author: Matthews :

text:
    James Klein Bowen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46787.
    Promulgated February 28, 1933.

      Rowland Cairr, O. P. A., for the petitioner.

      O. J. Tall, Esq., for the respondent.

       If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (e) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act.

   OPINION.

Matthews :

1. The first issue raised in this proceeding is with respect to a loss claimed in 1926 and involves an agreement made by the petitioner to settle for the sum of $200,000 an action at law brought by one Baker against the petitioner and a corporation, of which, he was apparently president, in the Supreme Court ox New York County, New York, and at the time of the agreement on trial in that court. The agreement which was put in evidence is referred to variously as a “ judgment,” and a “ court order,” but it appears on its face to be a settlement agreement by the parties to the action. The petitioner alleges in his petition that he was accommodation endorser for an insolvent corporation and that a judgment was entered against him for $200,000 on this note. It was shown that a portion of this amount was paid by petitioner in 1926, was claimed in his 1926 return, and was allowed as a loss by the respondent in that year. The only question is whether the whole amount should have been allowed in 1926.

The petitioner explains in detail in his petition that “ he kept no formal set of books ” and that there was “ no formal book record * * * of notes payable.” We must conclude that his accounts, such as they were, were kept on the basis of cash receipts and disbursements, and we have so found. John A. Brander, 3 B. T. A. 231; Wilson Marks, 6 B. T. A. 729.

The petitioner contends, however, that the full amount of $200,000, said to be the sum named in the court’s judgment, was a loss sustained in 1926 notwithstanding the petitioner’s cash basis; and in support of this contention relies on S. R. Davis, 9 B. T. A. 755, as reversed without opinion by the Circuit Court of Appeals (7th Circuit) on October 24, 1928, and on our decision in A. W. D. Weis, 13 B. T. A. 1284, in which we distinguished the Davis case; and on certain other cases.

Since these cases were decided the Supreme Court has ruled upon the question in Eckert v. Burnet, 283 U. S. 140. There the taxpayer on the cash basis was, with a partner, joint endorser of paper of a corporation which they had formed. The corporation was unable to pay and in 1925 the endorsers took up the corporation’s note and gave their own in exchange. In answer to the taxpayer’s contention, Holmes, J., said:

* * * A deduction may be permissible in tlie taxable year in whicli the petitioner pays cash. The petitioner says that it was definitely ascertained in 1925 that the petitioner would sustain the losses in question. So it was, ii the petitioner ultimately pays his note. So was the tax considered in United States v. Mitchell, 271 U. S. 9, 12, 46, but it could not be deducted until it was paid.

We do not see anything in the present case to take it out of the rule thus laid down. Whether the agreement here was made before or after the judgment does not, we think, alter the case. The terms of settlement specifically provided for the postponement of payment of the obligation in full, requiring the payment in 1926 of only $51,041.62. It is not contended by the petitioner that there was paid in 1926 more than $53,333.28, which included evidently the monthly payment due January 1, 1927. This amount was taken as a loss by the petitioner in his 1926 return and allow'ed by the respondent. We do not think he was entitled to any greater amount as loss on this account in that year and on this issue hold for the respondent.

2. Our decision of the first question makes necessary our consideration of the three alternative errors assigned. The first of these is that there was credited to petitioner in 1926 on the books of the Bowen Grocery Co., of which he was president, the sum of $8,668.65 which respondent has accordingly added to petitioner’s income for that year, on the theory that although petitioner was on the cash basis and may not have actually received this amount in the taxable year, it was properly includable as income under Regulations 69, article 51, which provides that amounts credited to a taxpayer, “without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made”, shall be regarded as income constructively received by the taxpayer in the year so credited, “although not then actually reduced to possession”. The petitioner challenges the application of this regulation in the present instance on the authority of William, D. Huber, 12 B. T. A. 1, in which we held that the taxpayer on the cash basis would not receive income from such a credit on a corporation’s books when it could be shown that the amount credited could not be withdrawn by taxpayer without serious embarrassment to the corporation.

It is unnecessary for us here to enter upon the merits of this contention, for the reason that the petitioner has failed wholly to substantiate with evidence his allegations (1) that the petitioner did not receive the amount in question as cash in 1926, and (2) that the corporation could not have paid the amount credited in 1926 because of its impending insolvency. A balance sheet of the corporation purporting to prove the latter fact was filed as an exhibit with the petition, but was never put in evidence. Moreover, it is possible that petitioner wished to abandon this issue, for although he made no formal waiver of the error assigned, he stated at the hearing that “ I don’t think this is a big item, and I am willing to pass over it.” In any case, we must sustain the respondent on this issue.

3. The next question is the March 1, 1913, value of three lots situate at 901, 903, and 905, Hamilton Street, Allentown, Pennsylvania, which petitioner sold in 1926. The petitioner relies on the appraisal made by three real estate men in 1926, which, averaged, gave a 1913 value of $222,833.33. The respondent questioned this value and the petitioner had a second appraisal made in 1928 by the Allentown Real Estate Board, which put the 1913 value of the land at $195,000. The respondent accepts the latter as the correct value. The petitioner contends that since the later valuation is not greatly at variance with the first, it must be taken to establish the soundness of the first. No evidence was introduced by petitioner with respect to the first appraisal, but the appraisal certificate of the Allentown Board was put in evidence by him, and its findings were supported by the testimony of witnesses called by the respondent. Even if we were able to accept the logic of petitioner’s contention, we could not in the circumstances do so. We think this issue must be resolved in the respondent’s favor, and have so found.

4. This brings us to the final issue, whether 1913 value of certain other lots at 907-909 Hamilton Street inherited by the petitioner before 1913 and sold in 1926 should be diminished, in calculating the gain on the sale, by the value of the life estate held in them by the petitioner’s mother. The issue as formulated by the parties under stipulation is set out in our findings of fact. It will be observed that no question is made of respondent’s valuation of the fee on March 1, 1913, nor of respondent’s method of computing the value of the life estate under Table A, article 13, Regulations 70; but only of the point of law whether the value of the fee should have been reduced by the value of the life estate so found.

