text:
    Estate of Lewis Cass Ledyard, Jr., Deceased, United States Trust Company of New York, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99249.
    Promulgated July 18, 1941.

      Allin H. Pierce, Esq., Will R. Gregg, Esq., and John H. Young, Jr., Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.

       SEC. 42. PERIOD IN WHICH ITEMS OE GROSS INCOME INCLUDED.
      * * * In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

   opinion.

Constitutional Question.

Disney :

The petitioner argues that the last sentence of section 42 of the Revenue Act of 1936 is not within the Sixteenth Amendment and violates the Fifth Amendment.

Whether or not the respondent’s action as to the income items involved herein violates the Fifth Amendment is fully answered in Estate of Wilton J. Lambert, 40 B. T. A. 802. In that case the decedent, an attorney, kept his books on the cash method of accounting and died in 1935 with accruable amounts owing to him for services rendered during his lifetime. We held that the last sentence of section 42, supra, did not violate the Fifth Amendment.

Decisions of this Board and the courts are uniform in holding that the effect of section 42 is to put the decedent on the accrual basis of reporting income in his final return. Lillian O. Fehrman, Executrix, 38 B. T. A. 37; Estate of Wilton J. Lambert, supra; Estate of G. Percy McGlue, 41 B. T. A. 1186; Herder v. Helvering, 106 Fed. (2d) 153; Helvering v. Enright, 312 U. S. 636. The accrual method of accounting and reporting income is not new. It has been a part of income tax laws since the 1916 Act. The constitutionality of the method was apparently assumed in United States v. Anderson, 269 U. S. 422, and in United States v. American Can Co., 280 U. S. 412. The accrual basis of accounting authorized by the Revenue Act of 1918 was held in Weed & Bro. v. United States, 38 Fed. (2d) 935; certiorari denied, 282 U. S. 846, not to violate the Sixteenth Amendment. Other cases hold that a deceased partner’s distributive share of partnership profits not reduced to possession constitutes income includable in the final income tax return of the decedent who had kept his books on the cash basis. Bull v. United States, 295 U. S. 247; Guaranty Trust Co. v. Commissioner, 303 U. S. 493. The constitutionality of section 42 was not questioned in Helvering v. Enright, supra, but the Court held that a right to receive in the future partnership income earned by the efforts of the decedent prior to his death is accruable as income and taxable, with cash actually received, in the final return of the deceased partner. Like income is involved herein. A tax imposed upon it is clearly within the Sixteenth Amendment, and we so hold.

Partnership Income.

The sole point for discussion under this issue is whether the amount of $134,534.95, paid to the petitioner as the decedent’s proportionate share of partnership profits on collections made after his death, is accruable within the meaning of section 42, supra. The proceeding was submitted prior to Helvering v. Enright, supra. The briefs filed by each party discuss at considerable length various cases of the courts and this Board, some involving the controlling statute, as to when income is accruable. No useful purpose would be served by discussing their interpretation of the decisions relied upon by them, in view of the more recent decision of the Supreme Court in the Enright case.

In the Enright case the respondent’s decedent was at the time of his death a member of a law partnership which kept its books and filed its returns on the cash basis each calendar year. Also, the decedent, like the petitioner here, was on the cash basis. The partnership agreement entitled the estate of any deceased partner to receive his share of, among other things, “outstanding accounts and the earned proportion of the estimated receipts from unfinished business”, and provided for a valuation of the items by the decedent’s executor and the senior surviving partner, the amount of which was payable by the surviving partners in equal installments within eighteen months. The will of the decedent directed his executor to accept the valuation placed on his interest by the senior surviving partner and to accept payment upon such terms as the valuing partner deemed necessary for liquidation out of the business. There was a further understanding that the estate would receive what was ultimately realized out of the valued assets.

The question before the Court was whether the valuation placed upon the decedent’s interest in partnership earnings prior to his death, which amount was returned by the executor for Federal estate and New Jersey inheritance tax purposes, constituted accrued income within the meaning of section 42 of the 1934 Act, which reads the same as section 42 of the 1936 Act. In holding that the income had accrued, the Court said, inter alia:

* * * There was no customary accounting system to determine whether the value of services rendered should be accrued before payment. Under such circumstances, we are of the view that items of partnership income properly accrued should be included in the income tax return of the deceased partner. This will cause the accrued items of partnership returns to be included in the income tax return of a deceased partner, whether the partnership method is accrual or cash. Furthermore, an accrual of compensation for the unfinished business seems sound in view of the purpose of the enactment of i 42.
* * * * ⅜ * ⅛
* * * Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, which on a cash return, would appear in the estate returns. Congress sought a fair reflection of income.
* * * The completion of the work in progress was necessary to fix the amount due but the right to payment for work ordinarily arises on partial performance. Accrued income under § 42 for uncompleted operations includes the value of the services rendered by the decedent, capable of approximate valuation whether based on the agreed compensation or on quantum meruit. The requirement of valuation comprehends the elements of collectibility. The items here meet these tests and are subject to accrual. ,

The effect of the Court’s opinion was, in general, to approve as an accrual, for inclusion in the final income tax return of the decedent, the value of the interest of the decedent in earnings of the partnership prior to his death, an asset of decedent at the time of his death, even though the amount had not been accrued or distributed by the firm. In that proceeding, as here, there was a large volume of uncompleted work, consisting of pending cases, taken over by the successor partnership. Here the partnership agreement made no provision for placing valuation on the decedent’s share of partnership earnings, though not actually collected, and the income taxed to the decedent by respondent is based upon payments made to the petitioner from cash collections after the termination of the partnership, not upon a valuation of the decedent’s interest as of the date of his ¡death. These payments were made pursuant to the partnership agreement under which the estate of a deceased partner was entitled to his “due proportion of all earnings received after such dissolution for services performed prior thereto.”

No contention is made by petitioner that the value of the decedent’s right to a proportionate share of partnership earnings for services rendered by its members prior to his death is less than the amount of $134,534.95 which was included in decedent’s income by respondent and is in controversy. Such evidence as there is of record discloses a value considerably in excess thereof. The interest was returned by the executor, the petitioner herein, for estate tax purposes at an estimated value of $281,178.12, or about twice the amount based upon actual receipts over a period of four years subsequent to decedent’s death. This evidence of value is sufficient to sustain the findings of respondent that $134,534.95 was accruable as income in the final income tax return of the decedent. Estate of George W. Wickersham, 44 B. T. A. 619. In sustaining the respondent on this issue we do not decide whether, without evidence of value of the right to partnership earnings, an accrual may be made based entirely upon actual receipts subsequent to the termination of the partnership.

Executor's and Trustee's Commissions.

The parties are in agreement that section 285 of the Surrogate’s Court Act and section 1548 of the Civil Practice Act of the State of New York, prescribing rates of compensation for executors and testamentary trustees and trustees of trusts inter vivos, are applicable only to living fiduciaries and that compensation to a deceased fiduciary is discretionary with the court. See Matter of Bushe, 227 N. Y. 85; Matter of Barker, 230 N. Y. 364; Matter of Rosenberg, 124 Misc. 434; 207 N. Y. S. 557; Matter of Mohr, 167 Misc. 523; 5 N. Y. S. (2d) 239. The contention of petitioner under this issue is that no amount should be included in income for accrued commissions for service rendered by the decedent as executor and trustee, upon the ground that it is impossible to determine in advance of a decree what amount will be allowed within the broad discretionary power of the court.

The petitioner contends that Estate of G. Percy McGlue, supra, is indistinguishable and controlling. That case involved the accrual, under section 42, of commissions earned by the coexecutor of two estates in the District of Columbia, where the proper court has discretionary power to award, upon the final settlement of the estate, a fee of from 1 to 10 percent of the value of the estate. In one of the estates no application had been filed for commissions prior to the hearing and consequently nothing had been allowed by the court or collected. The amount included in the decedent’s final return for accrued commissions was based upon the estimate made in the estate tax return for deduction purposes. In the other estate no accounting was filed and no allowance of commissions was made until after the decedent’s death. The amount so allowed was included in the decedent’s final return by the Commissioner. The indefiniteness of the amount, if any, that would be allowed by the court was a factor leading to our conclusion that the fees had not accrued to the executor at the time of his death. Upon appeal the court, following the rationale of the Enright case, reversed the Board. Helvering v. McGlue, 119 Fed. (2d) 167.

We are referred, however, to decisions of courts of New York denying commissions to fiduciaries who had failed to properly perform their duties. Petitioner does not contend and no evidence was offered to show that the decedent did not at all times faithfully perform his duties as a fiduciary. A witness for the petitioner, with experience before courts in the matter of commissions for services rendered by deceased trustees and executors, testified that when a trustee is entitled to anything he is usually awarded commissions at the statutory rate. All of the commissions allowed by the courts after decedent’s death were computed at the statutory rates.

The facts here do not differ in any material respect from Helvering v. McGlue, supra, following which we sustain the respondent except that, in accordance with the stipulation and amended answer, the amount should be decreased by $54.20.

Dividends.

