sold in 1924 to a realty corporation.

The corporation known as the Atlanta Realty Corporation was organized in 1912 for the purpose of erecting a modern office building, one of the three largest in the country. The $1,000,000 capital of the company was paid for with real estate and was owned entirely by the decedent and his wife. The stock in that company was partially disposed of by gift by the decedent before his death.

In or about 1911 the Pratt Engineering &' Machine Co., which the decedent owned, contracted with another corporation to erect an acid and fertilizer plant. The plant was completed by the Pratt Co., but the other party to the contract defaulted in payment, so that the Pratt Co. was compelled to take over the plant. In the solution of this difficulty the decedent advanced the funds with which to organize a fertilizer company in order to place the plant in operation. For the duration of the war the company made handsome profits, but had not succeeded in earning sufficient to restore the capital investment therein prior to the time when the war ended and business was no longer profitable. The decedent owned the stock in that company until his death.

In 1918 the decedent and others organized a trust company and he was elected vice president thereof and continued to occupy that office until 1926. That company was capitalized at $500,000, 2,372 shares of its stock being then owned by the decedent, which he later increased to majority ownership.

In or about 1915 the Commercial National Bank of Macon became financially embarrassed and was closed by the Comptroller of the Treasury, the assets of which were later bought by the American National Bank, which latter institution liquidated. The decedent purchased all of the assets of the American National, including $1,500,000 of the assets of the Commercial National, and he agreed to pay all of the debts of the American National, together with $150 a share to the stockholders. He- acted as liquidating agent, collected all of the assets that were collectible, and was discharged in 1925. One of the assets of the American National was a 6,253-acre farm, an historic plantation near Macon. The decedent decided to organize that farm as a model agricultural institution and he built a nine-mile levee to protect it from floods. - He spent substantial amounts on the development of the property, which he still owned at the time of his death.

Petitioner’s first claim relates to the deductibility of attorney fees paid by the decedent in the defense of a lawsuit brought against him and other directors of the Pratt Engineering & Machine Co.

We have consistently held since Sarah Backer, 1 B.T.A. 214, that where a suit is directly connected with or results “ proximately ” from a taxpayer’s trade or business, attorney fees and costs incurred therein are deductible as ordinary and necessary business expenses under the statute. The rule adopted in that case was approved in Kornhauser v. United States, 276 U.S. 145, and has since been followed in innumerable other cases. The Court in that case, reviewing certain departmental and Board rulings, spoke with approval of the allowance of a deduction of legal fees incurred by a physician in the defense of a suit for malpractice, the deductibility of similar expenses incurred in defending an action for damages by a tenant injured upon the taxpayer’s farm, and fees expended in the defense of a patent infringement suit. Speaking of legal fees being “ ordinary and necessary ”, the Court said “ it was an ordinary and necessary ’ expense, since a suit ordinarily and, as a general thing at least* necessarily requires the employment of counsel and payment of his charges.”

In Peoples-Pittsburgh Trust Co. et al., Executors, 21 B.T.A. 588; aff'd., 60 Fed. (2d) 187, the decedent had been the chairman of the board of directors of the Crucible Steel Co. of America and as the executive head of that company he swore to its returns for 1917 and 1918, which, upon examination by the department, were alleged to have been fraudulently prepared and criminal charges were preferred against the decedent. A true bill was returned against him and another officer of the company charging conspiracy to defraud the Government of taxes. Upon trial he was acquitted. In holding that the legal and accounting fees incurred in connection with that proceeding were deductible as ordinary and necessary business expenses, we said that “ the necessity of paying out that sum of money was occasioned by acts done by DuPuy in connection with his trade or business that were directly related thereto.” The Board there pointed out the distinction between purely personal acts, as such, done while engaged in a trade or business, for which one may be required to respond personally in damages, and those acts which are integrally a part of and proximately result from the business.

The foregoing case is, of course, distinguishable upon the facts from the instant case, for the reason that there criminal charges were involved instead of a civil suit as here. However, the Board did not concern itself with the criminal aspects of the proceeding, but merely sought to determine whether the deduction sought was one ordinarily found and necessarily incurred in the decedent’s trade or business, and, finding that it was, the deduction was allowed. Indeed it matters not whether the fees were paid in the defense of a civil or a criminal action if the payment thereof comes within the purview of the statute as interpreted by the many cases concerning the subject matter, Citron-Byer Co., 21 B.T.A. 308.