The controlling provision, section 204 (a) (5) of the Revenue Act of 1926, is set out in the margin. It was settled by Brewster v. Gage, 280 U. S. 327, that the testator’s death marks the time of acquisition by the legatee of even personalty included in the residue of the estate, and that this is the basic date therefore upon which gain or loss through a subsequent sale must be reckoned. A fortiori, real property, as here, which vests immediately in heirs or devisees upon the testator’s death, falls within the same rule. The petitioner here received at his father’s death and held subsequently on March 1, 1913, a remainder in fee, subject to his mother’s life estate. His interest on March 1, 1913, therefore, was not represented by the value of the fee in 1921 when the life estate fell in through his mother’s death, nor the value of the fee in 1913, but of the fee in 1913 diminished by his mother’s interest. The reckoning of such an interest by actuarial tables has the Supreme Court’s approval. Ithaca Trust Co. v. United States, 279 U. S. 151. The present case is governed by the rule laid down in William Huggebb, 24 B. T. A. 669, and we therefore hold on this issue for the respondent.

Judgment will he entered under Bule 50.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    Talbot C. Walker, Petitioner, v. Commissioner of Internal Revenue, Respondent. Susan D. Talbot, A. G. Harms, Wells Fargo Bank & Union Trust Company, Executrix and Executors of Estate of William H. Talbot, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Wells Fargo Bank & Union Trust Company, Administrator with Will Annexed, Estate of Frederick C. Talbot, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 20407, 20409, 20411.
    Promulgated February 28, 1933.

      Hartley Peart, Esq., Anson HerrieTc, O. P. A., and Fred H. Brown, O. P. A., for the petitioners.

      F. R. /Shearer, Esq., for the respondent.
   OPINION.

Lansdon :

At Docket No. 20407 the respondent asserts deficiencies in income tax against petitioner Talbot C. Walker for the years 1917,1918,1919 and 1920, in the respective amounts of $68.87, $30.97, $8,679.76 and $2,033.41. At Docket No. 20409 the tax in controversy is $46,488.05, which is the unabated remainder of an original deficiency asserted against W. H. Talbot for the year 1919, in the amount of $154,663.09. At Docket No. 20411, the tax in controversy is $22,402.98, which is the unabated remainder of an original deficiency asserted against the estate of Frederick C. Talbot for the fiscal period March 10, 1919, to December 31, 1919, in the amount of $28,499.28. Two issues are involved: (1) Whether certain distributions made to the several petitioners in the taxable years are taxable as profits accumulated after March 1, 1913, and (2) Whether the deficiency asserted against W. H. Talbot was barred by the statute of limitations at the date of the deficiency notice. The first issue is common to all the dockets. The three proceedings have been consolidated for hearing.

After the issue of the deficiency notices, but prior to the hearing, William H. Talbot, executor of the estate of Frederick C. Talbot, died. He was succeeded as such executor by the Wells Fargo Bank & Union Trust Company, which, by motion duly made and granted, has been substituted for the original petitioner at Docket No. 20411. In like manner Susan D. Talbot, A. G. Harms and the Wells Fargo Bank & Union Trust Company, as executrix and executors of the estate of William H. Talbot, deceased, have been substituted for the original petitioner at Docket No. 20409.

The parties have filed, and the Board adopts as its findings of fact, a stipulation which covers all the facts pertinent to the issues of these proceedings and which we hereby incorporate in this report by reference.

In the proceeding at Docket No. 20409, the petitioner pleads that the statute of limitations had run at the date of the deficiency notice. The parties agree as to the following facts in relation thereto. The income tax return of William H. Talbot, the petitioner’s decedent, was filed on March 15, 1920; on October 18, 1923, the Commissioner made a noncompliance assessment of the deficiency in the amount of $154,663.09, as to which an abatement claim was duly filed and which was pending at the effective dates of the Revenue Acts of 1924 and 1926; on August 26, 1926, the Commissioner mailed a letter to the petitioner in conformity with section 283 (e) of the Revenue Act of that year in which such claim was allowed for $108,175.04 and rejected for $46,488.05; on October 5, the original petition was filed with the Board of Tax Appeals. Petitioner never signed any waiver extending the period for determining, assessing or collecting the unabated portion of the noncompliance assessment nor made any bond in relation to the tax liability in controversy.

In support of his contention that the statute of limitations had run against hL tax liability for 1919, the petitioner relies upon Russell v. United States, 278 U. S. 181, and on numerous decisions of this Board in conformity therewith. In the Bussell case the court said:

Section 277, as above shown, limits suits for taxes imposed by the'Act of 1918 to five years after the return, except (§ 278) in certain cases where an assessment has been made. In the excepted cases the period for suit is extended to six years after the assessment. But §278 further provides that it shall not authorize the collection of a tax after the same has been actually barred by the applicable statute, and further that it shall not affect any assessment made prior to June 2, 1924.

Unless extended by waivers or by operation of law the time in which the Commissioner could move for the collection of the deficiency here involved expired on March 15, 1925. There was no waiver, but counsel for the respondent argues at great length that “ any assessment of tax for 1919, which is brought within the provisions of section 280 of the Revenue Act of 1924 by a final determination made after June 2, 1924, would be subject to the six year period of limitation for collection provided in the 1924 and 1926 Acts”. The infirmity of this argument as to the facts of the present proceeding is so obvious that little discussion is required. If the noncompliance assessment of October 15,1923, was not an assessment within the meaning of the law, it follows that no assessment or final determination was made prior to March 15, 1925, and that the denial of petitioner’s claim for abatement in part on August 26, 1926, was after the expiration of the statutory limitation provided in the Revenue Act of 1918. The plain fact here is that an assessment was made prior to June 2, 1924, and that no further action was taken until the statute of limitations had run. At August 26, 1926, the Commissioner was without authority to move further in the collection of the deficiency here involved. Guardian Trust Co., Executor, 15 B. T. A. 1256; J. F. Anderson Lumber Co., 15 B. T. A. 475; George U. Hind, 18 B. T. A. 96; Melville W. Thompson, 18 B. T. A. 1192; Lillian M. Wheeler, Executrix, 20 B. T. A. 695; William H. Schroll, 20 B. T. A. 1027; Caroline J. Shaw, Executrix, 21 B. T. A. 400. See also Brown & Sons Lumber Co. v. Burnet, 282 U. S. 283.

Counsel for respondent argues on brief that because petitioner has availed himself of the benefits of section 283 (e) of the Revenue Act of 1926, by appealing to this Board on the merits of his tax liability for 1919, he and his representatives can not now deny the applicability of related sections of that Act”, as was held in Brown & Sons Lumber Co., supra. There is no merit in this contention. Furthermore, the statute of limitations is an affirmative defense that may be pleaded before the Board in any proceeding for the redetermination of a deficiency asserted by the Commissioner. National Refining Co. of Illinois, 1 B. T. A. 236; Warner Sugar Refining Co., 4 B. T. A. 5; Ocean Accident & Guarantee Corp., Ltd., 6 B. T. A. 1045; Reliance Mfg. Co., 7 B. T. A. 583. As to Docket No. 20409 there is no deficiency for 1919.