The petitioner contends that as the dividends declared prior to decedent’s death were not payable or paid until thereafter, the right to receive the dividends had not become fixed at the time of decedent’s death, and, therefore, they were not accruable as income, citing Estate of G. Percy McGlue, supra, in which we held, upon like facts, that the dividends were not accrued income. On appeal the court-reversed the Board upon the ground that, as the declaration of the dividend created a corporate debt under the laws of New York, the right to the dividend had accrued at the time of death.

We have held that a dividend declared in December 1922 payable on January 1, 1923, is accrued income in 1922. Archer Maynard, Campbell, 6 B. T. A. 60. Other decisions of the Board hold that the general rule is that a declaration of a dividend creates a debt from the corporation to the stockholders. W. E. Caldwell Co., 6 B. T. A. 47; Callanan Road Improvement Co., 12 B. T. A. 1109. The rule prevails in New Jersey. Stevens v. U. S. Steel Corporation, 68 N. J. E. 373; 59 Atl. 905; Beattie v. Gedney, 99 N. J. E. 207; 132 Atl. 652. Accordingly, following Helvering v. McGlue, supra, we sustain the respondent on this issue.

Director’s Liability.

Section 43 of the Revenue Act of 1936 provides as follows:

The deductions and credits (other than the dividends paid credit provided in section 27) provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. In the ease of the death of a taxpayer there shall be allowed as deductions and credits for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

Petitioner admits upon brief that at the time of decedent’s death the liability had not become fixed or determinable. Its contention is merely that if sections 42 and 43 are construed to include “all amounts attributable to the decedent’s lifetime activities”, then the amount of the judgment, plus expenses incidental thereto, constitutes an accrued item.

The amount was not claimed as a deduction in the return of the decedent. In the statement attached to the deficiency notice respondent, in answering an alternative contention of petitioner that the item represented an accrued expense of the decedent at the time of his death, stated that neither the decedent during his lifetime nor the petitioner thereafter admitted liability under the suit and held, citing Lucas v. American Code Co., 280 U. S. 445, that the expenses did not accrue at the date of the decedent’s death and therefore were not deductible under section 43. Upon brief the respondent, without extended argument, contends that, while the rights forming the basis of the complaint may have existed at the time of death, they were not accrued at that time, and that the evidence fails to show that “the item is one of a nature for which the statute permits deduction.”

Up to the time of this suggestion in respondent’s brief the only issue made by the pleadings, or suggested in the deficiency notice, was whether the item was properly accruable. Nor was any sugges-lion 'made at the hearing that the item might not be a properly deductible item, because not an ordinary and necessary expense of business, or loss in a transaction in business or in a transaction entered into for profit, or otherwise. On the contrary, the opening statements indicate that the trial was pitched, as to this item, on the question of accruability. We therefore consider only that question.

Undoubtedly the matter of liability in the suit pending against the decedent at the time of his death was not accruable under ordinary concepts of accounting. However, the Enright case plainly imports into this matter, on account of the impact of section 43, a concept which differs from the ordinary accounting idea of accru-ability. Assuming, as the parties upon hearing assumed, that the facts in connection with the suit and judgment constitute proper basis for an allowable deduction, other than upon the question of accruability, in our opinion the Enright case impels us to hold that the item was accruable within the intendment of section 43. It is obvious that all facts upon which judgment was finally rendered had taken place prior to the decedent’s death, and the amount was later rendered definite by the rendition and payment of judgment in a certain amount, just as the compensation for the decedent’s services as executor and trustee was rendered definite by the payment of fees therefor after his death. A fair reflection of income requires, we think, that the item of judgment be placed in a category of deductions corresponding to the items of income. Section 43 covers deductions in a manner obviously intended to be parallel with the income covered by section 42, and the Supreme Court in the Enright case said: “Congress sought a fair reflection of income.” Such an end would be frustrated unless the meaning of “accrued” is applied, as broadened by that case, alike to income and deductions. We conclude and hold that the respondent erred in denying the deduction of the amount of judgment rendered for director’s liability and the expenses incident thereto in the total amount of $253,087.35.

Interest.

The only contention of petitioner under this issue is that the amount is constitutionally free from tax as accrued income. We have held that section 42, sufra, does not violate the Fifth Amendment and is within the Sixteenth Amendment. The interest was earned prior to death and payable thereafter. It clearly constitutes accrued income under section 42, sufra, and we so hold.

Decision will he entered under Rule 50.


source: Caselaw Access Project

author: Meluott :

license: Public Domain

text:
    Dupuy G. Warrick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98689.
    Promulgated July 18, 1941.

      John E. Park, Esq., and A. F. Hillix, Esq., for the petitioner.

      Benjamin L. Bird, Esq., for the respondent.
   OPINION.

Meluott :

Petitioner contends that he acquired the residence at West 69th Terrace in a transaction entered into for profit and that the loss sustained upon the disposal of the residence in 1933 is deductible under the provisions of section 23 (e) (2) of the Revenue Act of 1932.

Both parties agree that whether or not a loss is incurred in a transaction entered into for profit must be determined by the facts in each proceeding. Petitioner cites and relies upon a number of cases in which this Board has allowed as deductions losses incurred in connection with the sale of residential property where the predominant purpose in purchasing such property was to realize a profit on a subsequent sale, and where the use of the property for residential purposes was merely incidental. Sydney W. Sinsheimer, 7 B. T. A. 1099; John N. Hughes, 8 B. T. A. 206; Henry J. Gordon, 12 B. T. A. 1191; Minnie L. Campe, 17 B. T. A. 575; and Marjorie G. Randall, 27 B. T. A. 475. Respondent relies upon cases in which the predominant purpose in acquiring residential property was either not resale at a profit or where the use of the property for residential purposes from the time of its acquisition caused the transaction to lose the characteristics of a transaction entered into for profit, even though a profit-making motive might have existed at the inception of the transaction. Henry DeFord, 7 B. T. A. 630; affd., 29 Fed. (2d) 532; Richard Loper Austin, 17 B. T. A. 801; W. H. Moses, 21 B. T. A. 226; D. A. Belden, 30 B. T. A. 601; and R. C. Bayliss, 35 B. T. A. 1128.

At the hearing petitioner testified that his intention at the time he bought or traded for the West 69th Terrace home was to occupy it as a residence for the purpose of exhibiting it after it was furnished, that he intended to live in it until he could sell it at a profit, that he was not interested in this type of house as a permanent residence for his family, and that his primary interest was in larger grounds. Despite petitioner’s testimony, we are not convinced that his predominant purpose in acquiring the West 69th Terrace property was its resale at a profit. Immediately upon acquiring it he and his family moved in and used it for residential purposes. He had no other residence since he did not retain the Rockhill Road residence which he had been occupying since 1926. but used his equity in that property as part of the purchase price of the West 69th Terrace home. In furnishing this newly acquired house he appears to have used the furnishings of the Rockhill Road house in so far as they were adaptable. There was but slight difference in the size of the Rockhill Road and West 69th Terrace lots, and during the seven years he occupied the houses located on these lots he apparently made no effort to satisfy his expressed desire to secure a home with larger grounds surrounding it. Most people acquiring residential property believe they have made a good bargain; otherwise they would not buy. They hope or expect to make a profit when and if they sell it, and it is not unusual during their occupancy of such property for them to attempt to make a sale at a profit. But where, as here, an individual moves out of one residence into another, using his equity in the first as part of the purchase price paid for the second, and then continues to use the latter as a residence over a four-year period until, through a professional fee transaction, a larger and better home on a two and one-half acre tract is acquired, it would take stronger evidence than that submitted by petitioner to convince us that his predominant motive was to enter into a transaction for profit. As we view the transaction, petitioner acquired the West 69th Terrace property as a residence. As a result of its continued use as such, the purchase and sale of this property lost the characteristics of a transaction entered into for profit, even though a profit-making motive may have existed at the time of its acquisition. R. C. Bayliss, supra. Respondent did not err in disallowing the deduction of $6,500 as a loss incurred in a transaction entered into for profit.

The remaining issue relates to the note for $5,000 which petitioner executed and delivered to Mrs. Parrish on January 31, 1933, and which she returned to him endorsed in blank in June of 1935.

Petitioner contends that Mrs. Parrish made a gift of the note, and that respondent erred in including its face value, $5,000, in his income for 1935. Respondent takes the position that the facts belie that Mrs. Parrish made a gift of the note to petitioner in spite of the fact that she testified she intended to make a gift and that she was motivated solely by a desire to benefit petitioner as an expression of gratitude for numerous courtesies extended to her by him. Respondent urges that the return of the note should be treated as additional compensation to petitioner for the good job which he had done in defending her husband in the mail fraud suit and that the amount of the note should therefore be included in petitioner’s gross income.