Here, as in Peoples-Pittsburgh Trust Co., supra, the decedent was an executive of a corporation and was charged with the commission of acts performed by him for the corporation giving rise to court proceedings against him, which necessitated the payment of fees for the retention of counsel. Clearly, the acts complained of were in the performance of the decedent’s business and it naturally follows that the expenses so incurred resulted proximately from that business and we hold, therefore, that the deduction should be allowed. Cf. Fred T. Ley, 21 B.T.A. 216.

The other allegation of error urged by the petitioner relates to the disallowance of a certain alleged net loss in 1921, sustained in the bankruptcy of Pratt Engineering & Machine Co., which the petitioners seek to bring forward to the taxable years 1922 and 1923.

The circumstances surrounding this question, as the petitioners’ counsel frankly concedes, are very similar to those which obtain in Ida A. Van Dyke, 23 B.T.A. 946; affirmed by the Circuit Court at 63 Fed. (2d) 1020; and by the Supreme Court, per curiam, 291 U.S. 642. In that case Van Dyke’s activities over a period of years involved the development and promotion of town sites, particularly public utilities. There, as here, Van Dyke’s activities began with the purchase and sale of real estate. Thereafter he engaged in many other activities such as the development of utility companies, to which he advanced funds, the construction of street railways, lighting systems, sewerage and water systems, and in the promotion and development of a newspaper and certain other mining-ventures. Finally Van Dyke advanced a sum of money to one of his corporate interests owning a large tract of land in Florida, he being interested in the town site possibilities there and in the development of public utilities to serve such towns, and for such funds he received stock in the enterprise, thereafter devoting considerable time to its affairs. The enterprise was a failure, foreclosure proceedings were brought, and Van Dyke sustained a loss for 1922 which he sought to bring forward to the succeeding years in the reduction of his taxable net income. The respondent denied such deductions and the Board sustained him and was itself affirmed upon appeal.

While the decedent was an extremely active man and while his activities appeared to be even more voluminous than were Van Dyke’s in the foregoing proceedings, upon the essential facts the two cases are practically indistinguishable and in principle there is no distinction. See also Burnet v. Clark, 287 U.S. 410, and Dalton v. Bowers, 287 U.S. 404.

Decision will be entered v/nder Bule 50.


author: Van Fossan : Trammell, Goodrich,

text:
    Sydney M. Shoenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72529.
    Promulgated May 8, 1934.

      James W. Seller, Esq., for the petitioner.

      Nathan Gammon, Esq., and W. W. Kerr, Esq., for the respondent.
   OPINION.

Van Fossan :

A deficiency of $38,877.26 for the year 1930 is here contested. In simplest terms, the question is, Did petitioner make a bona fide sale of certain securities ? In the event of our affirmative decision the respondent raises a further question, Did petitioner have an option to reacquire substantially the same stocks ?

The facts are not complex. Petitioner is an individual. He is also president of the Globe Investment Co., of which he owns 70 percent of the stock, the remainder being owned by petitioner’s mother, an aged woman in poor health. By resolution dated May 15, 1929, the company granted petitioner authority to sell any of its property and generally to do all things necessary in connection therewith.

In December 1930 petitioner wished to establish a loss on certain stocks owned by him for the purpose of decreasing his income taxes. He instructed his broker to sell the stock at the market. At the same time he instructed the same broker to buy the same amount of the same stocks at the market for the account of the Globe Investment Co. Pursuant to these instructions, the broker issued to petitioner notices of sales as follows:

December 5,1930_$204,177. 50
December 11, 1930_ 90,962.50
December 22, 1930_ 16, 612. 50
311, 752. 50

On the identical dates the broker issued to the Globe Investment Co. notices of purchases of the same quantity of the same stocks at the same prices shown above. The Globe Investment Co. issued its checks to the order of the broker as follows:

December 6,1930_$204, 909.35
December 10, 1930_ 91,225.50
December 23, 1930_ 16,665.00
312,799. 85

Just prior to December 5, 1930, petitioner transferred to the Globe Investment Co. a sum of approximately $120,000.

