author: Smith :

text:
    Victoria Paper Mills Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75940.
    Promulgated May 24, 1935.

      James P. Quigley, Esq., for the petitioner.

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

Smith :

Tbis proceeding involves a deficiency in petitioner’s income tax for 1931 in the amount of $4,043.30. The petitioner contends that the respondent erred (1) in disallowing the deduction of attorney fees in the amount of $5,000, and (2) in including in its income $38,260.02 representing a refund of local taxes for prior years.

The petitioner is a corporation engaged in the manufacture of paper and paper products at Fulton, New York. In its return for 1931 it deducted as an ordinary and necessary business expense $12,077.64 representing fees paid for “ Legal and Professional Services.” The respondent disallowed $5,000 of the amount claimed in the return and contends that such amount was a capital expenditure incurred in connection with the sale of property.

The petitioner paid the amount of $5,000 on August 11, 1931, to George M. Fanning, an attorney, for “ services rendered in 1931, in examining title, passing abstract, negotiating for sale, examining power contract, etc. in the matter of water rights.” Most of the legal services in connection with the sale of the water rights in question were performed in 1931, but the sale was not consummated until the following year. The petitioner did not derive any profit from the sale and did not treat the $5,000 paid to Fanning as a part of the cost of the water rights sold.

The rule is well settled that commissions and other similar charges, including attorney fees, incident to the sale of or other disposition of property ordinarily are to be treated as capital expenditures and are deductible from the selling price in determining the amount of the gain or loss on the transaction. Seletha O. Thompson, 9 B. T. A. 1342: Mrs. E. A. Giffin, 19 B. T. A. 1243; Thomas Williams, 21 B. T. A. 109; affd., 59 Fed. (2d) 357; Washington Market Co., 25 B. T. A. 576; Odorono Co., 26 B. T. A. 1355; Briarcliff Investment Co., 30 B. T. A. 1269.

The evidence before us on this point is that the legal fee of $5,000 was paid to Fanning solely for his services incident to the sale of water power rights. We therefore sustain the respondent in his determination that the amount is not deductible as an ordinary and necessary business expense of the year 1931, but is a capital expenditure deductible from the amount received on the sale of the water rights for the purpose of determining the gain or loss thereon.

The respondent has added to the income reported by the petitioner in its return $38,260.02 representing a refund of taxes, with interest, which the petitioner paid to the city of Fulton, Oswego County, New York, over the years 1922 to 1930, inclusive.

During each of the prior years mentioned the petitioner was assessed local taxes by the city of Fulton which it paid under protest, claiming that such taxes were assessed on an overvaluation of its property. The petitioner filed suits in each year for refunds of the amounts claimed to be excessive. On August 4, 1931, an order was entered in the Supreme Court of New York, Fifth Judicial District, fixing the value of the petitioner’s properties and giving judgment to the petitioner against the city of Fulton for a refund of taxes paid during the years 1922 to 1931, inclusive, in the aggregate amount of $43,961.13, including interest. The amount of the stated overpayment in 1931 was $4,713.24. The interest thereon amounted to $987.87. The petitioner paid $15,647.70 taxes to the city of Fulton in 1931, but claimed a deduction of only $10,934.46 in its income tax return for that year. Thus, the amount of the refund ordered on account of the overpayment in 1931 was reflected in the petitioner’s gross income as reported in its income tax return for that year and is not in controversy in this proceeding.

The balance of the refund ordered for the overpayments made in the years 1922 to 1930, inclusive, in the amount of $38,260.02, the petitioner credited to surplus, but did not report in its income tax return.

On August 11, 1931, the petitioner assigned all of the aforesaid judgments against the city of Fulton for the refund of the tax overpayments made during the years 1922 to 1931, inclusive, to the Citizens National Bank & Trust Co. of Fulton, and received therefor a credit to its account with that bank in the total amount of $43,881.13, being the face amount of the judgments plus accrued interest. Separate assignments were executed for each year which were substantially alike except for the amounts thereof. Each of the assignments provided that:

* * * Victoria Paper Mills Company, in consideration of One Dollar ($1.00) to it duly paid, has sold and by these presents does assign, transfer and set over unto the said Citizens National Bank and Trust Company of Fulton, its successors and assigns, said judgment and all sum or sums of money that may be had or obtained by means thereof or on any proceeding to be had thereupon * * *.

and that “ the said Victoria Paper Mills Company further covenant that said judgment is a valid judgment against the City, and that the same will be paid.”

On May 25, 1932, the order of the court issued as aforesaid on August 4, 1931, was amended by further order of the same court. On July 25, 1932, the petitioner executed a further assignment to the Citizens National Bank & Trust Co. of Fulton of “ all its right, title and interest, claim and demand, so awarded to it by the aforesaid final orders of said Supreme Court dated the 4th day of August, 1931, and May 25, 1932, and all the moneys due and which may grow due thereunder, or therefrom.” In this assignment the petitioner guaranteed the payment of the judgment and interest by the city of Fulton not later than December 1, 1932.

None of these judgments has ever been paid by the city of Fulton and the question of the city’s liability for the amounts thereof is still in litigation in the courts of the State of New York. On December 7, 1934, the Citizens National Bank & Trust Co. of Fulton wrote the petitioner as follows:

Sometime ago we took by assignment from you certain Refund, City of Fulton Claims, payment of which was guaranteed by you in the Assignment.
Report of Examination of this Bank by a Representative of the Comptroller’s Office, indicates that inasmuch as these Claims are in litigation, that you, as Guarantor, should arrange to take them out of the bank.

The evidence does not disclose what- action, if any, the petitioner took in response to the above letter.

In its Federal income tax returns for the years 1922 to 1930, inclusive, the petitioner claimed and was allowed deductions for the taxes paid to the city of Fulton in those years.

The petitioner kept its books and made its income tax returns for all years on the accrual basis.

With respect to this issue the petitioner contends that it received no taxable income in 1931 on receipt of the judgment of the court for a refund of the taxes erroneously paid to the city of Fulton in the prior years, and that the amount received -from the Citizens National Bank & Trust Co. of Fulton was in the nature of a loan or advancement on the judgments and did not constitute taxable income.

The evidence of record does not support the petitioner’s contention. In the written assignments the word sold ”, “ assigned ”, and “ set over ” are used. No mention is made of any loan. There is no provision for interest except the interest accruing on the judgments and no provision for the repayment by the petitioner at any time of any specific amount to the bank. The petitioner merely guaranteed the payment of the judgments by the city of Fulton. We must therefore hold that the petitioner sold or discounted the judgments to the bank, guaranteeing their payment by the city of Fulton. See Alworth-Washburn Co. v. Helvering, 67 Fed. (2d) 694, affirming 25 B. T. A. 140; and Elmer v. Commissioner, 65 Fed. (2d) 568, affirming 22 B. T. A. 224.

The petitioner received approximately the face value of the judgments, plus interest, as a credit to its account with the bank and had the unrestricted use of the funds during the year 1931. We are of the opinion that the amount so received constituted taxable income of that year. See Burnet v. Sanford & Brooks Co., 282 U. S. 359; North American Oil Consolidated v. Burnet, 286 U. S. 417; Houbi gant, Inc., 31 B. T. A. 954. In North American Oil Consolidated v. Burnet, supra, the Court said:

Third. The net profits earned by the property in 1916 were not income of the year 1922 — the year in which the litigation with the government was finally terminated. They became income of the company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner of Internal Revenue (C. C. A.) 51 F. (2d) 73, 75, 76. Compare United States v. S. S. White Dental Manufacturing Co., 274 U. S. 398, 403, 47 S. Ct. 598, 71 L. Ed. 1120. If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Compare Lucas v. American Code Co., supra.

In Alworth-Washburn Co. v. Helvering, supra, it was Reid that the profit realized by the taxpayer on the sale of its assets was taxable income for the year when the taxpayer sold or discounted the purchase money notes at the bank. To the same effect was Elmer v. Commissioner, supra.

Since the amount received on the judgments for refund in 1931 represented a refund of taxes for prior years which had been deducted by the petitioner in its income tax returns for those years, the entire amount received in 1931 is taxable to the petitioner in that year. See Houbigant, Inc., supra, and cases therein cited. In our opinion the petitioner is taxable in 1931 on the amount received from the bank in that year on the assignment of the judgments.

Judgment mil be entered under Rule 50.


source: Caselaw Access Project

author: Steknhagen:

license: Public Domain

text:
    Oscar A. Olstad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76683.
    Promulgated May 24, 1935.