The stipulation discloses that at March 1, 1913, the Puget Mill Company had a surplus account of $19,535,614.79, which was made up of accumulated earnings and appreciation of assets to a fair market value at that date in the respective amounts of $2,183,090.83 and $17,352,524.26. Between February 28, 1913, and December 31, 1917, it sustained operating losses in the aggregate amount of $1,048,871.51. In the years 1918, 1919 and 1920 it realized operating profits in the respective amounts of $294,347.16, $176,584.27 and $370,880.06, a total of $841,611.49. Between February 28, 1913, and December 31, 1920, it realized appreciation accrued prior to March 1, 1913, in the aggregate amount of $5,182,477.65. In the years 1913 to 1920, inclusive, it made cash distribution to its stockholders in the respective amounts of $150,000, $150,000, $150,000, $300,000, $62,500, $650,000, and $300,000. The several petitioners herein received cash distributions in 1918, 1919 and 1920, as set out in the stipulation, but reported no part thereof as taxable income in their returns in any of those years. Upon audit the Commissioner determined that with the exception of the distribution on December 30, 1920, all such dividends were out of earnings or profits accumulated since March 1, 1913, and asserted as surtaxes the deficiencies which are here in controversy. The petitioners contend that all the distributions in question were out of earnings or profits accumulated prior to such date and in effect and in fact were nontaxable liquidations of capital.

The nature of the problem resulting from the conflicting positions ‘ of the parties herein requires us first to determine to what extent and for what purposes the surplus of the corporation at March 1, 1913, became capital by Acts of Congress, and, second, whether the word “ accumulated ” contains any meaning or implication not commonly recognized which must be discovered and applied in the application of the taxing statutes here involved.

The Revenue Act enacted September 8, 1916, and all subsequent statutes imposing income taxes, expressly provide that the term “ dividend ” means any distribution to the stockholders of a corporation out of earnings or profits accumulated since February 28, 1913, and that any earnings or profits accumulated prior to March 1, 1913, may be distributed exempt from the tax after the earnings and profits accumulated since February 28, 1913, have been distributed.

Section 10 of the Revenue Act of 1916 provides, in part, as follows:

* * * That the term “ dividend ” as used in this title shall be held to njean any distribution made or ordered to be made by a corporation, joint stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen * * *.

In the Revenue Act of 1918 Congress included in section 201 the following definition:

(a) That the term “ dividend” when used in this title (except in paragraph (10) of section 234) means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, * * *
(b) * * * but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings or profits accumulated since March 1, 1913, have been distributed.

In the Revenue Act of 1921, Congress reenacted the above provisions and added the following in section 201 (b) :

For the purpose of the Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913 have been distributed * * *.

All subsequent revenue acts include substantially identical definitions and provisions and evidence that the consistent policy of Congress since September 8, 1916, has been to permit the tax-free distribution of all corporate earnings or profits accumulated prior to March 1, 1913, and that no distinction is made between earned surplus and appreciation owned at that date.

In their interpretation of the statutory provisions above set out the courts have consistently held that for tax purposes Congress intended that all property owned by corporations at March 1, 1918, must be regarded as capital when distributed to stockholders. In Southern Pacific Co. v. Lowe, 247 U. S. 330, decided June 3, 1918, which was a case involving the taxability of a dividend paid out of surplus earned prior to March 1, 1913, the Supreme Court, speaking through Mr. Justice Pitney said:

This being so, we are bound to consider accumulations that accrued to a corporation prior to January 1, 1913, as being capital, not income, for the purposes of the act. And we perceive no adequate ground for a distinction, in this regard, between an accumulation of surplus earnings, and the increment due to an appreciation in value of the assets of the taxpayer.

In Lynch v. Turrish, 247 U. S. 221, in affirming a judgment of the Circuit Court of Appeals, the Supreme Court said:

The timber lands were the property, capital and capital assets, of their legal and equitable owner and the enhancement of their value during a series of years “prior to the effective date of the income tax law, although divided or distributed by dividend or otherwise subsequent td that date, does not become income, gains, or profits taxable under such an act.”

In Park v. Gilligan, 293 Fed. 129, the question for decision was whether a chose in action existing but of unknown value at March 1, 1913, but later determined and realized was capital at that date. In its opinion the court said:

Whatever claims the corporation had upon that date, whether arising from profit or otherwise, are to be considered as capital then accrued, for the purposes of this Act, and that profits since accrued means after acquired gain, which did not then exist, and that the mere fact that a then existing claim, even though representing a profit, was afterwards collected, would not make it a profit accrued after the prescribed date.

In T. Irving Hadden, Executor, 17 B. T. A. 596, and Annie P. Kountze, 17 B. T. A. 928, this Board was asked to decide the precise question here involved. In each case judgment was adverse to the petitioner not on the merits but because of insufficient evidence. The former proceeding was reviewed on appeal by the United States Court of Appeals for the Second Circuit. The infirmity in the evidence having been cured by an agreement between the parties, our decision on this question was reversed and the petitioner was sustained. In its opinion, Hadden v. Commissioner, 49 Fed. (2d) 709, the court said:

Congress did not intend that a corporation should be held to accumulate profits for one tax purpose only and not for another. No earned surplus can be accumulated until the deficit or impairment of paid-in capital has been made good. Dividends paid while there is an operating deficit should be deemed to be paid from capital or paid-in surplus even though there are earnings of the taxable year sufficient to pay the dividend in whole or in part. Operating losses sustained after March 1, 1913 must be deducted from profits realized after that date before there can be a taxable profit on the sale of land and the accumulated profits since March 1, 1913 must necessarily mean the net excess of all profits between March 1, 1913 and the date of distribution, less all losses sustained between the same dates. * * *

All the authorities above cited unite in support of the petitioner’s contention that, for Federal income tax purposes, all the property owned by the Puget Sound Company at March 1, 1913, was capital. To the extent that such property was made up of wasting assets used in its trade or business it was entitled to take depreciation in subsequent years based on the value at that date, entirely regardless of the cost of such assets or the state of the company’s balance sheet as to surplus. Wisconsin Nat. Bank, 4 B. T. A. 109; Even Realty Co., 1 B. T. A. 355; Clark & Co., 4 B. T. A. 355. In the event of the sale of assets acquired prior to such date, the basis for determining gain is the cost or fair market value thereat, whichever is higher. Red Wing Linseed Co., 5 B. T. A. 390; Pacific Realty Corp., 5 B. T. A. 1223; A. C. Fraser, 6 B. T. A. 346; First Nat. Bank of Ft. Dodge, 7 B. T. A. 817. It is clear to us that if all March 1, 1913, values are capital for some tax purpose, they must be capital for all such purposes.