The brokers issued petitioner their checks on the days and in the amounts following:

December 8, 1930_$130, 000.00
December 8, 1930_ 73,250.49
December 12, 1930_ 90, 666. 90
December 24, 1930_ 16, 548.00
310.465.39

On the days shown hereafter, each day being slightly more than 30 days subsequent to the original purported sale by petitioner, the petitioner, acting under his blanket authority granted by the Globe Investment Co., caused the Globe Investment Co. to transfer to himself, as an individual, all of the shares in controversy, at the market price of such shares. Petitioner issued his checks in purported payment, as follows:

The variations in the several amounts in the various tabular statements are due to commissions and other adjustments.

The above transactions were consummated after petitioner discussed with an accountant the matter of reducing his taxes.

In the transactions handled by the brokers, new stock certificates were issued by the companies whose stock was involved to the Globe Investment Co. In the transaction between petitioner and the company no new certificates were issued.

The respondent disallowed a loss claimed by the taxpayer in the amount of $191,886.30, which action is the sole error assigned.

On the basis of the above facts, taxpayer asks us to hold that he made a bona fide sale and legally established his loss. His brief is largely devoted to the argument that the corporation was a separate corporate entity and may not be disregarded.

It has been held frequently that transactions having the avowed purpose of avoiding taxes should be carefully scrutinized. The line of demarcation between what may lawfully be done and what may not be done is difficult to define or prescribe, but it is well settled that a mere ritualistic compliance with legal forms is not enough. Harold B. Clark, 2 B.T.A. 555; Harold F. Seymour, 27 B.T.A. 403; George H. Chisholm, 29 B.T.A. 1334; Commissioner v. Gregory, 69 Fed. (2d) 809. A sale must rest on a genuine intention to dispose of property without reservation or evasion of mind. What is in the minds of the parties is not to be determined solely by self-serving declarations or testimony of the party interested. It is pertinent to consider all the acts of the parties, the several steps employed, and all other related facts and inferences.

In' this case we start with a taxpayer who possessed, to all practical purposes, as an alter ego, a corporation entirely dominated by him. Acting alone, as he did, under a blanket grant of authority, and absent the usual evidences of corporate action, it is difficult to distinguish between the mind of Shoenberg, the individual, and Shoenberg incorporated. We next have as a basic premise the desire to establish losses and avoid taxes. There follow the purported sale through the broker by Shoenberg, the individual, and the purported purchase by the corporation, instructions for both transactions having been given by Shoenberg simultaneously. Part of the money necessary for the payment of checks issued by the company was supplied to the company by taxpayer. We then have the transfer of the stocks from the company to the individual after the expiration of the 30-day prohibitive period and the balancing of accounts. At the start of the series of steps the taxpayer had a certain number of shares in various companies; at the close he had precisely the same number of shares in the same companies.

Viewing the entire situation, we are of the opinion that the forms and ceremonies which taxpayer employed lacked the spark of vitality essential to a bona fide sale; that there was a persisting intention to hold title; and that in the mind of the taxpayer he never really parted with dominion over the stock. Consequently, the respondent should be sustained.

Were we incorrect in the conclusion above announced,' we would find it difficult to escape the alternative conclusion that even if the steps taken were sufficient to constitute a sale, Shoenberg, the individual, possessed an option to buy the stock back from Shoenberg, the corporation, during all the time he was out of possession, which option was exercised immediately on the expiration of 30 days after the sale. The existence of such an option would bring the transaction within the provisions of section 118 of the Revenue Act of 1928.

On the record we find no error in respondent’s determination.

Reviewed by the Board.

Decisión will be entered for the respondent.

Smith and Leech concur in the result.

Trammell,

dissenting: In my opinion, the taxpayer has literally met every statutory provision to entitle him to a deductible loss. I see no basis for holding that the sale was not bona fide.

Goodrich,

dissenting: Doubtless, for purposes of revenue production, the result reached in this case by the majority is highly desirable, but in law it is erroneous. These transactions are not “ a mere ritualistic compliance with legal forms ” nor “ purported sales ”, but are completed sales between separate legal entities, consummated through thé usual business channels by an outside agency — cash paid and delivery made. To here disregard the separate existence of this individual and the corporation is to construe as a lack of bona tides — equivalent to a finding of fraud or deceit — the unconcealed intention of deliberately incurring a loss to be used to reduce income and thus avoid taxes — a course which the Supreme Court has declared to be neither morally nor legally wrong, if accomplished by steps which the law allows. It is evident that this petitioner informed himself as to the means the law permitted him to use, and by those means garnered a loss. That loss should be deducted from his income.