The evidence on this issue convinces us that the note for $5,000 was not returned to petitioner as additional compensation for services rendered. Mrs. Parrish testified that she gave the note back to petitioner as an expression of gratitude for the many services and kindnesses that she had received from him; that petitioner never performed any legal or professional services for her; that from time to time, and especially during the time when she did not know the whereabouts of her husband, she had talked to petitioner as a friend about certain individual and personal problems; that petitioner had made it very clear at all times that any and all of the little things he had so graciously done for her were strictly acts of friendship; and that she intended when she returned the note to him to make a gift. Petitioner’s testimony was to the same effect. He testified that during the time the note was held by Mrs. Parrish he paid the interest due thereon, and that at the time she delivered the note to him in 1935, she said: “I want you to know that- there are a few people in the world who have some sense of gratitude. I have appreciated your friendship over a very difficult period. I have something I want to give you. Here it is.” She - then handed him the $5,000 note with her endorsement in blank. Petitioner also testified that the law firm which was entitled to participate in his earnings from legal services, when informed of this transaction, agreed that it had no interest in it.

Respondent’s attempt to connect the delivery of the note to petitioner with his defense of Parrish in the mail fraud suit is based largely upon inference. Petitioner has proved to our satisfaction that when Mrs. Parrish delivered the note to him in 1935 she intended to, and did, make a gift. He was justified in treating it as such. It is our conclusion that respondent erred in adding $5,000 to the income reported by petitioner-in his return for 1935, and this issue is decided in favor of petitioner.

Judgment will he entered u/nder Rule 50.


author: Mellott:

text:
    Trianon Hotel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95972.
    Promulgated July 22, 1941.

      Alton.Gumbiner, Esq., for the petitioner.

      A. B. Shannon, Esq., for the respondent.
   OPINION.

Mellott:

The pertinent provisions of the Revenue Act of 1936 are shown in the margin.

Petitioner’s first contention is that it was restricted in the payment of dividends in the taxable year by the provisions of a written contract executed by it prior to May 1, 1936, which required it to set aside $20,000 out of net earnings in 1936 for the purpose of discharging its covenant to satisfy the Muehlebach creditors’ claims. It claims that it is therefore entitled to the credit provided by section 26 (c) (1), supra.

The evidence presented by petitioner indicates that it did enter into a written contract prior to May 1, 1936, under the terms of which, after January 1, 1935, it was required to “set aside out of its net earnings, if any, the sum of Ten Thousand ($10,000.00) Dollars per year each year for the purpose of retiring issued and outstanding Preferred Stock until all of the issued and outstanding Preferred Stock shall have been retired; and after January 1,1935, no dividends shall be declared or paid during any year on the Common Stock until the sum of Ten Thousand ($10,000.00) Dollars for such particular year shall have been first set aside for the purpose of retiring the Preferred Stock as above stated.” The quoted provision was contained in the preferred stock certificates issued by petitioner in 1932.

It is axiomatic that provisions in preferred stock certificates constitute a binding contract between the issuing company and the purchaser of the stock. Respondent contends, however, that, despite the provision set out above, petitioner is not entitled to any credit under section 26 (c) (1), sufra. He points out that this section allows credit in an “amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by a corporation prior to May 1, 1936,” and takes the position that such “aggregate” consisted of petitioner’s surplus and undivided profits of $105,699.66, on hand at the beginning of the taxable year, plus its adjusted net income for that year of $161,623.45, and minus the $10,000 which it was required to set aside out of its net earnings. This amount is $263,323.11, which is in excess of petitioner’s adjusted net income of $167,623.45. Respondent therefore contends that petitioner is not entitled to any credit under section 26 (c) (1), supra.

Petitioner urges that its earnings and profits of $105,699.66 accumulated prior to January 1, 1936, could not be distributed within the taxable year since they were needed to pay the current expenses of the hotel and to pay for necessary repairs and replacements, and, therefore, should not be included in the computation of “the aggregate of the amounts which can be distributed within the taxable year as dividends * * One witness for petitioner testified that the current and necessary expenses of the hotel amounted to approximately $90,000 a month; that petitioner was required to keep this amount of cash on hand to meet these expenses; that at the beginning of the taxable year 1936 petitioner had current liabilities in excess of $81,000, of which between $50,000 and $60,000 was due within 30 days; that large amounts had to be expended for equipment and leasehold improvements; and that petitioner expended for such improvements $32,000 in 1932, $22,000 in 1933, $94,000 in 1934, $28,000 in 1935, and $64,000 in 1936. The testimony of this witness does not convince us that the surplus on hand at the beginning of 1936 was needed for the payment of current expenses or necessary capital improvements, and that it was not available for distribution as dividends. In its income tax return for 1936 petitioner reported gross receipts of $1,364,945.92 and cost of operations $325,868.69. Thus it had a gross income of $1,041,232.23. It claimed deductions of $846,174.81 for compensation of officers, rent, interest, and insurance, depreciation, salaries, and other expenses, leaving a net income of $195,057.42. Its balance sheet showed $97,910.21 cash on hand at the beginning of the year and $117,723.91 at the end of the year, and capital assets of $381,410.93 at the beginning of the year and $438,-297.40 at the end of the year. Despite the distribution of dividends in the amount of $112,156.17 and the retirement of $26,620.83 of its preferred stock, the surplus of petitioner was increased from $105,-699.66 at the beginning of the year to $156,763.83 at the end of the year. From this evidence it is apparent that petitioner’s income for 1936 was more than sufficient to take care of its current expenses and capital improvements, and that it was not necessary to call upon the accumulated earnings of prior years for such purposes.

Petitioner’s contention that the surplus on hand at the beginning of 1936 was not available for distribution as dividends during that year is further disproved by the action taken at the regular monthly meeting of its board of directors held on July 28, 1936. At that meeting, after referring to the prior declaration of a 7 percent dividend on preferred stock made on December 31, 1935, for the period February 1, 1932, to February 1, 1933, a declaration of a 7 percent dividend made April 28, 1936, for the period February 1, 1933, to February 1, 1934, and a declaration of a 7 percent dividend made May 27, 1936, for the period February 1, 1934, to February 1, 1935, the following resolutions were adopted:

Bk it Fübther Besolvbd : That there he at once appropriated, out of the surplus of this Corporation, the suin of $16,065.29 to pay as of the date hereof, the seven percent annual dividend on the outstanding Preferred Stock of this Corporation provided by this Company’s charter, and allocable to the period from February 1,1935, to February 1, 1936, and
Be it Further Resolved: That the said dividends be, and they hereby are, ordered and directed to he paid forthwith out of said surplus and earnings of this Corporation, to the preferred stockholders of this corporation of record as of this date. [Italics supplied.]

While we have answered petitioner’s contention that its accumulated earnings as of January 1, 1936, should not be included in computing the aggregate amount available for distribution as dividends in that year because they were needed for current expenses, etc., we desire to point out that there is, in our opinion, considerable substance to the respondent’s contention on brief that, even if petitioner had proved that the accumulated earnings were needed for the specified purposes, the act did not provide for any exception in such cases and they would have to be included in the aggregate which could be distributed as dividends during the taxable year.

Petitioner also strenuously urges that even if its surplus as of January 1, 1936, be considered a “free surplus”, it may not be used to lessen the amount of credit to which petitioner is entitled under section 26 (c) (1); that the statute is leveled at undistributed current earnings, and not at undistributed surplus of earlier years on hand at the beginning of the current year; that the purpose of the act is to impose a surtax on the current net income of a corporation in an amount measured by the undistributed net income; that to the extent the current net income is undistributed it is taxable, except in the amount that it can not be distributed by virtue of contractual prohibitions resulting from contracts entered into prior to the date the statute became effective; and that Congress intended to allow a credit to the extent that the current net income exceeds that part of the current net income which can be distributed without offending á contract restricting dividends.

Section 14 of the Eevenue Act of 1936 provides for the imposition of a surtax upon the undistributed net income of every corporation, and subdivision (a) (2) of this section defines “undistributed net income” to be “the adjusted net income minus the sum of the dividends paid credit provided in section 27 and the credit provided in section 26 (c), relating to contracts restricting dividends.” An examination of the sections discloses that the credits are not limited to current net income. Section 27 allows a credit for dividends paid, either out of earnings of prior years or out of the earnings of the current year. It also allows, under certain circumstances, as a part of the dividends paid credit, dividends paid in a preceding year in excess of the adjusted net income for that year. The purpose of section 26 (c) (1), as we interpret it, was to allow a taxpayer an additional credit where a corporation was prevented from distributing an amount equivalent to its adjusted net income of the current year by reason of a written contract executed prior to May 1, 1936, expressly dealing with the payment of dividends. Congress apparently realized that there would be instances, such as we have here, where, even though a corporation was required by the provisions of a written contract to set aside a portion of its earnings for a particular purpose, it might still be in a position, after it had discharged this contractual obligation, to distribute an amount equivalent to its adjusted net income. It, therefore, provided for a credit equal to the excess of the adjusted net income over the aggregate of the amounts which could be distributed within the taxable year as dividends without violating a written contract, etc. The aggregate amount which petitioner could distribute during the taxable year included its surplus as of January 1, 1936, and its adjusted net income of the current year, less the amount it was obligated by contract to set aside out of 1936 earnings, and which it did so set aside, for the retirement of its preferred stock. Since the aggregate of these amounts is in excess of its adjusted net income for 1936, we hold that it is not entitled to the claimed credit under section 26 (c) (1), sufra.