      Albert L. Cwff, Esq., for the petitioner.

      Samuel L. Young, Esq., for the respondent.
   OPINION.

Steknhagen:

The respondent determined a deficiency of $170.21 in petitioner’s income tax for 1931, by attributing to him income in the final distribution of an employees’ trust. The proceeding was submitted upon a written stipulation which it is unnecessary to set forth at length.

The Blaw-Knox Co., of which the petitioner was an employee, organized an employees’ trust, and, by the corporation’s selection, petitioner was permitted to become a participant. He subscribed first $3,000 and then $5,000, before 1931, and was allotted a share amounting to 140 proportionate interests out of a total of 18,230. The corporation sold to the trust 15,000 Blaw-Knox shares then having a market value of $1,545,000, for a price of $900,000. The contributions of participating employees amounted to $1,148,000, and the trust received income amounting to $111,167.17. The employee had no right, before termination of the trust, to trust assets or profits unless the trustee in his discretion elected to make a distribution; and if the employment ceased before the termination of the trust, his right of withdrawal was limited to his investment diminished by trust losses and not augmented by gains. He had no legal interest in trust assets before distribution. The value of Blaw-Knox shares decreased. The trust was duly terminated in 1931 and as his proper distributive share petitioner received $266.65 cash and 430 Blaw-Knox shares having a fair market value of $4,515.

Petitioner reported on his return neither a gain nor loss. Respondent, as the basis for the deficiency, imputed to bim income of $5,807.06 as his portion of the $645,000 (excess of value of shares at the time they were sold by the corporation to the trust over the sale price) and the $111,167.17 trust earnings.

A provision to serve the purpose of exempting employees’ trusts first appeared in the Senate revision of the Revenue Bill of 1921. The report of the Finance Committee, 67th Congress, 1st session, Report No. 275, at page 16, said:

Estates and Teusts.
Section 219 is amended slightly for the purpose of clarifying its provisions and making the interpretation thereof more definite and certain. A new subdivision (f) is added providing that an irrevocable trust created by an employer as part of a stock bonus or profit-sharing plan shall not be taxable under this section, but that the amounts actually distributed to any employee shall be taxable to the employee when distributed, to the extent that they exceed the contributions made by such employee.

The Conference Report of November 19, 1921, 67th Congress, 1st Session, Report No. 486, at page 29, contains the following:

Amendment No. 297: This amendment provides for the exemption from income tax of the income of a trust created by an employer as a part of a stock bonus or profit-sharing plan for the exclusive benefit of his employees, to which contributions are made by the employer or employees, or both, for the purpose of distributing to such employees the earnings and principal accumulated by the trust. The amendment, however, also provides that the amount actually distributed or made available to any distributee snail be taxable to him in the year in which distributed or made available, to the extent that it exceeds the amount paid in by him. The House recedes.

The Revenue Act of 1921, section 219 (f), is as follows:

(f) A trust created by an employer as a part of a stock bonus or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under this section, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits that part of the amount so distributed or made available as represents the items specified in subdivisions (a) and (b) of section 216.

So the provision remained in the Revenue Act of 1924, section 219 (f), and the Revenue Act of 1926, section 219 (f). The apparent purpose of this provision was not to impose a new tax, but rather to exempt such a trust entirely from tax and to postpone the incidence of tax until actual realization by the employee of the gains which were expected to inure to him from the trust. There is no reason to believe that the section was intended as a means of taxing to the employee any amount except gain or income to him, and indeed it may fairly be believed that the possibility of loss to the employee was not anticipated.

In presenting the Revenue Bill of 1928, the Ways and Means Committee of the House proposed a modification of section 219 (f) of the 1926 Act, and in its report of December I, 1927, 70th Congress, 1st Session, Report No. 2, at page 22, appears the following:

Sec. 165. Employees’ Tbusts.
Section 219 (f) of the 1926 Act provides that where a trust is created by an employer as a part of a stock bonus or profit-sharing plan for the benefit of the employees, and contributions are made to the trust by the employer and the employees, the amount actually distributed to the employees by the trust, in excess of their contributions, is taxable when distributed. Upon the termination of the plan there is distributed to the employee his proportionate share of the stock or securities purchased under the plan. Under section 219 of the 1926 Act, in such a case, the appreciation in the value of the stock, from the date of purchase by the trustee to the time of the distribution, is treated as income. As a result the employee is taxed not only upon the amount contributed to the trust by the employer, and the dividends or interest distributed to the employee, but also upon the appreciation in the value of the stock, which has not been realized. The amendment provides that upon such a distribution to an employee there should be taxed to him as compensation the amount contributed by the employer toward the purchase of the stock, all cash dividends on the stock, any interest paid to the employee, and any. other income received by him, but that any appreciation in the value of the stock over the cost to the trustee should not be taxed unless and until the gain is realized.

The Finance Committee of the Senate held the same view as the House, and its report of May 1, 1928, 70th Congress, 1st Session, Report No. 960, at page 21, said:

Sec. 23 (q) — Pension Trusts.
Section 165 of the House bill, like section 219 (f) of the 1926 act, exempts from taxation a trust created by an employer as part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by the employer, or employees, or both, the ultimate purpose being to distribute the earnings and principal of the fund often in the form of stock or securities, purchased under the plan, to the employees. The House bill and the existing law provide that the employee shall be taxed when he receives distributions from the fund, though the House bill makes a change in the method of computing the amount of taxable income realized by the employee on distributions from the trust. Under section 219 of the 1926 act the employee is taxed not only upon the amount contributed to the trust by the employer and the dividends or interest distributed to the employee, but also upon all unrealized appreciation in the value of the stock, when he receives it from the trust. The House amendment, adopted by the committee without change, corrects the situation by providing that upon such distribution, there shall be taxed to the taxpayer as compensation, the amount contributed by the employer toward the purchase of the stock, all cash dividends on the stock, any interest paid to the employee, and any other income received by him, but that any appreciation in the value of the stock purchased under the plan over the cost to the trustee shall not be taxed unless and until the gain is actually realized, which ordinarily occurs when the employee sells the stock.
A considerable number of business concerns, however, established pension plans for the benefit of their employees a good many years ago, under arrangements by which the company set aside a pension reserve fund, to which annual additions were made, the reserve fund not being turned over to a trustee. The yearly additions to such reserve funds were not deductible for income-tax purposes. These employers now desire to' adopt the more satisfactory plan of turning over the pension reserve funds to trustees to hold for the benefit of their employees. Under existing law, no deduction would be allowed for such' a transfer representing past accumulations, though distributions from the fund are taxable to the employee as additional compensation. The committee proposes an amendment in section 23 (q) which permits such reserve funds to be turned over to a trustee and allows the amount thereof to be prorated as a deduction over a period of years equivalent to the time during which the reserve fund was accumulated. This prevents the employer from taking the entire deduction in the year of transfer and operates equitably to the employer and to the Government.

Pursuant thereto, Revenue Act of 1928, section 165, was enacted, as follows:

SEC. 1G5. EMPLOYEES* TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but tbe amount contributed to sucb fund by the employer and all earnings of such fund shall be taxed to the distributee in the year in which distributed or made available to him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 26 (a) and (b).

We think this discloses that again the Congress was concerned with an alleviation of what it regarded as an undue tax burden upon the employee resulting from the treatment as gain in his hands of the unrealized increment in the value of the trust property before its distribution to him. The purpose of the change in the 1928 Act was, not to tax the employee where he was not being taxed before, but to relieve him of all possibility of tax upon appreciation in the value of trust securities before such appreciation came to his hand by sale.

The respondent, however, by a literal regard for the phraseology of the Revenue Act of 1928, would impute to the employee an artificial gain or income despite the fact that everything he receives is less than he paid in. His interpretation of the Revenue Act of 1928 is not one of further relief from a tax which would have been imposed under the 1926 Act, but of covertly defining as income a figure which had never theretofore been so recognized. In order to reach such a result it would be necessary to adopt several assumptions: First, that the sale by the employer to the trust of shares for a price less than their value is to be regarded as a contribution within the meaning of the section; second, that such a contribution is, when made, income, although the trust recipient is tax exempt; third, that such an amount, although not taxed when received by the trust, is nevertheless to be taxed to the employee upon termination of the trust, even though in the meanwhile it has disappeared through economic forces and he therefore never receives it; fourth, that in the ostensibly simple and generous language of the statute lurks a subtle mathematical formula to convert what is plainly an unfortunate transaction into a gain.