In the light of the authorities above cited, and of our conclusion as to the primary contention of the petitioner, little discussion of the divergent views of the parties as to the sense in which the word “ accumulated ” is used in the applicable statute is required. It seems clear to us that the respondent proposes to read into the law a meaning that is not indicated by the language. Apparently it is his contention that accumulation can be accomplished without regard to losses and in effect he argues that for purposes of the income tax only the time after losses have ceased and profits are being realized should be considered. The man who began business with property worth $100,000 lost $75,000 in the first two years and thereafter earned profits of $75,000 in two succeeding years, would have some difficulty in realizing that he had any accumulation of profits at the close of the four-year period. Counsel for respondent argues that petitioners propose to insert the word “ net ” into the law so that it shall read the net profits or earnings accumulated after March 1, 1913. In our opinion no such addition to the language of the statute by' interpretation or otherwise is necessary, since the words “ accumulated ” and “ accumulation ” -connote a net result obtained by combining additions and subtractions over the entire period involved. In any taxable year subsequent to March 1, 1913, accumulated profits or earnings can mean only the difference between losses and gains after that date. Hadden v. Commissioner, supra.

Having reached the conclusion that for Federal, tax purposes everything owned by a corporation at March 1, 1913, then became capital by operation of law, it follows that in subsequent operations an operating deficit occurs in any year in which losses are sustained ■in excess of surplus accumulated after March 1, 1913. Regardless of whether the earnings of any given year are sufficient to pay dividends declared in that year, such dividends must be regarded as paid out of capital to the extent that the operating deficit has not been made good from earnings. This principle was recognized by the Treasury in L. O. 942, 1 C. B. 300, which includes the following language:

Dividends paid while there is an operating deficit shall be deemed to be from capital or paid-in surplus even though there are earnings of the taxable years sufficient to pay the dividend in whole or in part.

To like effect are I.T. 2016, III-l C. B. 29; G.C.M. 1552, VI-1 C. B. 10; G.C.M. 3522, VII-1 C. B. 190; G.C.M. 3532, VII-1 C. B. 190. This Board has also often ruled that a dividend distributed prior to the time that an operating deficit is made good is a return of capital and that in computing invested capital the paid-in capital is to be reduced by the amount of such dividends. Crystal Ice Co., 14 B.T.A. 682; J. L. Washburn, 16 B.T.A. 1091; Lillian G. Shorb, 22 B.T.A. 644; cf. Frank D. Darrow, 8 B.T.A. 276.

Any argument on the theory that the petitioner’s contention violates the principle that taxes are imposed and tax liability computed on an annual basis is wholly inconsistent with the facts. In truth the determination of the respondent is much more clearly and definitely a violation of such principle. That Congress has the power to tax distributions from surplus in existence at March 1, 1913, and that this power was exercised under the Revenue Act of 1913, is well established. Lynch v. Hornsby, 247 U. S. 339. Later, however, in the Revenue Act of 1916, that power was abandoned and legislation was enacted which defined dividends as distributions of earnings or profits accumulated since March 1, 1913, and in effect, for Federal tax purposes, classified all property owned at March 1, 1913, as capital. This change was to correct the very defect which the respondent here alleges exists in the contention of the petitioner. To permit the taxation of distributions of surplus existing at March 1, 1913, in subsequent years, would be retroactive legislation and would determine tax liability for any given year not alone on income realized in that year, but also upon receipts from distributions of capital owned at March 1, 1913, which would be an obvious violation of the sound and equitable principle that whenever possible distributions should be taxed at the rates in effect at the time of their accumulation.

In considering the exemptions here in question it must not be overlooked that prior to March 1, 1913, Federal imposts on corporations were slight and distributions to stockholders were subject to very low tax rates. At September 8, 1916, war was imminent and, at the effective date of the Act of 1918, our country was engaged in a great conflict at costs that could be met only in part by the imposition of high and unwelcome taxes. The current rates during the taxable years now under review were so high that it was only fair that Congress should provide for their payment on and out of current incomes which were largely produced by war activities. To have done otherwise would have worked a virtual sequestration of property that had been accumulated when the country was at peace and taxes were low.

It is equally inconsistent to argue that our conclusion herein results in inequitable advantages to taxpayers who acquired corporate stock after March 1, 1913, and thereby succeeded to the right to receive distributions free from tax in the circumstances herein. The purchaser of corporation stock succeeds to all rights theretofore enjoyed and owned by the seller. If stock sold after March 1, 1913, represents values in existence at that date which are subject to subsequent distribution exempt from tax, it must be presumed that the transfer price covered such values and privilege and that the purchaser profits no more from the exemption than would the original owner. In fact, his actual advantage may be much less, since his investment covers the entire value at March 1,1913, much of which may have been profit or appreciation in the hands of the original owner. In any event, equitable considerations can not be regarded as controlling in our treatment of tax problems. We are required to base all our decisions upon the laws as enacted by Congress and interpreted by the courts. Congress has not distinguished between the stockholders of a corporation prior and subsequent to March 1, 1913. If this was neglect, and is serious, which is doubtful, it must be corrected by legislation.

Between February 28, 1913, and December 31, 1917, the Puget Mill Company sustained operating losses in the aggregate amount of $1,048,871.57. In the years 1918, 1919 and 1920 it realized $841,-611.49 as operating profits, which, neither in the aggregate nor in any one of the years in which the distributions were made, was sufficient to replace the impairment sustained between February 28, 1913, and December 31, 1917. It follows, therefore, that none of the distributions here involved were made from earnings accumulated after March 1, 1913. The determination of the respondent proposes to tax earnings and profits accumulated before such date, and in our opinion is contrary to the plain intention of Congress as reflected in the applicable statute.

Since this report was prepared our decision in Charles J. Canfield, 24 B. T. A. 480, relied on by the respondent, has been reversed by the Circuit Court of Appeals for the Seventh Circuit, 62 Fed. (2d) 751.

Reviewed by the Board.

Decision will he entered under Bule 50.


author: Steenhagen :

text:
    Edward B. Archbald, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph A. Archbald, Petitioner, v. Commissioner of Internal Revenue, Respondent. Emily A. Gale, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph A. Archbald, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61660, 61661, 61672, 61673, 65062-65064.
    Promulgated February 28, 1933.