Petitioner contends in the alternative that it is entitled to a credit under the provisions of section 26 (c) (2), sufra. Before petitioner can be allowed such a credit, it must appear that a portion of its earnings and profits of tfie taxable year is required by the provisions of a written contract executed prior to May 1, 1936, expressly dealing with the disposition of earnings and profits, to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within such year for the discharge of a debt.

It has been pointed out in connection with the first issue that petitioner was obligated by a provision in its preferred stock certificates to set aside, after January, 1935, out of its net earnings, if any, the sum of $10,000 per year each year, for the purpose of retiring issued and outstanding preferred stock. This provision expressly dealt with the disposition of a portion of petitioner’s earnings and profits of the taxable year, and was contained in a contract executed by petitioner prior to May 1, 1936. If, therefore, petitioner was required to set aside $10,000 per year each year “for the discharge of a debt”, it is entitled to a credit under section 26 (c) (2).

Petitioner takes the position that its agreement to set aside $10,000 per year out of its net earnings for the purpose of retiring issued and outstanding preferred stock should be construed to be a contract requiring it to set aside a portion of its net earnings for the discharge of a debt. It urges that its preferred stock certificates were in reality certificates of indebtedness and that the general rule that the holders of preferred stock of a corporation are not creditors should not therefore be applied. It is true, as petitioner points out, that the corporate designation of the character of the instrument is not conclusive. Commissioner v. Proctor Shop, Inc., 82 Fed. (2d) 792; Commissioner v. Palmer-Stacy-Merrill, Inc., 111 Fed. (2d) 809. Each case must be decided upon its own facts. Dayton & Michigan Railroad Co., 40 B. T. A. 857; affd., 112 Fed. (2d) 627. The evidence in the instant proceeding does not convince us that the certificates of preferred stock issued by this petitioner were other than what they purport to be. Petitioner relies strongly upon the testimony of former creditors of the Whitmore Hotel Co. to the effect that they understood petitioner’s preferred stock was being given to them as evidence of the unliquidated balance of the debts owed to them; that they did not consider the preferred stock as an investment; and that they did not desire to become investors in a hotel property. It argues that this testimony shows that the intention of the creditors was not to embark upon the corporate venture and take the risks of loss attendant thereon in order to enjoy the chances of profit, and that it was the intent of petitioner to acquire the assets of an embarrassed hotel by paying off its creditors, half in cash and half in deferred payments. As proof that a debt was recognized as such bjr petitioner, it introduced in evidence a page from a combination journal and ledger book, known as a “voucher register,” showing that in September 1936 $22,616.76 was credited to preferred stockholders as an account payable. It also points out that the holders of its preferred stock had no voting power and were not entitled to notice of stockholders’ meetings.

The evidence convinces us that it was the intention of petitioner from the very beginning to acquire the accounts of creditors of the Whitmore Hotel Co. in exchange for cash and preferred stock. The purpose of acquiring these accounts in this manner was to permit petitioner to begin its operation of the hotel “free of all current liabilities.” The contract under which it acquired the assets of the hotel specifically provided that petitioner did not assume or agree to pay any of the obligations of the Whitmore Hotel Co., except that it agreed to acquire by assignment all the accounts payable of that company. When the accounts were assigned to petitioner, it issued shares of its preferred stock in part payment therefor. The preferred stock certificates gave the holders the right to receive, out of surplus or net earnings of the corporation, a yearly cumulative dividend of 7 percent per annum; the right to have $10,000 per year set aside out of the net earnings of the corporation after January 1, 1935, for the purpose of retiring preferred stock; and the right to receive upon dissolution or liquidation, the full par value of the stock and all unpaid dividends accrued thereon before any payment to the common stockholders. These provisions, including the provision that the holders of the preferred stock should have no voting power, differ in no material respect from those usually contained in preferred stock issues.

While the corporate designation of the character of an instrument such as the preferred stock certificates issued by petitioner is not conclusive, the name given will not be ignored and courts will not lightly assume that the corporation has given the instrument an incorrect name. Greensboro News Co., 31 B. T. A. 812. The provisions of the certificates are an important factor in determining whether the holders thereof should be treated for tax purposes as preferred stockholders or creditors. A corporate creditor has been defined by tins Board to be “one who has loaned to the corporation money or its equivalent, usually for compensation or interest, at a fixed rate, to be repaid at a designated time or in a designated manner.” Elko Lamoille Power Co., 21 B. T. A. 291; affd., 50 Fed. (2d) 595. In Richmond, Fredericksburg & Potomac Railroad Co., 33 B. T. A. 895; affd., 90 Fed. (2d) 971, in determining that fixed periodic payments made to holders of “guaranteed stock” were in reality interest although denominated “dividends”, we said: “It seems to us * * * that in this case the basic test to be applied is whether the stockholder invested his money with the view of receiving a return from its use dependent on the successful operation of the company, on the one hand, or, on the other hand, whether he invested with no regard to the profit or loss which the company might enjoy or sustain, but with a dependency on the regular payment of compensation for the use of the money and the assurance of its ultimate payment.” If the intention of the petitioner were to treat the holders of its preferred stock as creditors, we are at a loss to account for the absence of any provision fixing a definite time when the debt would mature and requiring payment to be made whether earnings existed or not. Cf. Meridian & Thirteenth Realty Co., 44 B. T. A. 865. Dividends were not payable to the holders of such stock in any event, but only when and if declared by petitioner’s board of directors. Moreover, the rights of the preferred stockholders to dividends and to have their stock redeemed depended upon earnings derived from the successful operation of the hotel. They were given preference only over common stockholders in the event of dissolution or liquidation.

The provisions of the stock certificates are not the only evidence that a debtor-creditor relationship did not exist between petitioner and its preferred stockholders. Petitioner’s articles of incorporation provided that its capital stock should consist of 10,000 shares of common stock having a par value of $5 per share and 10,000 shares of preferred stock having a par value of $25 per share, and contained the statement that more than 17 percent of the authorized capital stock (8,146 shares of common and 1,342 shares of preferred) had been actually paid up in cash. In the minutes of the meetings of its stockholders and directors the preferred stock was always referred to as such and not as a certificate of indebtedness. In its capital stock tax return for 1936, it reported that its outstanding capital stock consisted of 9,180% shares of preferred stock and 9,330% shares of common stock. Approximately 4,300 shares of its outstanding preferred stock were not issued in connection with the acquisition., of the accounts of Whitmore Hotel Co. creditors. In the balance sheet forming part of its income and excess profits tax return for 1936, it listed as a capital stock liability “Preferred Stock (less stock in treasury)” amounting to $229,504.17 at the beginning and $202,883.34 at the end of the year. In the same return it claimed $112,156.17 as a “Dividends paid credit”, $65,502.84 of which represented distributions to the holders of its preferred stock, and in computing its net taxable income no deduction was claimed for “Interest paid” during the year.

The provisions of petitioner’s preferred stock certificates, petitioner’s consistent treatment of these certificates as preferred stock, its repeated reference to “dividends” to be paid or paid to the holders thereof in the minutes of its corporate meetings and tax returns, its action in setting aside $20,000 out of its surplus funds and earnings for the purpose of retiring issued and outstanding preferred stock, and other evidence heretofore mentioned, all serve to convince us that petitioner did not set aside $20,000 during the taxable year for the discharge of a debt. In reaching this conclusion we do not doubt the sincerity of those former creditors of the Whitmore Hotel Co. who testified that they did not intend to become investors and accepted petitioner’s preferred stock as evidence of the unliquidated balance of the debts owed to them. Whatever their intention may have been, they became investors when they assigned their Whitmore Hotel Co. accounts to petitioner in exchange for cash and preferred stock. Respondent did not err in disallowing the credit claimed by petitioner under the provisions of section 26 (c) (2), supra. Cf. May Hosiery Mills, Inc., 42 B. T. A. 646.

The remaining contention of petitioner is that if it is not entitled to a credit under section 26 (c), then it is entitled to an additional dividends paid credit under section 27 (f) of the Revenue Act of 1936 for the $26,620.33 (should be $26,620.83) which it paid during the taxable year in retirement of its preferred stock.

Section 27 (f) of the 1936 Act provides that in the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28,1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid. Section 115 (c) of the same act provides that in case of a distribution in partial liquidation the part of such distribution “which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.” In Credit Alliance Corporation., 42 B. T. A. 1020, this Board discussed at length the provisions of section 27 (f), supra, and among other things said: “It seems * * * plain that Congress did not intend to confer dividends paid credit for a return of capital. * * * Indeed, Regulations 94, article 27 (f)-l (b) states: £To determine the amount properly chargeable to the earnings or profits accumulated since February 28, 1913, there must be deducted from the amount of the distribution that part allocable to capital account.’ ”

The amount of $26,620.83 which petitioner paid during 1936 in retirement of a part of its preferred stock was not properly chargeable to its earnings or profits accumulated after February 28, 1913. The entire amount distributed, representing the par value of 1,064% shares retired, was chargeable to its capital account, and as a result of this distribution petitioner’s preferred stock liability on the balance sheets forming part of its 1936 return was reduced from $229,504.17 at the beginning of the year to $202,883.34 at the end of the year. Under these circumstances, petitioner is not entitled to an additional dividends paid credit because of the provisions of section 27 (f).