The petitioner does not claim to be entitled to deduct as a loss the difference between the amount of his investment and the value of the property distributed to him by the trust, and we do not therefore go so far as to say that such a loss has been sustained. But the failure of the statute to recognize a loss may not be regarded as a ground for computing a gain. While it may be that the distribution at the termination of the trust is properly but the occasion of a purchase by the employee of the shares distributed at a cost represented by the amount originally invested, and that he may not deduct a loss, he is not to be charged with a gain or income. In the present proceeding, it is the latter proposition alone which we are called upon to decide, and we have no difficulty in concluding that the receipt of the shares worth $4,515, and the cash of $266.65, after the petitioner had invested $8,000, does not involve the receipt by him at that time of taxable income.

The only decision which touches the subject is that of Schaefer v. Bowers, 50 Fed. (2d) 689. It was there held, under the Revenue Act of 1926, that the employee was taxable at the time of the distribution of the trust with the value of the shares received, to the extent that such value exceeded his investment. The argument that the incidence of the tax occurred at the time of the employee’s contribution to the trust, -because the employee could be said immediately to have an equitable interest in the trust property, was rejected. In the course of the opinion, reference was made to the effect of the amendment of 1928, and the court suggested that it would be an unreasonable interpretation of the Act of 1928 to hold that the employee would be taxable upon income of the trust to which he had never had access and over which he had never had control, when prior to the distribution to him the shares had fallen in value. Although this was clearly obiter, we see no reason to believe that the court failed to apprehend the language or intendment of the 1928 Act or that the decision by the court would have beep otherwise if the present problem had been there suggested. It seems to us that it adequately meets the Government’s argument in the present case.

We therefore hold that the Commissioner was in error in increasing petitioner’s income by $5,807.06.

Judgment will be entered under Rule 50.


author: MoRRis: Aeundell,

text:
    Elvira Scatena, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63920.
    Promulgated May 29, 1935.

      Myrtile Oerf, G. P. A., for the petitioner.

      George D. Brdbson, Esq., for the respondent.
   OPINION.

MoRRis:

The first question pertains to whether or not the aggregate value of the 175 shares of stock of the Bank of America National Association received by the petitioner, as dividends, from Bancitaly Corporation and National Bankitaly Co. is taxable within the period under consideration, 1929, as the respondent has determined and as he here contends. The respondent relies upon the following provisions of the Bevenue Act of 1928 and the articles of Begulations 74 promulgated by him pursuant thereto:

Seo. 115. (a) Definition of dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
Sec. 42. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.
Abt. 621. * * * A taxable distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands.

The essential facts are that two corporations in which the petitioner owned stock declared dividends in Bank of America shares in September 1928; recognized the dividend as a liability on their books as of October 31,1928, and delivered the shares to the transfer agent on November 1, together with a list of the shareholders and the exact number due each, and directed that certificates be made out accordingly. During November, December, and January the transfer agent delivered the new certificates to the trust department of the Bank of Italy National Trust & Savings Associations for delivery to the shareholders. One hundred and sixty-nine of the petitioner’s shares were prepared and registered by the transfer agent on or before December 5, 1928; six additional shares were issued in petitioner’s name in January 1929 after she had completed payment for the stock to which said shares related.

The respondent’s position is that the dividends are taxable for the year 1929 when actual physical delivery of the certificates was made to the petitioner. His argument ignores the vital distinction between the ownership of an interest in a corporate enterprise and the certificates which are a mere evidence of that ownership. “ A certificate is authentic evidence of title to stock; but it is not the stock itself, nor is it necessary to the existence of the stock. It certifies to a fact which exists independently of itself.” Pacific National Bank v. Eaton, 141 U. S. 227. Ownership of stock is not affected by the shareholder’s failure to be in physical possession of a certificate. In Snyder v. Commissioner, 73 Fed. (2d) 5, affirming 29 B. T. A. 39, the court said:

* * * A stockholder may prove his ownership of shares by evidence other than that of the certificate. * * * The shares may go in one direction and the certificate in another * * *. Then “ ownership follows the owner, and not the certificates.” Rowbert v. Penrose, 38 Fed. (2) 577, 579. * * *
From these observations, abundantly sustained by decisions, it is plain that the petitioner in this ease owned shares of U. G-. I. stock, though neither he nor his brokers ever held certificates for them in his name * * *.

A similar view was expressed in Hoffman v. Commissioner, 71 Fed. (2d) 929, reversing in part 28 B. T. A. 1264: But the law is well settled that non-delivery of possession [of certificates] would not preclude title to the stock passing forthwith. * * * ”

In Minal E. Young, Executor, 6 B. T. A. 472, the Board considered the same question on similar facts. In that case a resolution was passed by the corporation in 1918 declaring a dividend of certain stock owned by it in another corporation and held by voting trustees under a voting trust agreement. We held in that case that, notwithstanding there was no actual delivery of the certificates during the year 1918, tlie stockholders were nevertheless the recipients of income in that year and not in the year 1919. In support of the conclusion reached, we said:

Under the resolution of March 11, 1918, the taxpayers became the owners of their proportionate part of the voting trust certificate for the stock of the Salt Creek Producers Association, Inc., owned by the New York Oil Co. The resolution provided that the certificates of stock of the Salt Creek Producers Association, Inc., would be issued to the stockholders of the New York .Oil Co. upon the surrender of their old certificates in the New York Oil Co. to be exchanged for new certificates of reduced par value. This, in our opinion, related merely to the receipt of the certificates representing the stock which became theirs by virtue of the resolution of March 11. While it may be true that a division or distribution by a corporation is not taxable to a stockholder who is on the cash receipts and disbursements basis until the amount of the distribution is made available to him, this does not mean that, when stock of one corporation is distributed by another, the certificate itself must actually be received before there can be taxable gain. Since a person may be a stockholder in a corporation without ever having received a stock certificate, the time of the actual receipt of the stock certificate is immaterial. The question is, when did the taxpayers become the beneficial owners of the stock of the Salt Creek Producers Association, Inc.? We think they became the owners thereof in 1918 by virtue of the resolution distributing the stock.

From the foregoing decisions it is clear the dividends were income in 1928, as the petitioner had received the stock although she did not have the paper evidence. The fact that the certificates were not delivered directly from the transfer agent to the stockholders does not indicate the retention of any right by the issuing corporations. On the contrary, the corporation’s books, their surrender of the certificates, the notice of the stock exchange, the shareholders’ unchallenged right to the December cash dividends, and the receipt by the trustee of the certificates for delivery to the registered owners are indicative that neither corporation retained any interest in the dividend shares after October 1928. The petitioner, as the registered holder, had herself received right, title, and interest thereto in 1928 and was enjoying the fruits of ownership.

It is in this respect that the conclusion herein reached is clearly not in conflict with Avery v. Commissioner, 292 U. S. 210. In that case the Court held that a cash dividend payable on or before December 31, represented by a check dated and mailed on that day, but not received until January, constituted income in January. The distinguishing factors are apparent from the Court’s language:

It was the practice of the company to pay all dividends by checks not intended to reach stockholders until the first business day of January; there is nothing to show that petitioner could have obtained payment on December 31st, he did not expect this, and the practice shows the company had no intention to make actual payment on that day. Nothing indicates that it recognized an unrestricted right of stockholders to demand payment except through checks sent out in the usual way. The checks did not constitute payments prior to their actual receipt. The mere promise or obligation of the corporation to pay on a given date was not enough to subject to petitioner’s unqualified demand “ cash or other property ”; and none of the parties understood that it was.

The taxpayer’s gain was represented by the check and until it was in his hands he had received nothing. In the instant proceeding the receipt of the stock certificates added nothing to that which the petitioner already had, namely, title and all the benefits of ownership which had been acquired in the preceding year.

The respondent added $33,862.50 to the petitioner’s income for 1929, representing the value of 175 shares of Bank of America National Association received as a dividend. Six of these shares were not placed in the petitioner’s name until January 24, 1929, after she finished paying for the stock upon which these shares were declared. Although the parties stipulated that the petitioner, on November 1, 192'8, was the legal and equitable owner of the stock from which she received the six shares, it may be inferred from the stipulation that these six shares were intentionally withheld until final payment and that the petitioner had no right to them until that time. In effect the respondent has so determined, and we should not, therefore, disturb his determination to the extent of the value of the six shares.