      Joseph H. Morey, Esq., Robert A. Littleton, Esq., and W. W. Spalding, Esq., for the petitioners.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Steenhagen :

These petitioners were all members of a partnership, and the controversy is as to the taxable gajn to be imputed to each of them as the result of a sale by the partnership of property contributed by them to the firm’s capital at the time it was organized. The facts in detail are set forth in a written stipulation, but it is not necessary either to restate the stipulation or to set forth all the facts in order to indicate clearly the nature of the issue or the basis of the decision.

The Archbald Securities Company was organized as a partnership under New York law on July 20,1928, to buy, sell and otherwise deal in stocks, bonds and other securities and other property. The organizing partners were Edward B. Archbald, Joseph A. Archbald, and Joseph A. Archbald, Jr. On November 6, 1928, Emily A. Gale (nee Archbald) became a partner. Each of these individuals contributed to the partnership certain securities theretofore owned by him which had been acquired either by purchase or by gift. These contributions • were entered by the partnership upon its accounts at their fair market value at the time of contribution, and upon this basis the individual partners’ proprietary interests were fixed. The market value of the contributed securities was in each instance greater than the cost or other proper basis to the contributor. During 1928 and 1929 the partnership sold some of these securities at prices sometimes in advance of and sometimes equal to their value at the time of contribution, such prices being greater than the cost or other basis to the individual contributing partner.

A concrete instance will be sufficient to exemplify. Edward B. Archbald, in December, 1927, acquired by gift from his father 900 shares of the common stock of Noranda Mines, Ltd., which the father had purchased at a cost of $15.56 per share. This figure, $15.56, was therefore Edward’s basis for determining gain or loss, whenever that determination should be made, Revenue Act of 1928, section 113 (a) (2). These 900 shares of Noranda were contributed by Edward to the partnership at the time of its organization, July 20, 1928, and his proprietary or capital account was credited with the market value thereof on that date, which was $50 per share. The other partners, including Emily when she entered, likewise contributed Noranda common shares in divers amounts and were credited with the same market value per share. Eight thousand eight hundred shares were thus contributed by the original three partners in July and 1,200 by Emily in November. In August and October, 1928, the partnership sold 4,000 shares for $224,877.50, a rate of over $56 a share, and in November and December, 1928, after Emily’s admission to the firm, 2,200 shares were sold for $136,827, a rate of over $62 a share. The remaining 3,800 shares were sold in 1929 for $240,873.25, a rate of over $63 a share.

The ¡partnership remained in existence without change through 1928 and 1929, and still continues. When dissolution occurs, each partner will be entitled, by the agreement, to the “ return of his contribution,” which, by the context, means the value and not the identical property contributed. The accounting period and method apparently used by the partnership and by the individuals were the calendar year and the actual receipts or cash method, and the case is free from any difficulty attributable to disparity in these respects between the practice of the partnership and that of any partner.

The partnership filed its returns for the period July 20, 1928, to December 81, 1928, and for the calendar year 1929, as provided in the Revenue Act of 1928, section 189, and included in its net income as gain the difference between the amount received in the sale of the Noranda shares and their market value when contributed. The net income so computed was shown as distributable among the several partners in accordance with their distributive shares; and this distributive share was in turn included by each partner in the net income shown on his individual return. No more than this was actually distributed by the partnership in respect of such sales.

The Commissioner added to each individual petitioner’s income the increment in value of the shares between the time of the petitioner’s original purchase (or that of his donor), and the time of contribution to the partnership. This he computed by apportioning the number of shares sold among the partners in the same ratio as their contributions of such shares were to the whole number of such shares contributed, and to such proportionate number of shares applying the aforesaid increment. Thus, since Edward contributed 900 of the first 8,800 shares, to him were assigned 9/88 of the first 4,000 sold, or 409.09086 shares, and to his distributive share of partnership income was added the increment of $34.44 per share ($50 — $15.56) multiplied by 409.09086, or $14,089.09. The Commissioner’s determination is mathematically more complicated by reason of the change in ratio resulting from Emily’s entrance into the firm on November 6 with an additional contribution and the sale thereafter of 2,200 shares of the 6,000 then owned in November and December, and also by the contribution and sale of shares in other corporations. But such additional facts do not illumine the consideration of the issue.

In the notices of deficiency issued December 28,1931, to the several petitioners, the determination of deficiency for 1928 was predicated upon the “ opinion that the taxable gain to the contributing partner is the difference between cost and value of securities at date turned into and used as a basis for determining profit or loss by the partnership at date of sale by the partnership.” After the publication, under date of January 11,1932, of an opinion by the General Counsel of the Bureau of Internal Revenue, G. C. M. 10092, XI-2-5349, the deficiencies for 1929 were expressly predicated upon that opinion, the conclusion of which is “ that the basis of computing gain or loss upon the sale by a partnership of an asset contributed in kind to the partnership enterprise is cost or other basis to the contributing partner.” The petition and answer joined issue on that view, and respondent stands upon G. O. M. 10092 here. By an amendment to the answer, the respondent presents the alternative contention that if the individual partner’s basis is not to be used in determining partnership distributable income, then it must be held that the contribution by each partner was in 1928 a taxable realization of income to him of the increment reflected in the then market value; and this view with its undisputed facts, the petitioner traverses.

The Commissioner’s argument is largely predicated upon the idea that because a partnership is not separately taxable, its existence must be disregarded entirely in the chain of ownership, so that the sale, although admittedly made by the partnership, imports as the basis for measuring the gain or loss the cost to the contributing partner. We find nothing to support that idea. The taxing acts have, since the adoption of the Sixteenth Amendment, recognized the existence of partnerships, expressly providing, however, except in the Bevenue Act of 1917, that partnership income should be taxed distributively to the individual partners. W. J. Burns, 12 B. T. A. 1209, 1222; T. D. 1957, March 12, 1914, 16 T. D. 37. The profits tax of 1917 was imposed directly upon the partnership. The duty of withholding has since 1913 been imposed as well upon copartnerships as upon others. The income of partnerships has been required to be computed quoad the partnership before ascertaining the taxable distributive shares, and this partnership income is so far distinct from that of the individual partners that it takes its own fiscal year whenever that year is different from that of the partner, L. O. 816, 1 C. B. (1919) 168; L. O. 972, 2 C. B. (1920) 163; and this, even when it results in a different credit for an individual in partnership from that of an individual sole proprietor. Shearer v. Burnet, 285 U. S. 228; Charles Colip, 5 B. T. A. 123. The fact that the tax imposed upon corporations and associations carried an express exception — “not including partnerships” — implies a recognition of the unity of a partnership; and the exclusion is only applicable to “ ordinary partnerships,” Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110.