Decision will be entered for the respondent.

       SEC. 26. CREDITS Off CORPORATIONS.

        *******

      (c) Contracts Restricting Payment of Dividends.—
      (1) Prohibition on payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.
      (2) Disposition of profits of taxable year.—An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside, ffor the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.
      (3) Double credit not allowed.—If both paragraph (1) and paragraph (2) apply, the one of such paragraphs which allows the greater credit shall be applied; and, if the credit allowable under each paragraph is the same, only one of such paragraphs shall be applied.
      SEC. 27. CORPORATION CREDIT ffOR DIVIDENDS PAID.

        *******

      (f) DISTRIBUTION in liquidation.—In the ease of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.


author: Murdock: Smith,

text:
    Pyramid Metals Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102354.
    Promulgated July 22, 1941.

      Morris Glasser, O. P. A., and Oharles Melvoin, O. P. A., for the petitioner.

      Alvin B. Peterson, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency in income tax of $146.95 and a deficiency in excess profits tax of- $49.37, each for the calendar year 1938. The only issue for decision is whether or not the petitioner is entitled to a deduction of $822.78 representing the portion of the real estate taxes for the year 1938 which was applicable to the period from August 1, 1938, to the end of the year. The facts have been stipulated and the stipulation is adopted as the Board’s findings of fact.

The Cleveland Realty Corporation owned a piece of property in Chicago, Illinois, which was rented by Lakeside Upholstery Co. The latter had an option to purchase the property by meeting any outside offer. The petitioner made an offer on February 26,1938, to purchase the property on August 1, 1938. This offer recognized the option of the Lakeside Upholstery Co. The Chicago Realty Corporation accepted the offer subject to its terms and conditions and gave notice of the offer to the Lakeside Upholstery Co. on February 26,1938. Lakeside never exercised its option and sale was made of the premises to the petitioner on August 1, 1938. The petitioner, in the settlement, received credit for seven-twelfths of the real estate taxes on the property for 1938. The petitioner paid the real estate taxes on the property for 1938 in two installments of $987.34 each. The first was paid on June 2, 1939, the second on September 5, 1939. Five-twelfths of the real estate taxes for 1938 amounted to $822.78. The petitioner kept its books and filed its return for the calendar year 1938 upon an accrual basis. The petitioner accrued on its books for 1938 and claimed on its return for that year an item of $900.16 representing five-twelfths of the estimated amount of the real estate taxes on the property for the year 1938. The Commissioner, in determining the deficiency, disallowed the deduction.

The petitioner claims the right to deduct $822.78 as taxes under section 23 (c) of the Revenue Act of 1938. The parties agree that these real estate taxes in the State of Illinois accrued on April 1, 1938. The petitioner first endeavors to show that it became the equitable owner of the property prior to that date, on February 26, 1938, when its offer to purchase was accepted and a deposit of $5,000 was made. The facts show, however, that it did not acquire any title, equitable or otherwise, to the property at that time. The offer and acceptance involved only a sale of the property on August 1,1938, and not on any prior date. Furthermore, the tenant of the property had the refusal of it after the owner had received the offer. The petitioner became the owner of the property on August 1, 1938, and not prior thereto. Thus, it was not the owner of the property when these taxes accrued and became a lien.

The case of Edward C. Kohlsaat, 40 B. T. A. 528, involved real estate taxes on property in Illinois and the Board held that they were deductible as taxes only by the owner of- the property on April 1 in the year to which the taxes applied. The Board was simply following a long and consistent line of cases, the theory of which was that the purchaser, who is charged in his settlement with the seller, or who later pays the taxing authorities, amounts which had accrued as taxes or become a lien on the property prior to the time that he acquired title, has made no payment qua taxes but has merely paid a part of the purchase price to acquire a clean title. See discussion, in Commissioner v. Coward, 110 Fed. (2d) 725. Although most of the cases have involved a claim by the purchaser to deduct all of the taxes for the year of purchase or for a prior year (see Grand Hotel Co., 21 B. T. A. 890; Leamington Hotel Co., 26 B. T. A. 1004; Alden Anderson, 27 B. T. A. 980; Missouri State Life Insurance Co., 29 B. T. A. 401; affirmed on this point, 78 Fed. (2d) 778; Texas Coca-Cola Bottling Co., 30 B. T. A. 736; California Sanitary Co., Ltd., 32 B. T. A. 122; Merchants Bank Building Co., 32 B. T. A. 1072; affd., 84 Fed. (2d) 478; Gatens Investment Co., 36 B. T. A. 309; T. H. Banfield, 42 B. T. A. 769; American Liberty Oil Co., 43 B. T. A. 76; Falk Corporation v. Commissioner, 60 Fed. (2d) 204; Lifson v. Commissioner, 98 Fed. (2d) 508), proration of taxes was involved in at least two cases. First Bond & Mortgage Co., 27 B. T. A. 430, and Walsh-McGuire Co. v. Commissioner, 97 Fed. (2d) 983. The claim to the deduction was denied in all of those cases where the taxes had accrued or become a lien before the purchaser had acquired title. The cases of Commissioner v. Rust, 116 Fed. (2d) 636, and Carondelet Building Co. v. Fontenot, 111 Fed: (2d) 267, are not exceptions to the rule, since the taxes allowed as deductions in those cases did not accrue or become liens until after title had passed to the new purchaser.

The one case out of line which has come to our attention is Supplee v. Magruder, 36 Fed. Supp. 722, from the District Court for the District of Maryland. The taxpayer in that case claimed the right to deduct taxes allocable to that portion of the year during which he was the owner of the property and the court allowed the deduction. Judge Chesnut, who wrote the opinion, attempted to distinguish prior cases on the ground that they involved claims to deduct taxes for prior years, but, as a matter of fact, many of the cases cited above involved taxes for the year of purchase, and in the two cases mentioned above prorating was considered and rejected. Furthermore, the question decided by the court in the Supplee case is present in practically every case, potentially at least, since most sales must take place within some taxing year. The long established rule based on sound reason should not be plowed under at this late date, and with all due respect to the District Court, we do not agree with the Supplee decision.

The petitioner also contends that this deduction should be allowed for 1938 in order to clearly reflect income. See section 43. That section was not designed to cover minor items such as this and, obviously, it has no application where the taxpayer can not show that it is entitled to a deduction of some kind under some other provision of the statute.

Eeviewed by the Board.

Decision will he entered for the respondent.

Smith,

dissenting: “Taxes paid or accrued within the taxable year” are deductible from gross income. Sec. 23 (c), Eevenue Act of 1938.

On August 1, 1938, petitioner acquired real estate in the city of Chicago at a cost of $33,000. Under the terms of the contract of purchase, dated February 26, 1938, rents, water taxes, and insurance premiums were to be adjusted pro rata between the seller and the purchaser as of the date of delivery of the deed, which was on August 1, 1938. On that date there were delinquent taxes due on the property. The grantor was charged with those delinquent taxes and also with seven-twelfths of the taxes payable for the year 1938. From August 1, 1938, the petitioner was the owner of the property and received the rents therefrom. It accrued upon its books for the balance of the calendar year five-twelfths of the taxes for the taxable year. It claimed the deduction of those taxes in its income tax return for 1938. The respondent says that these may not be deducted and that they must be treated as a part of the cost of the property. The Board sustains the respondent upon this point.

The net result of this holding is that the full deduction of the taxes paid upon the real estate for 1938 is available to no one. I do not think that is the proper construction of the statute. I think that Congress intended that the full amount of the current year’s taxes is deductible by some one. Manifestly, the grantor is not entitled to the deduction of the taxes for the period August 1 to December 31, 1938, because it was not chargeable with them and did not pay them. But I can not see why the grantee, which was the owner of the property and received the income of the property from August 1, 1938, and which paid the taxes, is not entitled to deduct them.

It is quite apparent that the rulings of the Board and of the courts in some tax cases which have come before them are entirely out of line with commercial practice. Ordinarily taxes are adjusted to the date of sale between seller and purchaser. They do not constitute a part of the price at which real estate is sold. The cost of the Chicago real estate purchased by the. petitioner in 1938 was $33,000. That was the price that the seller received. Why should a portion of the taxes representing five-twelfths of the 1938 taxes be added to the cost? It seems to me entirely immaterial that the taxes became a lien on the property on April 1, 1938.