The respondent argues, but does not affirmatively plead in his answer, that, because he advised the petitioner that these dividends should be reported as income for the taxable year 1929, which she failed and refused to do, and because of the fact that the statute of limitations now bars the satisfaction of a deficiency upon said dividends in the year 1928, the petitioner is now estopped to deny their taxability in 1929. Estoppel in order to be availed of must be pleaded and proved and the failure to do so is fatal. Bamberg Cotton Mills Co., 8 B. T. A. 1236, citing In re Stoddard Bros. Lumber Co., 169 Fed. 190.

The respondent concedes that , the second issue falls within the principle of T. I. Hare Powel, 27 B. T. A. 55, and James A. Connelly, 30 B. T. A. 331. Therefore, upon that issue the petitioner will be sustained.

Reviewed by the Board.

Judgment will be entered imder Buie 50.

Aeundell,

dissenting: I think this case comes within the principle of Avery v. Commissioner, 292 U. S. 210, and the stock was taxable as a dividend when received in 1929. In that case the corporation declared dividends in November 1924 and November 1929, payable on or before December 31 of the respective years. The dividend cheeks were prepared in 1924 and 1929 bat held in the treasurer’s office in each case until the first business day of the following year, and then distributed through the office mail. The Court said in part:

If we give the words of the statutes their ordinary meaning, clearly the dividends under consideration were not actually received by the taxpayer during 1924 and 1929. Certainly they were not received when declared. They did not come into the taxpayer’s hands on December 81st simply because payable on that day. And, unless Congress has definitely indicated an intention that the words should be construed otherwise, we must apply them according to their usual acceptation.
*******
* * * Nothing indicates that it [the corporation] recognized an unrestricted right of stockholders to demand payment except through checks sen l out in the usual way. The cheeks did not constitute payments prior to their actual receipt. The mere promise to pay on a given date was not enough to subject to petitioner’s unqualified demand “cash or other property”; and none of the parties understood that it was. [Italics supplied.]

Applying the reasoning of the above opinion to this case I do not see how it can be said that the stock was “ received ” by the taxpayer in 1928. Putting the stock in her name in 1928 did not constitute a receipt by her any more than did the writing of checks in the Avery case. There, as here, the corporation became a debtor to the stockholders and they became creditors in the earlier year; no doubt that there, as here, the corporation made appropriate book entries in the earlier year. But the creation of a debt in favor of the taxpayer on a cash basis does not result in income to him save in unusual cases as in those where the doctrine of constructive receipt may be applicable. Here there is no showing of availability to the taxpayer in 192b or that she understood the dividend to be available before 1929. The letter of the president of the corporations, dated September 27, 1928, notified the stockholders that the dividend shares would be mailed “ as soon as it is practicable to do so, which should be on or before January 2, 1929.” There is nothing in that notice to lead the stockholders to expect actual distribution in 1928, and, in fact, this taxpayer did not receive her dividend shares until 1929. On the fact of actual receipt in 1929, and in the absence of any showing either that the corporation intended to distribute in 1928 or that the stockholders had any reason to expect receipt in that year, I think we should adhere to the fundamental rule of taxing income in the year of receipt, which in this case is the year 1929.

Black agrees with this dissent.


author: TRAmmell:

text:
    Eugene Hoskins and Bena Hoskins, Petitioners, v. Commissioner of Internal Revenue, Repondent.
    Docket No. 74749.
    Promulgated May 31, 1935.

      William B. WatMns, Esq., for the petitioners.

      Oarroll Walker, Esq., and E. G. Mitchell, Esq., for the respondent.
   OPINION.

TRAmmell:

This proceeding is for the redetermination of a deficiency in income tax of $105 for 1982. The only question in controversy is the correctness of the respondent’s action in subjecting to tax the compensation received by petitioner Bena Hoskins for her services as director of the public school cafeterias of Fort Worth, Texas.

The petitioners are husband and wife and reside at Fort Worth, Texas. During 1932 Mrs. Hoskins was employed as director of the public school cafeterias by the Fort Worth Independent School District, a political subdivision of the State of Texas, which was organized and created by special act of the Legislature of Texas. For her services in that capacity she received compensation in the amount of $3,400, which was her only income and which the respondent determined was subject to tax and included it as taxable income.

The Fort Worth Independent School District is administered by a board of education consisting of seven members who employ a superintendent of schools and a business manager of schools. At some undisclosed date or dates the board of education caused to be installed in the public school buildings of Fort Worth or in adjoining buildings equipment for the operation of 48 cafeterias. The kitchens of these cafeterias are equipped with such ranges, ovens, and electric refrigeration as are found in any first-class eating place and the dining rooms are equipped with steam tables and display racks. The initial cost of establishing these cafeterias came from the funds of the Fort Worth Independent School District. No charge is made by the board of education to the cafeteria system for the space it uses. In addition to being used for cafeteria purposes the space is used for ordinary class purposes when necessary.

In theory the public elementary school buildings in Fort Worth are so located that a pupil will not have to travel more than a mile to reach school. With respect to the high schools the distance is greater, being about four miles in some instances. A period of 30 minutes is allowed pupils in all schools for lunch. From two to four lunch periods between eleven o’clock and one o’clock are allowed at the various schools depending upon the size of the school. Under a regulation of the board of education a pupil may bring his lunch to school, or he may get it in the school cafeteria, or if he lives within a sufficiently short distance from the school he may go home for it, but he may not go off the school ground at recess and buy it.

A purpose of the cafeterias is to teach the pupils to eat a balanced diet. With this end in view a plate lunch consisting of a balanced meal is served in the cafeterias at the elementary schools. In the cafeterias at the high schools the pupils have the privilege of making their own selection on the theory that after they have been taught to eat a balanced diet in the elementary schools they will select it when in high school. All pupils who wish to do so eat at the cafeterias and when they do they pay for what they eat. Indigent and undernourished children are not furnished any free meals.

The operation of the cafeterias comes under the general supervision of the business manager employed by the board of education. Each cafeteria has a local manager in charge of it. About 138 persons other than the petitioner were employed in the cafeteria system during 1932. Their salaries ranged from $1.25 a day for the part-time help to $4 a day for the managers of the cafeterias at the larger high schools. The system is operated as a nonprofit-making enterprise, but is so conducted as to be self-sustaining and on a basis that the proceeds from the sale of food will be sufficient to pay for the food and to pay the operating expenses. The receipts from the conduct of the cafeteria system are kept in a depository separately from the general funds of the school system and in an account designated “ Cafeteria Department of the Fort Worth Independent School District.” The amount of the receipts of the cafeteria system from the sale of food to pupils during 1932 was approximately $200,000. From such receipts the compensation of Mrs. Hoskins, as well as that of all other persons employed in the cafeteria system, was paid.

The procedure through which Mrs. Hoskins was given employment as director of the public school cafeterias was as follows: She was first recommended by the business manager to the superintendent of schools, who in turn recommended her to the board of education, which elected her to the position for a period of one year. The same procedure was followed in employing teachers in the school system, except that the original recommendation for their election was not made by the business manager. The procedure followed in employing the local managers of the cafeterias, together with, the other help employed thereat, was the same as that in the case of Mrs. Hoskins, except that she was the first to recommend their employment. Mrs. Hoskins took no oath of office.

Mrs. Hoskins was the general manager of the cafeteria system and had supervision over the 48 cafeterias. She planned uniform menus of balanced meals to be served in the cafeterias; planned the meals for a school for tubercular children; assisted in purchasing the food and supervised the preparation and serving of it; checked over daily all orders for food and approved the bills of each cafeteria at the end of the month. She helped plan new cafeterias as they were installed. She spent an average of about twelve hours daily in the performance of her work.

The petitioners allege that the respondent erred in determining that the salary here involved constituted taxable income. They contend that Mrs. Hoskins was employed in the exercise of a governmental function and that therefore her salary is exempt from taxation both under the applicable revenue act and on the ground that the Federal Government under the Constitution has no power to tax it. The respondent concedes that the cafeteria system was operated pursuant to and by authority of the laws of the State of Texas and makes no contention that Mrs. Hoskins was not an employee of a political subdivision of that state. He does contend, however, that the operation of the cafeteria system constituted the carrying on of a business by the school district and not the exercise of an essential governmental function, and that the salary constituted taxable income. In the absence of statutory provision for exclusion or exemption of the compensation received by Mrs. Hoskins it must be included in petitioners’ gross income, unless it is exempt upon constitutional grounds. It is compensation for personal services which the statute provides shall be included in gross income. The question is, Is it impliedly exempt under the Constitution ?