If the law of New York were controlling, it could not be said that the partnership has no separate standing, for by her own decisions applying her own statute, the uniform partnership act, ownership by the partnership is not identical with ownership by the partners. Costello v. Costello, 209 N. Y. 252; 103 N. E. 148. Cf. Harris v. Commissioner, 39 Fed. (2d) 546; and see Sam H. Harris, 11 B. T. A. 871, 874. The very income which is by the Federal Government taxed to the individual members, irrespective of actual distribution, is, before partnership distribution, withheld from their individual creditors in bankruptcy except as reflected in their general interests in the partnership, United States v. Kaufman, 267 U. S. 408; In re Finkelstein, 298 Fed. 11; and for such individual tax the United States has no priority of claim against the bankrupt partnership. Upon the death of an individual partner, none of its assets are specifically his, irrespective of his specific contributions.

It is clear, therefore, that a doctrinaire assertion that a partnership is not an entity affords no key to the determination. Congress has not taxed partnerships directly; but, apart from that, there is no reason to think that their existence was ignored or that for other purposes under the statute their legal character was not to be fully accepted. W. J. Burns, 12 B. T. A. 1209; Henry W. Healy, 18 B. T. A. 27, 32. Whatever particular paradox this may seem to promote, it is not to be resolved by dogmatically treating the method of tax as if it were an obliteration of partnerships. If the necessary adjustment is difficult, it is perhaps no more so than many other problems of partnership law. Under the 1918 Act, personal service corporations were not taxed directly, the tax being imposed upon the shareholders as if they were partners; yet it has never been suggested that their legal existence was to be ignored. Robert Van Iderstine, Trustee, 24 B. T. A. 291.

Considered thus realistically, without being overwhelmed by concepts, the issue is not foreclosed by the language found in some earlier opinions. United States v. Coulby, 251 Fed. 982, often quoted, is clearly confined to the taxing of partnership income, and is no authority for saying that generally partnerships were ignored. The Circuit Court of Appeals, in affirming the judgment, 258 Fed. 27, removed all doubt when it said, “ However, the statement made in the opinion that a partnership has no legal existence, aside from the members who compose it, is too broad, as, for instance, in view of the Bankruptcy Act, yet as applied to the particular portion of the statute and the question in hand it is correct.” The essence of the decision is that the dividend credit for normal tax was contemplated by the statute to be coincident with the tax, and not to lapse because the partnership was not directly taxed.

Since, then, a partnership is treated sometimes as an entity and sometimes not, its nontaxation carries no implication of the measure of its income or that of the individual partners. It is clear from section 183 of the 1928 Act and all its predecessors that partnership income was fully recognized as a unit figure, and that its computation proceeded from the same bases as if it were that of an individual. The basis of the partnership’s gain is the capital investment or cost of the partnership, as it would be of an individual.

But the Commissioner would now tax the individual partners not alone upon their distributive shares of partnership income so computed, but upon a further computation either of their partnership shares or of their other income. Although the partner may have no more than his distributive share of partnership income, and the capital of the partnership may be preserved, he is nevertheless to be taxed as if the increment of the item sold above its original cost to him were realized by him. Being contrary to fact and contrary to his legal rights as a partner, it should be supported by more than ingenious construction of the alleged statutory purpose. Language quite clear either in terms or implication should be found to demonstrate such a legislative purpose; and more especially since in the twenty years of income taxation this purpose has never heretofore been suggested. But no such language appears. It is only by applying to the statute an elusive analysis, complex in its assumptions, that the alleged purpose (is educed. Such a construction should be rejected unless it is impelled by necessity either to avoid clear error or important administrative difficulty. There is no showing of either; but, on the contrary, the new construction involves new difficulties in its application. If the partnership gain or loss is to be measured on the basis of the contributing partner’s cost, the partnership accounts must for tax purposes alone carry data and computations wholly exotic as regards the partnership affairs. Variances would either be carried on or would require unforeseen adjustments not alone between tax data and business data, but also otherwise. In respect of such capital contributions as we have here, consisting of stock in trade, a harmonious system of inventory must be devised, cf. Charles A. Ferguson, 14 B. T. A. 820, while if the contribution be of capital assets such as buildings or plant, depreciation and obsolescence would present problems. Interminable conflict and difficulty might ensue in respect of the relative rights of the several partners in such property accounts, cf. Henry Wilson, 16 B. T. A. 1280.

Within the Commissioner’s contention is the idea that the sale of the item of property by the partnership is the first realization of the earlier increment and hence the tax should be imposed at this point lest it escape entirely. The reasoning is similar to that which caused Congress to enact the so-called donor-donee provision in respect of gifts, i. e., that the gain upon the sale of property acquired by gift should be based upon the cost to the donor, Taft v. Bowers, 278 U. S. 470. Here, however, Congress has omitted to prescribe a similar rule, and neither the Commissioner nor this Board should do so under the guise of statutory construction, even if it could be assumed that the system were thereby improved.

There is also no justification under the statute or in reason for adding to the individual’s other income something beyond his distributive share of partnership income as a separate realization by him through the sale by the partnership of the increment arising prior to his contribution. Clearly at the time of the partnership’s sale, he realizes nothing directly and at the end of the year he has only his distributive share of partnership income. See W. C. Langley & Co., 2 B. T. A. 199. His capital contribution to the full extent of its value at the time of contribution is still his stake in the business. He realizes no part of it until there is a distribution of partnership capital. When such distribution takes place either by partial liquidation or with dissolution, he measures his gain or loss upon the cost or March 1, 1913, value of his property contribution. Nigel Leslie Campbell, 1 B. T. A. 441. This has been the view which has been consistently adopted and administered. Zolton v. Morvay, 19 B. T. A. 928; I. T. 2010, III-1 C. B. (1924) 46; S. M. 3748, IV-2 C. B. (1925) 17. Under it, the taxable increment is taxed when it comes to the individual. Henry Wilson, 16 B. T. A. 1280. The suggestion that the increment may go untaxed in the event the partner dies before such realization, is not sufficient to deflect the rule, for to a similar extent the death of an individual owner likewise defeats a tax upon increment which has not theretofore been realized. There has been no inclination thus far to enact either an obituary toll by treating death as a realization of income or to impose a preventive substitute.