I entirely agree with the opinion of the court in Supplee v. Magruder, 36 Fed. Supp. 722. The court’s opinion is, I think, in line with the reasoning of many Board and court opinions. See Patrick Cudahy Family Co., 36 B. T. A. 1147; affd. (C. C. A., 7th Cir.), 102 Fed (2d) 930; New Orleans Cold Storage & Warehouse Co., Ltd., 40 B. T. A. 121; Carondelet Building Co. v. Fontenot (C. C. A., 5th Cir.), 111 Fed. (2d) 267; Commissioner v. Coward (C. C. A. 3d Cir.), 110 Fed. (2d) 725; Estate of H. L. Rust, 41 B. T. A. 832; affd., Commissioner v. Rust (C. C. A., 4th Cir.), 116 Fed. (2d) 636.

It is furthermore to be noted that the petitioner kept its books of account on the accrual basis. In United States v. Anderson, 269 U. S. 422, the Supreme Court said that the accrual basis was for the purpose of enabling taxpayers to “make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period.” Under the contract by which the petitioner purchased the Chicago real estate it was required to pay the taxes that were “properly attributable” to the period after August 1, 1938. It is in reason to say that those taxes were a charge against the income of the property during the ownership by the petitioner.


author: Aettndell :

text:
    Mabel G. Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101820.
    Promulgated July 24, 1941.

      Ellis D. Sever, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   opinion.

Aettndell :

The question before us may be disposed of by decision of the first issue. The gift tax, by familiar principle, may not be applied to gratuitous transfers which are incomplete in nature and will not be consummated, if at all, until some later time. Burnet v. Guggenheim, 288 U. S. 280; Hesslein v. Hoey, 91 Fed. (2d) 954; Emily Trevor, 40 B. T. A. 1241. Indicia of such incompleted transfers have been given in numerous decisions. Marrs McLean, 41 B. T. A. 1266; Martin Beck, 43 B. T. A. 147; see Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; John S. Mack, 39 B. T. A. 220. The factors which are significant here in large measure determine also the applicability of the estate tax to transfers made during life in which the decedent retains some benefit or right of control. Sanford v. Commissioner, 308 U. S. 39; Rasquin v. Humphreys, 308 U. S. 54; Marrs McLean, supra, p. 1268; Meta Biddle Robinette, 44 B. T. A. 701.

Examination of the transfer before us discloses that the petitioner’s disposition of the corpus of the trust was conditioned on her right to have principal applied when necessary to furnish to her an annuity of $8,400 per year.

There remained thus in the petitioner'after the 1936 transfer the right to receive portions of the principal of the trust whenever income did not equal that amount. His right pervaded the entire trust corpus and in this circumstance may not be restricted here to only a portion of the trust by assigning a market value to the annuity. The possibility, moreover, that the corpus would be used to furnish the annuity was not remote, as is demonstrated by the failure of the trust income to equal the annuity in any of the years of which proof is made. Cf. Ithaca Trust Co. v. United States, 279 U. S. 151; Michigan Trust Co. et al., Executors, 27 B. T. A. 556; see also Burdick v. Commissioner, 117 Fed. (2d) 972.

In these circumstances it may not be said that petitioner has parted finally with her rights in the properties. transferred and there was, in consequence, no completed gift in the 1936 transfer.

In the instant case, moreover, the principles drawing together in pari materia the estate and gift taxes may appropriately be applied. The latter tax can have no application where, as here, the transfers made were so far incomplete as to compel the inclusion of the transferred properties in the petitioner’s estate; the rights and benefits retained by the petitioner in the trust corpus bring it within the scope of the estate tax, see Helvering v. Hallock, 309 U. S. 106; Emily Trevor, supra, and accordingly the gift tax, which, in so far as it may, has application exclusive of the field of the estate tax, may not be here imposed. Sanford v. Commissioner, supra; Morris Michel, 43 B. T. A. 1036.

In view of what has been said above, it becomes unnecessary to consider the additional arguments of the petitioner based on other incidents of the transfer, reserving to petitioner the right to occupy a home purchased with trust funds and to receive from the trustees such income in addition to the annuity as they might consider necessary for petitioner’s support. Cf. Edward, Rayne McComb Herzog, 41 B. T. A. 509; affd., 116 Fed. (2d) 591; Katherine S. Rheinstrom, 37 B. T. A. 308.

In accordance with the stipulation of the parties, it. is held that there is an overpayment of $1,155.34.

Decision will he entered under Rule 50.


author: Hill :

text:
    Rose B. Larson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of A. E. Larson, Deceased, Shirley D. Parker, Administrator, d. b. n. c. t. a., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88813, 88814.
    Promulgated July 24, 1941.

      3. B. Janes, Esq., and George C. Kiwnear, Esq., for the petitioners.

      B. H. Nehlett, Esq., and Clyde R. Maxwell, Esq., for the respondent.
   OPINION.

Hill :

The first issue is basic and its determination will affect most of the other questions before us in this proceeding. This issue concerns the treatment for income tax purposes of income from community property received, by the estate of decedent during the period of administration of the estate. Petitioner contends that all such income received by the estate should be reported as income of the estate by the fiduciary representing the estate. Despondent contends that the community income received by the estate is taxable one-half to the estate and one-half to the survivor of the community.

Petitioner and respondent do not differ on the question of whether petitioner as surviving spouse has a vested interest in the community property. Despondent argues, however, that, since petitioner had a vested interest in the property, the income should be taxed to her. Petitioner’s contention is that regardless of the fact that she had a vested interest in the property she was not entitled to its income during the period of administration. The applicable Federal statutes are section 161 (a) (3) and section 162 (c) of the Eevenue Act of 1934. State laws concerning the phase of community property here under consideration are sections 1342 and 1419 of Eemington’s Eevised Statutes of Washington.

The courts of the State of Washington have long adhered to the rule that on the death of either husband or wife the whole of the community property is subject to administration as the estate of the deceased spouse. Ryan v. Fergusson, 3 Wash. 356; 28 Pac. 910; In re Guye's Estate, 54 Wash. 264; 103 Pac. 25; F. T. Crowe & Co. v. Adkinson Construction Co., 67 Wash. 420; 121 Pac. 841; Stanton v. Everett Trust & Savings Bank, 145 Wash. 165; 259 Pac. 10. Thus the entire income on community property during the period of administration is receivable by the estate.

We are of the opinion that the entire income from community property of decedent and petitioner during the period of administration was taxable to the estate. The instant case is not distinguishable from Barbourr v. Commissioner, 89 Fed. (2d) 474. There community property stock was sold after the death of the husband but during the period of administration of his estate. The Circuit Court of Appeals for the Fifth Circuit held that income received by the administrator of the estate during the period of administration was taxable in its entirety to the estate. We have recently approved this rule. Estate of Lucile Gruy, 42 B. T. A. 1279. We have shown above that the Washington authorities have laid down the rule that community property is subject to administration as the estate of deceased spouse. Those cases do not differ materially from the Texas authorities relied upon by the court in the Barbour case. Respondent cites the case of George Drumheller, 27 B. T. A. 209, for the proposition that one-half of the community income is taxable to petitioner. In that proceeding, however, the instant problem was not before us. That case is not controlling because the specific question we are now considering was not in controversy.

This was not the case of “a nonintervention will” in which, upon a showing of solvency, the estate may be administered without court approval. Here each sale and distribution required court sanction and petitioner could only receive the income in question as a distribution from the estate. The facts of the case at bar present petitioner’s view in the strongest possible light. Since the community property was subject to administration and income therefrom was receivable by the estate during administration, we believe it would be contrary to the intendment of section 161 (a) (3) of the Revenue Act of 1934 to tax any part of that income to petitioner. In spite of petitioner’s vested interest in the property, she had no right to the income during the taxable year. We hold that the income from community property subject to administration is taxable in its entirety to the estate of decedent during the period of administration.

The second and third issues relating to interest on obligations and rentals from property held by the community are necessarily determined by our decision on the first issue. We hold that no part of the sum of $2,374.68, interest, nor the sum of $9,782.49, rentals, which respondent included in petitioner’s gross income, is taxable to petitioner. The entire amounts are includable in income of the decedent’s estate.

The next issue is whether or not any portion of the dividends on community stock is taxable to petitioner. This question is also determined by our disposition of the first issue. Petitioner contends, however, that she erroneously reported the sum of $1,570 in gross income for the year 1934. The amount reported on her return represents one-half the sum of $3,140, which is the portion of a $3,600 dividend of the Surety Finance Co. which might be said to have accrued at the date of decedent’s death. Since the dividend was not received until after the estate was in administration, no part of the dividend should have been included in petitioner’s gross income. We hold that petitioner should not have included this amount in her 1934 income tax return.

In connection with this issue petitioner made a contention concerning the taxability of the proceeds of a dividend check in the sum of $3,600, dated December 31, 1934. This contention turned, upon whether or not the check was actually received during the taxable year. Because of our determination of the first issue, we need not consider whether the check was actually received in the taxable year or in the year 1935.