Since the filing of the brief of the petitioners in this case the Supreme Court has rendered its decision in Helvering v. Powers, 293 U. S. 214. The question there was whether the salary of certain “ public officers ” of the State of Massachusetts who, pursuant to the laws of that state, were engaged in conducting the business of a street railway system under state control was constitutionally exempt from the imposition of a Federal income tax. In holding that Congress had the constitutional authority to lay the tax, the Court said:

While the undertaking is for the public benefit, it is still a particular business enterprise — the operation of a street railway — and the functions of the trustees are limited accordingly.
*******
We come then to the question whether the Congress has the constitutional power to impose an income tax upon the compensation of public officers of the character here involved. We do not regard that question as answered by mere terminology. The roots of the constitutional restriction strike deeper than that. The term “ public office ” undoubtedly implies a definite assignment of public activity, fixed by appointment, tenure and duties. But whether that field of activity in relation to a State, carries immunity from federal taxation is a question which compels consideration of the nature of the activity, apart from the mere creation of offices for conducting it, and of the fundamental reason for denying federal authority to tax. That reason, as we have frequently said, is found in the necessary protection of the independence of the national and state governments within their respective spheres under our constitutional system. Collector v. Day, 11 Wall. 113, 125, 127; Ambrosini v. United States, 187 U. S. 1, 7; Indian Motocycle Company v. United States, 283 U. S. 570, 575. The principle of immunity thus has inherent limitations. Metcalf & Eddy v. Mitchell, supra, pp. 522-524; Willcuts v. Bunn, 282 U. S. 216, 225, 226; Indian Motocycle Company v. United States, supra, p. 576; Fox Film Corporation v. Doyal, 286 U. S. 123, 128; Board of Trustees v. United States, 289 U. S. 48, 59. And one of these limitations is that the State cannot withdraw sources of revenue from the federal taxing power by engaging in businesses which constitute a departure from usual governmental functions and to which, by reason of their nature, the federal taxing power would normally extend. The fact that the State has power to undertake such enterprises, and that they are undertaken for what the State conceives to be the public benefit, does not establish immunity. South Carolina v. United States, 199 U. S. 437; Flint v. Stone Tracy Company, 220 U. S. 107, 172; Murray v. Wilson Distilling Company, 213 U. S. 151, 173; Metcalf & Eddy v. Mitchell, supra; Indian Motocycle Company v. United States, supra; Ohio v. Helvering, 292 U. S. 360, 368, 369. Tlve necessary protection of the independence of the state government is not deemed to go so far.
*#**$$#
The method which the State may adopt in organizing such an activity cannot be regarded as determinative. If the dealers in South Carolina, or those employed to operate the state stores in Ohio, had been denominated public officers, and as such had been assigned definite tenure and duties, the same result would have been reached, as the principle involved would be equally applicable. Nor, in such a case, would the fact that the officers were entrusted with the authority to fix prices for the sales under their charge in a manner appropriately to secure the revenue needed for the enterprise, or were charged with the duty of ascertaining the losses, which, if they occurred, were to be borne by general taxation, establish a material distinction. The nature of the enterprise, and not the particular incidents of its management, would control.
AVe see no reason for putting the operation of a street railway in a different category from the sale of liquors. In each case, the State, with its own conception of public advantage, is undertaking a business enterprise of a sort that is normally within the reach of the federal taxing power and is distinct from the usual governmental functions that are immune from federal taxation in order to safeguard the necessary independence of the State. If, in the instant case, the Commonwealth had acquired the property of the Company and had organized management of it in perpetuity by the state government, instead of temporarily, or had taken over all the street railways in all its cities for direct operation by the commonwealth, there would appear to be no ground, under the principles established by the decisions we have cited, for holding that this would effect the withdrawal of the enterprise from the federal taxing power. And the fact that the State has here undertaken public management and operation for a limited time, and under the particular restrictions of the agreement with the Company, cannot he said to furnish a ground for immunity.
If the business itself, by reason of its character, is not immune, although undertaken by the State, from a federal excise tax upon its operations, upon what ground can it he said that the compensation of those who conduct the enterprise for the State is exempt from a federal income tax? Their compensation, whether paid out of the returns from the business or otherwise, can have no quality, so far as the federal taxing power is concerned, superior to that of the enterprise in which the compensated service is rendered.

Although the salary of public officers of a state was involved in the foregoing case and in the instant case there is involved the compensation of an employee of a political subdivision of a state, the principle involved is the same and the decision there is, in our opinion, equally applicable here.

As indicated by the Court, the fact that a person is a public officer of a state does not standing alone make his compensation immune from Federal taxation, but that consideration must be given to the nature of the activity in which such person is engaged. If it be found that such activity is in the conduct of a business enterprise of a sort that is normally within reach of the Federal taxing power and is distinct from the usual governmental functions that are immune from Federal taxation where the state is acting in its sovereign capacity, then the compensation derived therefrom is not immune. And this is true notwithstanding the fact that the business enterprise is one that the state has the power to conduct and one which it conceives that it is conducting for the public benefit.

In the instant case a political subdivision of the State of Texas engaged in the operation of a number of cafeterias, employing in such activity Mrs. Hoskins and many others. Normally the income arising from the operation of cafeterias comes within the Federal taxing power. It is a business in competition with private industry as distinguished from a governmental sovereign function, and, while it was doubtless conducted in the public interest and for the public benefit, it is still a particular business enterprise in which the state or political subdivision thereof was engaged. Its operation constitutes a departure from the exercise of a usual sovereign function and is an activity distinct from the usual governmental functions which are immune from Federal taxation. The activity being one which is normally within the Federal taxing power, the compensation of those engaged in its promotion likewise is within that power. We therefore conclude that Congress had authority to lay the tax on the compensation of Mrs. Hoskins and that the respondent did not err in including it in her taxable income.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    Margaret S. Sawtell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73023.
    Promulgated May 31, 1935.

      Charles M. Rogerson, Esq., for the petitioner.

      J. R. J ohnston, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves a deficiency in petitioner’s income tax for 1930 in the amount of $8,298.22. The only question in issue is whether the petitioner is liable in her individual tax return for 1930 for the tax on the profit from the sale in that year of 600 shares of stock of the Charlestown Gas & Electric Co., which, at the time of the sale, were held in trust.

The petitioner’s husband, Frank N. Sawtell, on March 17, 1930, transferred to her as a gift a voting trust certificate for 600 shares of stock of the Charlestown Gas & Electric Co. At that time, Frank M. Sawtell was acting as one of five trustees of a trust, hereinafter referred to as the “voting trust”, created April 4, 1927, for the purpose of holding and selling the Charlestown Gas & Electric Co. stock. Under the provisions of the voting trust agreement, any of the stockholders could turn in their stock to the trustees or their nominees and receive trust certificates therefor. The trustees were authorized at any time to sell all, but not less than all, of the capital stock of the company at $175 a share, or at such other price as might be agreed upon by the trustees and approved by the holders of three fourths of the voting trust certificates. Upon the sale of the stock the voting trust was to terminate. The Boston Safe Deposit & Trust Co. was named to act as agent for the trustees in accepting the shares of stock and issuing stock trust certificates.

At the time the petitioner’s husband, transferred his voting trust certificate for the 600 shares of stock to the petitioner, negotiations were under way for the sale of the stock then held by the trustees to the Eastern Gas & Fuel Associates. Such an agreement was entered into on April 14, 1930. On April 21, 1930, the trustees notified the holders of the voting trust certificates, including the petitioner, that a sale of the stock to the Eastern Gas & Fuel Associates, to be completed before May 1,1930, at $175 a share, had been agreed upon and that after that day the proceeds from the sale of the shares represented by the voting trust certificates would be paid to the holders thereof, upon surrender of their certificates to the Boston Safe Deposit & Trust Co. The notice reads in part as follows:

Eastern Gas and Fuel Associates liave agreed to pureliase, and we liave agreed to sell, all the stock of Charlestown Gas & Electric Company which we now hold as Trustees under the above Declaration of Trust, or which may be deposited with us as such Trustees on or before May 1, 1930, at the price of $175 a share, payable in cash on delivery of the shares on May 1, 1930. The May' 1st dividend on the Charlestown stock now held by us is to be received by the registered holders of the stock trust certificates representing the same at the close of business today.
*******
If you wish to receive cash for your stock trust certificates, payment will be made at any time after the first day of May upon presentation of your certificates, duly endorsed for cancellation, at the office of the Boston Safe Deposit and Trust Company, Agent. If you desire to exchange your stock trust certificates for Preferred shares of Eastern Gas and Fuel Associates, it will be necessary for you to send your certificates, together with the enclosed letter of transmittal, to the Boston Safe Deposit and Trust Company, Agent, on or before noon of May 1,1930.