The Commissioner’s alternative claim, now for the first time presented, is that, if the partnership is so far an entity as to be a barrier to the use of the individual contributor’s earlier cost basis, then the contribution by the individual to the partnership must be what he calls a “closed transaction,” being an exchange of the corporate shares for an interest in the partnership which reflects the contribution value of the corporate shares; and that such “ closed transaction ” involves a realization to the individual of the gain. In this proceeding, it happens that the individual’s contribution to the partnership was made in 1928, which was the year in which the partnership sold the property contributed, and thus the alternative issue is made available in a single proceeding. We are of opinion, however, that there is no serious dilemma, as the respondent suggests. Since a partnership stands ambiguously before the law in other fields, it is not disturbing that it should be found so under the income tax statute. So it has been for many years, S. 0.42, 3 C. B. (1920) 61, without the suggestion heretofore of difficulty to either the Bureau or the taxpayers. The logical conflict seems thus far to have had no untoward result, and no reason is shown why the “ page of history ” should now be torn out. New York Trust Co. v. Eisner, 256 U. S. 345. However the proposition might have been treated at the threshold of income taxation in 1913, a change now in the long established practice should be prompted by important practical considerations and not merely by a desire for logical harmony.

But if we felt entirely at liberty to consider the contention apart from its history, we would find it unconvincing. That the contribution of individual property to a newly organized partnership operates to shift its title from the individual and to change the nature of his interest is clear. Cf. Pharos-Reporter Publishing Co., 1 B. T. A. 879. But it does not follow that such change is itself the realization of gain or loss. Cf. L. O. 816, 1 C. B. (1919) 168. On the contrary, the investment is now more fettered than before, as it is bound with others in the joint enterprise. Although a transformation in title has occured, there has been no exchange of property for other and different property, but only a further venturing of the old investment in a new project with the hope of added income in the future. Cf. Blodgett v. Silberman, 277 U. S. 1, 10. Unlike corporate shares received in exchange for the subscription price in property, the new partnership interest may not be separately disposed of without destroying the partnership. Harris v. Commissioner, 39 Fed. (2d) 546. To this extent the partnership and the partner are identical, and a corporation and its shareholders are not. And even in respect of the corporation, when shares are not issued for the property contributed, as in the case of a contribution of property by an existing shareholder by way of paid-in surplus, it is not held that the increment reflected in the increased value of the shares is income before it is more definitively realized by sale or liquidation of the shares.

Finding ourselves unconvinced either by Gr. C. M. 10092 or by the argument here, we hold that the change now being made by the Commissioner in the long established rule is contrary to law, and his determination is therefore reversed.

Beviewed by the Board.

Judgment will be entered vmder Rule 50.

Love dissents.


author: Arundell:

text:
    Farley Hopkins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52330.
    Promulgated February 28, 1933.

      Herbert Pope, Esq., and Preston B. Kavanaugh, Esq., for the petitioner.

      0. A. Gwirm, Esq., for the respondent.
   OPINION.

Arundell:

The respondent determined a deficiency in income tax for the year 1921 in the amount of $39,239.39, all of which is here in controversy. The major issue involves the basis for gain or loss on the sale of stocks and bonds distributed to petitioner as remainderman under his grandfather’s will. The facts were stipulated and we adopt, by reference, the stipulation as our findings of fact.

Petitioner’s grandfather died testate on December 13,1915. Under the will the residuary estate was left to trustees to invest and to pay one-half the income to the testator’s wife (grandmother of the petitioner) for life, and the other half to his daughter (mother of the petitioner) during her life. Upon the death of either the grandmother or mother her share of the income was to be divided equally between petitioner and his brother, but they were to receive none of such income unless and until they respectively reached the age of twenty-five years. The trust property was to go to petitioner and his brother when they respectively attained the age of thirty years or as soon thereafter as the death of the mother and grandmother occurred, such distribution to be made one-fourth to each of the remaindermen upon the death of each of the life tenants, provided he had then reached the specified age.

Petitioner’s mother died in 1923. Petitioner was thirty years old on February 9, 1926, and on that date the trustees distributed to him certain stock representing his one-quarter of the principal of the trust. The grandmother died on September 10, 1926, and on that date the trustees distributed to petitioner his remaining one-fourth of the trust property.

In 1927 petitioner sold certain of the securities so distributed to him in 1926, and in his income tax return he used as a basis for determining gain or loss the value of the securities when received by him (except as to a block of Camel Company stock and the value of that has been stipulated).

Of the securities sold in 1927, one block of stock — the Camel Company stock — formed part of the estate of petitioner’s grandfather at his death in 1915. As to that stock respondent held that the basis was the value at the date of the grandfather’s death. The remainder of the securities sold in 1927 represented investments made by the trustees under the will. The respondent used as a basis for computing gain on the sale of these securities the cost thereof to the trustees.

Petitioner’s assignments of error and argument under the first issue are directed entirely to the claim that value at the date of distribution in 1926 is the proper basis for determining gain or loss. At one point in the argument it is faintly suggested that petitioner’s remainder interest was contingent during the existence of the life tenancies, but counsel for petitioner further state that in their opinion the character of the remainder is not decisive of the question before us. If this question is material our construction of the will is that it operated to vest the remainders at the time of the testator’s death. See Hoblit v. Howser, 338 Ill. 328; 170 N. E. 257; Isabel R. Molter, 27 B. T. A. 442, and cases cited therein. Under the decided cases it must be held that the basic date; i. e., date of acquisition by petitioner, was the date of the testator’s death. Rodman E. Griscom, 22 B. T. A. 979; William Huggett, 24 B. T. A. 669; Chandler v. Field, 58 Fed. (2d) 370; affd., 63 Fed. (2d) 13; Isabel B. Molter, supra. No question is raised as to the propriety of respondent’s use of the value of the stock comprising the testator’s estate at the date of death as distinguished from the value of petitioner’s interest therein, nor as to his use of cost of the stock purchased by the trustees, and we do not pass upon these matters.

The remaining issue is whether the respondent correctly included in 1927 income certain dividends which were reported by petitioner as income received in 1928. These dividends — $38,250 from the Camel Company, $187.50 from each the American Radiator Company and the Youngstown Sheet and Tube Company — it is stipulated “ were declared in 1927 and were payable December 31, 1927. The checks in payment of these dividends were mailed in 1927 and they were received by petitioner in January, 1928.” Petitioner’s income tax return for 1927 was made on tbe cash receipts and disbursements basis.

The facts under this issue are on all fours with those in Mary Miller Braxton, 22 B. T. A. 128, in which we held that the dividends should be included in income for 1927, the year in which they were declared and payable. See also Commissioner v. Bingham, 35 Fed. (2d) 503; Effie B. Shearman, 26 B. T. A. 716.