The fifth issue is whether or not petitioner is taxable on gain from the sale of one-half of 85,000 shares of Sunshine Mining Co. stock which were sold by the estate of decedent in the taxable year. Petitioner contends that the shares sold came entirely from the interest of the estate. Respondent argues that it was the intent of the executor to sell shares from petitioner’s interest as well as that of decedent’s estate. He urges that the listing plan contemplated the sale and option of about 40 percent of each of four shareholders’ holdings and that this intent would not be satisfied unless 40 percent of the entire holdings of the Sunshine Mining Co. stock in the hands of the executor was subject to option and sale. Respondent further argues that there was no immediate need for the sale of the stock, since the will of the decedent permitted the executor to have three years to liquidate the estate in order to pay bequests.

We are of the opinion that the shares in question were sold from the interest of decedent. We are convinced that petitioner gave neither actual nor tacit consent to the sale of shares from her interest. Although Parker, as her agent, approved the action of the executor in optioning the shares, it must be remembered that petitioner was residuary legatee and vitally interested in the preservation of the worth of the estate. Testimony at the hearing clearly indicated that the options and sales were to enhance the value of the remaining shares in addition to obtaining funds for the payment of legacies.

The executor of the estate petitioned for the Probate Court’s permission to option and sell the shares for payment of bequests. No citation of cases is necessary to demonstrate that petitioner’s interest could not be sold to pay bequests under decedent’s will. Although three years for liquidation of property to pay bequests was allowed to the executor under the will, it was certainly discretionary with the executor, after obtaining court approval, to liquidate a portion of the estate at an early date.

The factors which show undeniably that the interest in shares sold was that of the estate alone are the petition and order for partial distribution of the estate. The order of the court stated that “said Rose B. Larson is entitled, as her share of community property, to receive from said executor, upon the closing of said estate, a total of 105,487 shares.” Since the entire community interest in the Sunshine Mining Co. shares aggregated 210,974 shares, the court’s order indicates that one-half of the original number of shares was treated as the property of petitioner after the sale of 85,000 shares had been made. We consider the court’s order a finding behind which we can not inquire. The Probate Court’s' determination, as evidenced by its order, must be binding as to which interest was disposed of by the options and sales. Helvering v. Rhodes, 117 Fed. (2d) 509. See Mildred M. Hubbard, 30 B. T. A. 619. Accordingly, we hold that no portion of the 85,000 shares optioned and sold by the executor of decedent’s estate was sold from petitioner’s interest. Respondent’s determination was erroneous and is hereby overruled.

In connection with this issue respondent has urged an alternative contention that, in the event we find, that the shares sold were not petitioner’s, then she must be taxed upon dividends paid on her stock subject to administration. In the first issue we held that dividends paid on petitioner’s stock in the hands of the executor were not taxable to petitioner while the stock was subject to administration. That issue disposes of. respondent’s alternative contention here.

The final issue is whether or not petitioner is entitled to a deduction for interest paid in the sum of $1,901.96. Respondent contends that the obligations upon which the interest was paid were incurred by petitioner’s son and that the interest is not deductible by petitioner. He argues that petitioner voluntarily satisfied the obligations of another.

Petitioner’s obligation as comaker of the notes was both joint and several. The notes were at all times her personal obligations and amounts paid by her as interest must be considered interest paid on her indebtedness. George A. Neracher, 32 B. T. A. 236. Nor does the fact that petitioner later made a gift to her son of the amount borrowed change the result. Petitioner, however, has proved payment of only $1,551.96 as interest. Mere accrual of $350 interest does not give rise to a deduction in that' amount to a taxpayer on a cash basis. We hold that respondent should have allowed petitioner a deduction of $1,551.96 for interest paid in the taxable year.

Upon recomputation we shall give effect to the stipulations filed at the hearing disposing of issues relating to Docket No. 88814 and the issues relating to Docket No. 88813 for the year 1933.

Decision will be entered under Rule 50.

       SEC. 161. IMPOSITION OB TAX.
      (a) Application op Tax.—The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
      *******
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
      SBC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * * * * * * '
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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-properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. . ■

       § 1342. Descent of Community property.—upon the death ■ of either husband or wife, one-half of the community property shall go to the survivor, subject to the community debts, and the other half shall be subject to the testamentary disposition of the deceased' husband or wife, subject also to the community debts. In case no testamentary disposition shall have been made by the deceased husband or wife of his or her half of the community property, it shall descend equally to the legitimate issue of his, her or their bodies. If there be no issue of said deceased living, or none of their representatives living, then the said community property shall all pass to the survivors to the exclusion of collateral heirs, subject to the community debts, the family allowance, and the charges and expenses of administration. * * *
      § 1419. Community property, flow ailministereg,.—A surviving spouse shall be entitled to administer upon the community property, notwithstanding any provisions of the will to the contrary, if the court find such spouse to be otherwise qualified; but if such surviving spouse do not make application for such appointment within forty days immediately following the death of the deceased spouse, he or she shall be considered as having waived his or her right to administer upon such community property. If any person, other than the surviving spouse, make application for letters testamentary on such property, prior to the expiration of such forty days, then the court, before making any such appointment, shall require notice of such application to be given the said surviving spouse, for such time and in such manner as the court may determine, unless such applicant show to the satisfaction of the court that there is no surviving spouse or that he or she has in writing waived the right to administer upon such community property. * * *


text:
    James B. Lapsley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Cary W. Jones and Mrs. Bertha M. Jones, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102201, 102202.
    Promulgated July 24, 1941.

      A. F. Hillix, Esq., for the petitioner.

      G. W. Reardon, Esq., for the respondent.
   OPINION.

Mellott:

Bespondent’s claim for increased deficiencies can not be allowed. Belying solely upon the recited consideration of $100 in the deed from Kretsinger and his wife to petitioners, respondent contends that this is the measure of the loss sustained by them, and, since it is less than the allowable depreciation upon the property during the period it was held, that they sustained no loss in 1936. Pie also argues that the loss was sustained by petitioners in December of 1934, when they joined with B. Bryson Jones in the execution of the deed to Kretsinger. Finding has been made that Kretsinger was a mere straw man, accommodation holder of, and conduit for, the title to the property and that petitioners at all times remained the equitable owners of it. Therefore, when petitioners deeded the property to the mortgagee on April 11, 1936, they sustained a loss equal to the total amount of their investment in the property.

Eespondent contends that, even if the partnership sustained a loss upon the transfer or conveyance of the real estate to the mortgagee in 1936, still such loss constitutes a capital loss and is limited, under section 117 of the Eevenue Act of 1936, to $2,000, or $1,000 to each of the two partners. He cites Helvering v. Hammel, 311 U. S. 504; Electro-Chemical Engraving Co. v. Commissioner, 311 U. S. 513; Welch v. Street, 116 Fed. (2d) 953; and Edward F. C. McLaughlin, 43 B. T. A. 528; argues that the rule applied in those cases is applicable “whether or not there is an existing personal liability on the mortgage”; and concludes his argument with the statement that “The decision of the Board in Commonwealth, Inc., 36 B. T. A. 850, which was decided in 1937, as well as the other cases relied upon by the petitioners, have in effect been reversed by the foregoing recent decisions.”

The Board has not taken the view that the Commonwealth case was in effect reversed or overruled by the cited cases. Our view, expressed in W. W. Hoffman, 40 B. T. A. 459, that an ordinary loss, deductible in full, was sustained by a taxpayer who abandoned real estate subject to mortgages which he had never assumed, was recently affirmed by the Circuit Court of Appeals for the Second Circuit. Commissioner v. Hoffman, 117 Fed. (2d) 987. A similar conclusion was reached in Warner G. Baird, 42 B. T. A. 970, where a quitclaim deed was given, “not to relieve petitioner of a liability, but only to simplify the transfer of title.” It was pointed out that as to petitioner the transaction “had no aspect of a sale or exchange”, the Commonwealth case being cited. After the Supreme Court handed down its opinions in the Hammel and Electro-Chemical cases respondent filed a motion to vacate. In a Memorandum Sur Decision Under Rule 50 and Denial of Motion to Vacate subsequently published in 43 B. T. A. 415, it was said: “These opinions of the Supreme Court have been duly considered and are found to be distinguishable and to require no modification of the Board’s opinion in the present proceeding.” In Bert B. Burnquist, 44 B. T. A. 484, the petitioner “had no continuing liability” on a mortgage at the time a quitclaim deed was given to the mortgagee. We followed the Commonwealth case and held that, since there was no sale or exchange of a capital asset, the loss should be allowed as an ordinary loss, not limited by section 117 (d) of the Eevenue Act of 1936.

It is clear, under our findings, that petitioners were not obligated to make payment of the $25,000 note. They, like the petitioner in the Commonwealth case, made no sale or exchange of a capital asset (cf. Rogers v. Commissioner, 103 Fed. (2d) 790, affirming Betty Rogers, 37 B. T. A. 897), but abandoned the property to the mortgagee (W. W. Hoffman, supra, and Commissioner v. Hoffman, supra.) Paraphrasing the language used in Commonwealth, Inc., supra, “The execution of the deed marked the close of a transaction whereby petitioners abandoned their title.”

Being of the opinion that the cited cases are controlling, we hold that the Commissioner erred in determining the deficiencies.