On April 30, 1930, the petitioner, upon the advice of her husband, transferred all of her beneficial interest in the 600 shares of stock of the Charlestown Gas & Electric Co. to the Malden Trust Co., as trustee, under two trust agreements executed, April 30, 1930, which created two separate irrevocable trusts of 300 shares each of the Charlestown Gas & Electric Co. stock for the purposes hereinafter stated. These two agreements, which were identical in form, provided, in effect, that the Malden Trust Co. should hold and sell the trust property and pay all of the trust funds to the grantor, the petitioner, on January 1, 1931, but if the grantor should die before that time the trustee should hold the trust property for the benefit of the grantor’s daughters, ages eight and six, respectively, using such part of the income as might be needed for their maintenance, education, and support, and distributing the remaining trust funds to them when they were 25 years of age. In the event of the death of the grantor and her daughters before January 1, 1931, the trust property was to be paid to Frank M. Sawtell. The petitioner was 42 years of age and was in good health at the time the trusts were created. The trust agreements were drawn up by the petitioner’s husband, who is a lawyer, with the advice of one of the other trustees of the voting trust, who is also a lawyer.

On April 30, 1930, the Malden Trust Co. transferred the voting-trust certificate for the 600 shares of the Charlestown Gas & Electric Co. stock which it held under the aforesaid trust agreements to the Boston Safe Deposit & Trust Co., agent for the voting trustees, and received from the Boston Safe Deposit & Trust Co., on May 1, 1930, a check for $105,000 representing the proceeds from the sale thereof.

The respondent has determined that the profit of $66,000, on the sale of the shares in question, which the parties admit to be correct as to amount, is taxable to the petitioner in her individual return for 1930 and not to the trustee in its fiduciary returns. In his deficiency notice the respondent stated that the conveyance by the petitioner of her interest in the 600 shares of stock to the Malden Trust Co. did not represent a genuine trust transaction and that the trust can not be considered as valid for income tax purposes.

The respondent contends that the so-called trusts were invalid and ineffective for the reason that they were testamentary in nature, the donor being the only beneficiary, except in the event of her death, and were void under the laws of the Commonwealth of Massachusetts, which permit a testamentary disposition of property only by duly executed will. In support of this contention the respondent cites McEvoy v. Boston Five Cents Savings Bank, 201 Mass. 50; 87 N. E. 465. The facts in that case were different from those in the instant case, as is shown by the following quotation from the syllabus:

Where, under a trust created in bank deposits, declarant during her lifetime could at any time revoke it, or could demand and receive from the trustee all the money at any time, and then do with it what she chose, and the other part of the trust related solely to the disposition of the deposits after her death, the only material effect of the instrument is testamentary, as declarant’s rights as beneficial owner during her lifetime are not limited in any material way, and it cannot be given effect under the statutes, which permit a testamentary disposition of property only by a duly executed will.

In the instant case the grantor could not at any time revoke the trusts or demand any of the trust funds. More recent cases in which trust conveyances more nearly resembling those under consideration in the instant case have been held valid for certain purposes by the courts of Massachusetts are Jones v. Old Colony Trust Co., 251 Mass. 309; 146 N. E. 716; Roche v. Brickley, 254 Mass. 584; 150 N. E. 866.

The respondent makes the further contentions that the income of the trusts for the year 1930 was income to be distributed currently by the fiduciary to the beneficiary, the petitioner, and is therefore taxable to the petitioner under section 162 (b) of the Revenue Act of 1928, or that the income, at the discretion of the grantor, was to be distributed, or held for future distribution, to her and is therefore taxable to her under section 167 of that act.

The pertinent provisions of the Revenue Act of 1928 are as follows:

SEO. 161. IMPOSITION OF TAX.
(a) Application of tax. — The taxes imposed by this title upon individuals shall apply to the income o£ estates or of any kind of property held in trust, including—
(1) Income accumulated in trust for the benefit of unborn or unascer-tained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
(b) Computation and, payment. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). For return made by beneficiary, see section 143.
SEC. 162. NET INCOME.
* # * * * * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
* * * * * * *
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person .not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him * * * such part of- the income of the trust shall be included in computing the net income of the grantor.

The applicability of section 162 (b) to the issue presented depends upon whether the income of the trusts created by the petitioner was “to be distributed currently.” This phrase unquestionably refers to continuing trusts whose income is to be distributed to the beneficiaries at periodic intervals. This was-the interpretation placed upon it in Commissioner v. Stearns, 65 Fed. (2d) 371, in which the court said that it understood by the phrase “ that the will or deed directs the distribution”; that the phrase “presupposes a periodic duty of the trustee, and possibly in rare cases of an executor; its typical example is the case of a life tenant.” Cf. People's Pittsburgh Trust Co. v. United States, 6 Fed. Supp. 447. The language of the whole section 161 is directed to continuing trusts and not to ephemeral or short-lived trusts. The question is pertinent as to whether the income of a short-lived trust, for instance, one lasting for one month, is a trust, the income of which is “to be distributed currently.” In the circumstances of this case we do not deem it necessary to answer this question. But it would seem there is much ground for holding that the income of a trust which is to be paid over to the beneficiary within a period of less than a year from the date of its creation is one whose income is “to be distributed currently.”

In our opinion the question in issue in this case is controlled by section 167. This is identical with section 219 (h) of the Revenue Act of 1924. Its purpose was remedial. The Senate Finance Committee Report on the Internal Revenue Bill of 1924, page 25, contains the following:

Section 219. This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means of estates and trusts.
* * sfe * * *
(3) Subdivision (h) of this section provides that income of a trust tohich may be distributed to the grantor or which may be used for the payment of premiums of policies of insurance on his life shall be included in the gross income of the grantor. Trusts have been used to evade taxes by means of provisions allowing the distribution of the income to the grantor or its use for his benefit. The purpose of this subdivision of the bill is to stop this evasion. [Italics supplied.]

The intention of Congress in the enactment of this section was to block the machinations of tax attorneys and others to avoid taxes through the device of trusts. The provision should be interpreted broadly “ as questions of due process always are, not narrowly or pedantically, in slavery to forms or phrases.” Burnet v. Wells, 289 U. S. 670. It is true that the petitioner, the grantor of the trusts, did not have it in her discretion to have the income of the trust distributed to her within the year 1930, but it is equally true that the trusts were created with the intention that the income should be “held or accumulated for distribution” to her on January 1, 1931, which in fact was done. It will be noted from an inspection of section 167 that the phrases “ be distributed to the grantor ” and “ be held or accumulated for future distribution to him ” are connected by the disjunctive “ or.” It is therefore not necessary that the grantor shall have an election to have the income distributed to her within the taxable year in order for the section to apply. This construction appears to be warranted by the explanation of section 219 (h) of the Revenue Act of 1924, contained in the Senate Finance Committee Eeport on the Internal Revenue Bill of 1924, quoted above. We think that the petitioner exercised the required election upon the creation of the two trusts here involved.

In Frances Marshall Canfield et al., Executors, 31 B. T. A. 724,“ we held that where the grantor of a trust had no power to revest in himself title to any part of the corpus of the trust at any time prior to January 3, 1931, on which date the trust terminated, the income of the trust for 1930 was not taxable to the grantor. In that case the income of the trust, pursuant to the indenture of trust, was paid during the calendar year 1930 to the beneficiaries. The respondent had held that the grantor of the trust was taxable upon the income paid over to the beneficiaries. We held otherwise, but that case is distinguishable from the present upon its facts; for here the income was never intended to be paid to anybody but the grantor.

Looking to the motives and purposes of the trusts as shown by the wording of the trust agreements themselves, and the circumstances under which they were created, we are satisfied that the controlling motive of the petitioner and her husband in creating the trusts was to effect the sale of the shares of stock through the trusts in such a manner as to reduce the .petitioner’s individual income tax liability by eliminating the profits from the sale from her income of 1930. Petitioner is not subject to criticism for attempting to minimize her tax. But it is not to be supposed that in enacting the trust provisions of the statutes Congress intended that they should be availed of by taxpayers merely for the purpose of gaining an advantage in the computation of their tax. The Supreme Court, in Gregory v. Helvering, 293 U. S. 465, refused to sanction a transaction purporting to be a reorganization and complying literally with the requirements of the statute, section 112 (i) (1) (B) of the Revenue Act of 1928, where—

* * * The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.