Decision will be entered for the fetitioners.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      * * ⅝ * * O *
      (d) Limitation- on Capital Losses.—Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *


author: Arnold:

text:
    Coca Cola Bottling Company, Inc., of Blytheville, Arkansas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101155.
    Promulgated July 29, 1941.

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

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Arnold:

Section 26 (c) (1), Eevenue Act of 1936, set forth in the margin, controls the issue presented, i. e., whether petitioner is entitled to the credit therein granted. The section was designed by Congress as a “special tax exemption” and is to be strictly construed. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane Johnson Co., 38 B. T. A. 1355; affd., 311 U. S. 54. It does not afford relief to all corporations having contracts restricting the payment of dividends, but only those which fall within the terms of the section.

We have found as a fact that petitioner executed a written contract prior to May 1, 1936. That contract contained a provision which expressly dealt with the payment of dividends.. It is provided therein that the principal and interest on loans and advancements made by J. A. Leech to the petitioner “will be repaid * * * before the payment of any dividends.” -

However, it appears from the evidence adduced that the principal creditor of the petitioner, who owned 94 percent of its capital stock, deliberately and intentionally waived the contract restrictions as to the payment of dividends for. the taxable year. Furthermore, it should be noted that for all practical purposes the corporation was the alter ego of Leech, as he and his wife owned 99 percent of the corporation’s stock. The minutes of the directors’ meeting of December 30, 1936, show that a $30,000 dividend was declared and paid with full knowledge and after much discussion of the contract restrictions. The minutes show that J. A. Leech advised that the former actions of the board and stockholders in observing the restriction should be ignored and a dividend paid in order to avoid a heavy tax penalty. He advised the directors that petitioner’s attorney and its auditor were of the same opinion. Leech further advised that income taxes and .the amount of his debt could be deducted from current earnings and profits before the dividend was paid. The record shows that this procedure was followed and that the difference, after allowing for income taxes and the debt to Leech, was declared and paid as a dividend on December 30,1936.

Thus it appears that the contract which restricted petitioner from paying dividends was completely disregarded by the debtor corporation, with the consent and upon the insistence of the creditor for whose benefit the contract was executed. The question naturally arises whether the credit provided under section 26 (c) (1) should be allowed in view of the mutual waiver of the contract provisions as to payment of dividends in 1936. The waiver was not restricted to the $30,000 later paid as dividends. Petitioner could have paid out as dividends any funds available for distribution without violating the provisions of the written contract. The credit was provided for by Congress as a special tax exemption from the surtaxes imposed on undistributed profits, Helvering v. Northwest Steel Rolling Mills, Inc., supra, where, because of contract restrictions, the corporation was prohibited from distributing its earnings and profits.

In our opinion, under the particular facts herein effect should be given for tax purposes to the things done by the contracting parties, and their waiver of the contract restrictions for the taxable year 1936 deprives petitioner of a credit under section 26 (c) (1).

Reviewed by the Board.

Decision will be entered* for the respondent.

ÁRuNdell and Smith dissent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      *******
      (c) Contracts Restricting Payment of Dividends.—
      (1) Prohibition on payment of dividends.—An amount equal to the excess of the' adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a.contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Abundell :

text:
    State Line & Sullivan Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100121.
    Promulgated July 29, 1941.

      Anthony Brayton, Esq., for the petitioner.

      Charles P. Reilly, Esq., and J. T. Haslam, Esq., for the respondent.
   OPINION.

Abundell :

This proceeding is brought for redetermination of the following income and excess profits tax deficiencies:

Portions of the deficiencies for 1932 and 1934 are not disputed. The issue from which the remaining deficiencies arise is whether deductions for obsolescence in each of the taxable years may be air lowed for certain railroad properties of the petitioner claimed by it to have become wholly obsolete in 1934. The respondent contends, aside from the merits of this question, that the petitioner is concluded in his claims here by the decision of the District Court in State Line & Sullivan Railroad v. Phillips, 17 Fed. Supp. 607; affd., 98 Fed. (2d) 651; certiorari denied, 305 U. S. 635, which is alleged to be res adjudicata of the issue involved here. The case was submitted under Rule 30 on the stipulation of the parties.

The petitioner during the taxable years was the owner of approximately twenty-four miles of single-track railroad which it had leased in 1884 to an operating company for a term of fifty years. At some time during the year 1930 the petitioner concluded that its lessee would not enter into a renewal of the lease in 1934, due to the decline in freight hauled on the petitioner’s road, and that its railroad property would be wholly obsolete in 1934. Accordingly, it filed a claim for refund of tax for the years 1927 to 1929, based on appropriate deductions for obsolescence, under sections 214 (a) and 23 (k) of the Bevenue Acts of 1926 and 1928, respectively, which it had not taken in any of these years. In its returns for each of the taxable years before us it took similar deductions for obsolescence. Following is a list of the deductions thus claimed for obsolescence of the railroad property:

1927 _$30,662.37 1932 _ $65,220.17

1928 _ 32,162.34 1933 - 65,220.17

1929 _ 39,541.68 1934 _ 30,769.23

1930 _-_ 65,220.17

1931_1_ 65,220.17 Total 394,016.30

Both petitioner’s claims for refund and its deductions during the taxable year were rejected or disallowed by the Commissioner for failure to show that obsolescence in 1934 was a reasonable certainty during the years involved. The petitioner thereupon filed suit for refund of 1927 to 1929 taxes, based on these claims, in the District Court of the United States for the Middle District of Pennsylvania. At the trial of this suit it was disclosed that in 1934 the petitioner’s lessee made an offer to renew its lease on a yearly basis at one-half the former rental and that petitioner refused this offer; and, further, that both petitioner and its lessee in 1935 made application to the Interstate Commerce Commission to abandon operations on the road, and permission was denied. Judgment of the court was given for the Government on the ground that the proof was that petitioner’s railroad was “a commercially useful venture in 1934” and that there was thus no certainty during the years 1927 to 1929 it would be obsolescent in 1934. State Line & Sullivan Railroad Co. v. Phillips, 17 Fed. Supp. 607. This judgment was affirmed at 98 Fed. (2d) 651, and certiorari was denied by the Supreme Court at 305 U. S. 635.

The contention of the respondent in these circumstances is that petitioner is concluded by the judgment of the District Court, supra. The petitioner argues in reply that the former, suit is not res adjudicata here, since it involved neither (1) the parties nor (2) the issue in these proceedings. These will be considered in order.

(1) Petitioner’s first contention is that there is no identity between a collector of internal revenue and the Commissioner or the United States. He argues that a suit for refund is brought against the collector personally and that the judgment therein is satisfied by the United States only if subsequently a certificate is issued by the court stating that the collector acted with reasonable cause or under the authority of the Secretary of the Treasury. It is admitted that judgment in a suit to which the United States or the Commissioner is a party is res adjudicaba as to the same issues involving the same taxpayer and the collector, since the latter is a subordinate agent of the Commissioner. Tait v. Western Maryland Railway Co., 289 U. S. 620; Sage v. United States, 250 U. S. 33.

The argument of the petitioner has the authority of Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308, in which it was held that the Commissioner of Internal Revenue is not estopped by a judgment rendered in a former suit against the collector, because of the personal nature of the liability of the defendant in the prior proceeding. Some doubt has been cast on the doctrine of this case by George Moore Ice Cream Co. v. Rose, 289 U. S. 373; see also Second National Bank v. Woodworth, 66 Fed. (2d) 170; Anniston Manufacturing Co. v. Davis, 87 Fed. (2d) 773, 779; and in one instance, on the authority of the Moore case, supra, it has not been followed. Western Maryland Railway Co. v. United States, 23 Fed. Supp. 554. However, in no larer case considered by the Supreme Court has the question here been before the Court, and in cases subsequent to the Moore case, sufra, the Supreme Court, in considering related questions, has cited with approval its former holding in Bankers Pocahontas Coal Co. v. Burnet, supra; see Tait v. Western Maryland Railway Co., supra; Sunshine Anthracite Coal Co. v. Adkins, 310 U. S. 381. Accordingly, the earlier decision of the Supreme Court must be regarded as still controlling.

This view is borne out by a recent case decided by the Court of Claims, Nunnally Investment Co. v. United States, 36 Fed. Supp. 332, in which the question presently before us was considered. It was stated there that the earlier decisions of the Supreme Court, denying res adjudicaba in this situation, must be regarded still as controlling despite dictum, in later cases. Certiorari was denied by the Supreme Court in the Nunnally case on May 26, 1941. The Circuit Court of Appeals for the Second Circuit has reached a similar conclusion in considering, recently, a related question. Isabelle Hammond-Knowlton, Administratrix v. United States, 121 Fed. (2d) 192.

In these circumstances, considering the decision of the Supreme Court in Bankers Pocahontas Coal Co. v. Burnet, supra, and all those cases subsequent to it which have considered this or related questions, it must be concluded that there is no res adjudicaba in the present case. Accordingly, the petitioner is not concluded by the decision of the District Court and is entitled to present evidence on the merits of the question before us.

In these circumstances it becomes unnecessary to consider the petitioner’s second argument.

The proceedings will be set for hearing on the merits in due course.