We think that the same principle should apply in the instant case. In our opinion profits from the sale of the shares of stock in question should be taxed to the petitioner in 1930, the year of the sale.

Reviewed by the Board.

Judgment will be entered for the respondent.

ARthstdell, Matthews, and TdeneR concur in the result.

Leech dissents.


author: Aeunbell :

text:
    B. T. Babbitt, Inc. (New York), and B. T. Babbitt, Inc. (Delaware), Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74047.
    Promulgated May 31, 1935.

      Robert G. Poskcmzer, Esq., for the petitioners.

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

Aeunbell :

The pleadings herein raise issues as to deductions for depreciation and obsolescence of trade brands and trade-marks, and amortization of contracts to refrain from competition. There is no evidence concerning the basis or rate of exhaustion of the trade brands or trade-marks and we assume that issue has been abandoned by petitioner. See Norwich Pharmacal Co., 30 B. T. A. 326, holding that trade-marks are not susceptible of exhaustion by the passage of time, nor wear and tear by use in the business.

Petitioners’ present claim is for deductions for the amortization of the contracts to refrain from competition which were part of the agreements whereby the businesses of competitors were acquired. The theory of petitioners is that the covenants to refrain from competition constituted capital assets which had a limited life and that deductions for exhaustion thereof are allowable under section 23 (k), Revenue Act of 1928, which provides for the deduction of a “ reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” The respondent’s position is that the substance of the contracts was to convey to Babbitt the good will of its competitors and that the element of restraint of competition can not be segregated and separately valued.

The decided cases are to the effect that the cost of eliminating competition is a capital asset. Where the restraint or elimination is for a definite and limited term the cost may be exhausted over such term, Farmers Feed Co., 17 B. T. A. 507; Christensen Machine Co., 18 B. T. A. 256, 50 Fed. (2d) 282; Black River Sand Corporation, 18 B. T. A. 490; News Leader Co., 18 B. T. A. 1212; Eitingon-Schild Co., 21 B. T. A. 1163; Eagle Pass & Piedras Negras Bridge Co., 23 B. T. A. 1338. On the other hand, where the benefits of restraint or elimination of competition are permanent or of indefinite duration, no deduction for exhaustion is allowable. Press Publishing Co., 17 B. T. A. 452; affirmed as Newspaper Printing Co. v. Commissioner, 56 Fed. (2d) 125; Clak Thread Co., 28 B. T. A. 1128.

It appears on the face of the contracts here that Babbitt acquired several kinds of property, among others, the business, good will, trade-marks, trade brands, processes, licenses, formulae, and covenants to refrain from competition. If we had nothing but these contracts to go on we would agree with the respondent that a segregation can not be made. We have, however, uncontradicted evidence on this phase of the case dealing with it from two angles, namely, the substantial value of the covenants to refrain from competition and the comparatively minor value of the other properties. Three witnesses testified on this subject. One, a certified public accountant whose experience with Babbitt and other lye concerns dates back to 1916. Another, a manufacturer of cleaning products including lye, who is a competitior of Babbitt, chairman of the Code Authority of the Lye Industry, and has been engaged in the lye business since 1915. The third, a lawyer who has been general counsel and a member of the board of directors of Babbitt since 1923 and negotiated the contracts here involved.

The testimony of these witnesses is that trade brands, trade-marks, or labels are of very little value in the lye industry; formulae are of no value because the formula of each brand is required to be printed on the container. Sales are dependent on price and the personal contact of the producer with wholesalers and jobbers. The testimony is that labels and trade-marks can be changed with but little effect on sales if the contact with wholesalers is maintained by the producer. The primary object of Babbitt in entering into the contracts was to eliminate competition and thus enable it to maintain its sales volume. The testimony is directly to the point that Babbitt would not have purchased the businesses of its competitors without the agreements to refrain from competition.

There is but little range in the testimony of the relative values of the noncompetition agreements and the other properties acquired under the contracts. The highest value placed on any of the covenants to refrain from competition is 90 percent of the entire contract price, and the lowest is 85 percent, assigned by one witness to the Hall covenant. Recognizing that this is not a matter susceptible of exact valuation and that there is room for some variation of opinion as to relative values, we are inclined to accept the lower figure given, 85 percent, as representing the relative value of the covenant to refrain from competition. This percentage in our opinion represents a fair allocation of the price paid under each contract for the restraining covenant, and is to be treated as the cost of such covenant. Christensen Machine Co., supra, and Black River Sand Corporation, supra. As the covenant in each case was for a definite period of years, under the cases above cited, the cost is exhaustible over such periods, namely, 25 years under the Hall contract, 15 years under the Schield contract, and 20 years under the Ford contract.

Decision will he entered wnder Rule 50.


author: TueneR:

text:
    Luther Wallin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60748.
    Promulgated June 6, 1935.

      F. E. Eagler, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

TueneR:

The disputed deduction was claimed as a bad debt in petitioner’s return, but in his petition he abandoned that theory and claimed it to be deductible as a payment made in connection with the operation of his regular trade or business. Whether the deduction is claimed as an ordinary and necessary business expense or a business loss is not clear from the pleadings nor from the discussion. Inasmuch, however, as the payment must be shown to have been made in connection with the petitioner’s business, whether claimed as an expense or a loss, our subsequent discussion will show that it makes no difference on the record before us whether the deduction is claimed as a business loss or an ordinary and necessary business expense.

The satisfaction of the bond given by the petitioner in connection with the injunction proceedings seems to be the basis for the petitioner’s claim that the item of $10,500 paid to the bank constituted an ordinary and necessary business expense or a loss incurred in his business. The petitioner has failed, however, to provide us with the facts necessary to sustain such a contention.

The most definite information with reference to the purpose of the payment is to be found in the endorsement contained on the check, to the effect that it was given as “ Settlement of all issues between the Guaranty Bank and Trust Company, B. G. Dickey, Luther Wallin, and Loraine Wallin Dickey.” We might assume that the issues referred to included the matter of the injunction bond which the petitioner stated was given to enable DeMange to proceed with the cutting of the timber. The petitioner was unable, however, to tell us whether any timber was cut thereafter and whether there was in fact any liability under the bond so given. Furthermore, we were not advised as to the amount of the bond, nor given any definite information as to its terms. On the other hand, it is rather definitely shown, by the record that the payment of $10,500 to the bank did cover the obligation of Dickey and Johnson for the balance due on the land. The statement on the check made no mention of the settlement of any issues between the bank and Johnson, but the petitioner stated in his testimony that upon the payment of the amount mentioned he could have had the land deeded to himself if he had sq desired, and in that case the bank must have accepted the $10,500 as satisfaction of the obligation for the balance due on the land purchase. We have no showing whatever of any obligation on the part of the petitioner to satisfy the claims of the bank against his son-in-law, B. G. Dickey, or against Johnson. In fact the testimony of all the parties is to the effect that the purchase of the land in fee from the bank was the independent enterprise of Dickey and Johnson, and that the petitioner had nothing whatever to do with it.

Even though it should be conceded that the obligation under the bond given in the injunction proceedings was such that its satisfaction should properly be classified as an ordinary and necessary business expense or a business loss of the petitioner, there is no basis whatever for any claim or contention that the obligation of Dickey under the foreclosure proceedings constituted such an item to the petitioner, and since it is perfectly clear that Dickey’s obligation with reference to the purchase price of the land was settled by the payment of $10,500 in cash, and there is no evidence whatever to show what portion of the payment, if any, was applicable to the satisfaction of the bond, the determination of the respondent in this proceeding must be sustained.

Judgment will be entered for the respondent for a deficiency in the amount shown by his notice of determination.


author: Aeundell:

text:
    The Fifth Avenue Bank of New York, as Executor of the Estate of Frederic D. Bell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69534.
    Promulgated June 6, 1935.

      James L. Dohr, Esq., for the petitioner.

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

Aeundell:

Our opinion deciding the issues raised in the pleadings in the above entitled proceeding was promulgated December 26, 1934, and is reported at 31 B. T. A. 945.

The matters now before us for consideration are as follows: (1) Respondent’s proposed recomputation, (2) respondent’s motion for reconsideration and revision of the opinion promulgated December 26, 1934, and (3) respondent’s motion for leave to file a second amended answer.

The respondent determined a deficiency in income tax for 1930 in the amount of $6,645.22 and notified petitioner thereof by letter of January 4, 1933. Petition was filed January 26, 1933, and answer February 18, 1933. There were no further pleadings until January 19, 1934, when respondent, pursuant to leave granted at the trial on January 17,1934, filed an amended answer. By the amended answer respondent alleged the correct deficiency to be $21,887.12 and asserted claim therefor.

The deficiency originally asserted was determined on the theory that under the reorganization provisions of the Revenue Act of 1928 only a part of the gain realized on the exchange of stock for stock and cash was to be recognized for tax purposes. The theory of the amended answer was that the reorganization provisions did not apply and that the entire gain was subject to tax. Both parties filed briefs, the last, petitioner’s reply, being filed on March 17,1984.

Up to this time both parties had proceeded upon the assumption that whatever gain the decedent, Bell, had realized on the exchange was a capital gain. Upon our consideration of the case it was discovered that, according to the stipulated facts, part of the stock received by Bell was issued to him as compensation for services in negotiating the exchange agreements and not in exchange for his Laboratories stock. It was at once apparent that, no matter what our holding on the exchange question might be, the amount of tax would be affected, inasmuch as the stock received for services would be taxable at normal and surtax rates as distinguished from the capital gain rate. This situation was called to the attention of both parties and they appeared at an informal hearing at which the matter was discussed in detail. Neither party took any action following this hearing. We thereafter proceeded to a further consideration of the case and promulgated our report on December 26, 1934. Our holding, in substance, was to deny the respondent’s claim for an increased deficiency, pur theory being that the exchange of stock for stock came within the reorganization provisions, and further that the increase in tax on account of the receipt of stock for services would not be redetermined as a deficiency in view of the respondent’s failure to move for an increase on that ground.

On January 15, 1935, counsel for the respondent filed a proposed recomputation setting forth a deficiency in the amount originally asserted, $6,645.22. This proposal by notice dated January 17, 1935, was set down for hearing on February 6, 1935. On January 23, 1935, counsel for the respondent filed a motion for reconsideration, revision, and review by the Board. By order of the Chairman of January 28, 1935, this motion was denied in so far as it asked for review by the Board and was referred to Division No. 7 in so far as it asked for reconsideration and revision of the Division opinion. On February 2,1935, counsel for the petitioner filed with the Board his written acquiescence in the respondent’s proposed recomput'ation of January 15, 1935. By order of March 27, 1935, the respondent’s proposed recomputation and his motion for reconsideration and revision of the Division opinion were set for hearing on April 17, 1935. On April 11, 1935, counsel for the respondent filed a motion for leave to file a second amended answer, attaching thereto the amended answer.

We shall consider first the motion for reconsideration and revision of the division opinion. The first matter questioned is the holding that the American Cyanamid Co. was a party to a reorganization and that there was no taxable gain to petitioner’s decedent on the receipt of stock of that company in exchange for stock of the Lederlo Antitoxin Laboratories. We are of the opinion that our holding in this respect was correct, and the motion, in so far as it is addressed to this phase of the case, will be denied.

Second, counsel for the respondent claims that we erred in refusing to find an increased deficiency. The argument is that the claim for an increased deficiency asserted by respondent in his first amended answer will support the increase resulting from the fact that Bell received part of the stock for services instead of in exchange for other stock as determined by the respondent. As above pointed out, the original determination and the first amended answer were both predicated on the theory of an exchange of stock for stock, and the question presented to us was whether the gain on the exchange ivas taxable or nontaxable. No claim was asserted for an increase based on the fact of receipt of stock for services, not even after the fact of such receipt was directly called to the attention of the parties. Respondent cites Helvering v. General Utilities & Operating Co., 74 Fed. (2d) 972 (C. C. A., 4th Cir.), which is to the effect that the respondent’s determination may be sustained on appeal on a ground other than that presented to the Board. Holding to the contrary, see Helvering v. Brandeis & Sons, 75 Fed. (2d) 487 (C. C. A., 8th Cir). Whatever may be the correct rule in that class of cases, it does not reach this case, for here the respondent is not asking for an affirmance of his determination, but is asking, for an increase in the deficiency over and above the amount he determined. Section 274(e) of the Revenue Act of 1926 gives the Board jurisdiction to determine an increase in the deficiency “ if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.” This we have construed to mean “ that the prayer [for an increase] must have the support of specific claims in each case based on specific grounds.” Cascade Milling & Elevator Co., 25 B. T. A. 946. Cf. Moise v. Burnet, 52 Fed. (2d) 1071. We are accordingly of the opinion that the claim in the first amended answer for an increase asserted on the ground of a taxable exchange will not support the redetermination of an increase on the wholly different ground of receipt of stock for services. The respondent’s motion of January 23, 1935, will accordingly be denied.

We take up next respondent’s motion for leave to file a second amended answer. In the amended answer attached to the motion it is alleged that the exchange of stock for stock was a taxable transaction and that the value of the stock received as compensation constituted taxable income, and claim is asserted for the entire amount of the deficiency computed on those theories.

The rule relating to amendment of pleadings, Eule 17, provides in part:

Upon motion made, the Board may, in its discretion, at any time before the conclusion of the bearing, permit ai party to a proceeding to amend the pleadings to conform to the proof.

In Steele, Wedeles Co. v. Commissioner, 83 Fed. (2d) 541, affirming 11 B. T. A. 279, the court sustained our refusal to allow the petitioner to amend at the hearing. The facts and the holding are set forth in the following excerpt from the opinion:

The action of the Commissioner in deducting $49,153.12 from invested capital as depreciation was not attacked by petitioner in its claim before the Board of Tax Appeals. At the hearing, however, leave was prayed so to amend as to include an attack upon this item. This motion the board denied as made too late. Apparently such action was not an abuse of discretion, for the record discloses that the Commissioner’s determination of invested capital was made prior to May 28, 1926, when petitioner applied for redetermination. Almost a year later, during the hearing, petitioner sought to amend to attack this item. We believe denial under these circumstances within the discretion of the board.

In Pierce Oil Corporation, 30 B. T. A. 470, we said that the time limited by the words “ conclusion of the hearing ” in Eule 17 “ cannot be said to extend beyond the time when the trial has been concluded and the briefs filed.”

In the present case counsel for the respondent had abundant opportunity to ask leave to amend before the conclusion of the hearing ” and to assert claim for the additional deficiency now claimed “ at or before the hearing.” The agreed statement of facts, signed by counsel for both parties, was filed at the hearing, and it sets forth quite distinctly and beyond any possibility of misunderstanding the fact of Bell’s receipt of stock as compensation for services. No reason is given for the failure to timely move to amend and assert claim in respect of the income on the receipt of stock as compensation, and we must assume that the respondent was not inclined to assert a claim for additional deficiency on that ground. As above pointed out, even after we called the matter to the attention of the parties, counsel for respondent made no move to have a redetermination based thereon. Whether or not a motion at that time would have been timely is not before us for decision.

Counsel for the respondent relies on cases in which taxpayers were allowed to amend so as to raise the issue of the statute of limitations on motions made after submission. In our opinion they are not in point. In Alameda Park Co. v. Lucas, 37 Fed. (2d) 805, and Geuder, Paeschke & Frey Co. v. Commissioner, 41 Fed. (2d) 308, the motion to amend was filed before the opinion of the Board was handed down. In Enameled Metals Co. v. Commissioner, 42 Fed. (2d) 213, it appears that prior to the promulgation of the Board’s report the taxpayer had advised the Commissioner that it intended to raise the limitations issue.

In view of what we have said above, it is our opinion that the respondent’s motion for leave to amend is not timely and it will be denied.

Moreover, the respondent’s motions, both that for reconsideration and review and that for leave to amend, are essentially attempts to raise a new issue on settlement under Rule 50. As pointed out above, the respondent’s recomputation under Rule 50 was filed on January 15, 1935, and by notice of January 17 it was set for hearing. It was after that that respondent filed his motions. New issues may not be raised on settlement under Rule 50. Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308.

The proposed recomputation filed by respondent has been assented to by counsel for petitioner. In view of the denial of respondent’s motions, no change will be made in the recomputation and decision will be entered in accordance therewith.

Reviewed by the Board.