We accordingly sustain the respondent on both issues, and

Decision will he entered for respondent.


author: Leech :

text:
    H. and L. Epstein, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Army and Navy Store Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. and L. Epstein, Inc., and Army and Navy Store Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44267-44269.
    Promulgated February 28, 1933.

      Bernard Greensfelder, Esq., for the petitioners.

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

Leech :

These three proceedings, consolidated for hearing and decision, are appeals from deficiencies in income taxes asserted against the Army and Navy Store Trust for the period January 1 to February 5, 1924, in the sum of $140.27, for the period February 6 to December 31, 1924, in the sum of $1,334.72, and from a deficiency asserted against H. and L. Epstein, Inc., for the calendar year 1924 in the sum of $417.96. The errors assigned are the same in each proceeding, these being the disallowance by respondent of the respective taxpayers’ claims of affiliation for all of the calendar year 1924 with the H. and L. Epstein Trust Estate.

The facts are all formally stipulated by the parties and the stipulation filed is incorporated herein by reference as our findings of fact. Briefly stated, the facts are that the petitioner, H. and L. Epstein, Inc., is a Missouri corporation which acquired on organization in 1922 a supply house in St. Louis, Missouri, and two chains of retail stores. The stock of this petitioner has at all times been owned by the same seven individuals.

Shortly after its organization and in the same year this petitioner caused to be created two “Massachusetts trusts”, each with 500 shares or beneficial interests, known as the Army and Navy Store Trust and H. and L. Epstein Trust Estate. To each of these trusts it conveyed one of the chains of stores referred to in consideration of the issue to it of all of the shares of or beneficial interests in such trust. Thereafter these trusts owned and operated these stores. The petitioner, H. and L. Epstein, Inc., continued to own all of the shares or beneficial interests in the two trusts mentioned, with the exception of 30 shares of the petitioner Army and Navy Store Trust which it sold to one Hill and 30 shares of the H. and L. Epstein Estate which it sold to one Eagan. Both of these individuals were store managers and both sales of stock were made prior to 1924. On February 5, 1924, H. and L. Epstein, Inc., reacquired from Hill the shares sold him and on December 30, 1924, reacquired the shares sold to Eagan. These reacquired shares were in each instance owned by this petitioner during the balance of the year 1924.

This corporate petitioner and the two trusts mentioned filed consolidated returns for the calendar year 1924, during which year the H. and L. Epstein Trust Estate had an operating loss. Eespond-ent in determining the deficiencies here in question held that the corporation and the Army and Navy Store Trust were only affiliated in 1924 for the period of February 6 to December 31, inclusive, and that the H. and L. Epstein Trust Estate was not affiliated with either of the other two for any period during 1924. Eespondent now admits that affiliation of the three organizations did exist for the one day, December 31, 1924, and that the deficiency should be recomputed with this adjustment.

Section 240 (c) of the Eevenue Act of 1924, provides:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least &5 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. A corporation organized under the China Trade Act, 1922, shall not be deemed to be affiliated with any other corporation within the meaning of this section.

Petitioners contend that affiliation of the three organizations existed during all of the year 1924 because the stipulated facts show them all to have been owned during that period by the “ same interests ” within the purview of section 240 (c) above quoted. Several decisions of the courts and of the Board are cited in support of the contention that ownership of a small amount of stock by employees under conditions somewhat similar to those here existing constitutes holding by the “same interests.” These decisions, however, were rendered prior to the decision by the Supreme Court in the case of Handy & Harman v. Burnet, 284 U. S. 136. It is shown that Hill, who owned 6 per cent of the shares of one trust here involved, and Eagan, who owned 6 per cent of the shares of the other trust, had no other interest in these three organizations. Neither of them owned shares in H. and L. Epstein, Inc. Consequently they can not be considered as the same interests as the seven owners of the stock of that company and for the same reason can not themselves be considered jointly as the same interests in respect to ownership of the two trusts in question. Handy & Harman v. Burnet, supra; Crossett Western Co., 27 B. T. A. 258. It necessarily follows that there was no statutory affiliation between these companies predicated upon ownership of 95 per cent of their voting stock by the same interests for the period February 6 to December 30, 1924.

Petitioners contend, however, that affiliation existed during the period February 6 to December 31, 1924, because it is shown that during that period H. and L. Epstein, Inc., owned more than 95 per cent of the voting stock of the two trusts by reason of its ownership of 970 shares or 96 per cent of the combined 1,000 shares of the two. It is urged that this shows a 96 per cent ownership of the voting stock of the two and complies with the statutory requirements.

We do not agree with this construction and application of section 240 (c). The purpose of Congress in this section was to tax the income resulting from the conduct of what was in effect a single business enterprise, as that of a business unit, even though conducted by means of several corporations. The report of the Senate Finance Committee, to which had been referred the Revenue Act of 1918, in discussing section 240 thereof, which, in all respects pertinent to the question presented here, is identical with section 240 of the Revenue Act of 1924, states:

The purpose of section 240 was, by means of consolidated returns, to require taxes to be levied according to the true net income and invested capital resulting from and employed in a single business enterprise, even though it was conducted by means of more than one corporation. [Senate Documents, Vol. 4, Doc. 310, 65 Cong. 3d Sess.]

The purpose and intent as stated above has been recognized by respondent and also by Congress in enactment of subsequent income tax legislation. Regulations 41, art. 77; section 1331 (a), Revenue Act of 1921; sections 240 (b) and 336 of House Bill 12863 (40 Stat. 1081 and 1096). Regulations 45 (1920 Ed.) arts. 631, 633. Cf. Handy & Harman v. Burnet, supra.

In the last cited case the court also recognized that the ownership required of two or more corporations by the parent company as the basis for affiliation is an ownership in each to the extent set out in the section. On that question the court said:

It requires no discussion to show that such returns will not make' against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all the stock of each of such corporations.

Petitioner’s theory would permit a corporation owning all of the voting stock of a 100,000 share corporation to acquire affiliation with a corporation of 5,000 voting shares by the purchase of only one share of the latter’s stock. In that case, although it would then own more than 95 per cent of the combmed voting shares of the two, to allow affiliation under such conditions would defeat the purpose of the quoted section. Accordingly, we refuse to give such meaning where the construction applied by respondent gives effect to the legislative intent.

We hold that the action of respondent, to the extent to which he denied affiliation, is correct with the one exception that affiliation of the three organizations existed for one day of the taxable period, to wit, December 81. Respondent agrees that his determination should be adjusted to that extent.

The appeal under Docket No. 44261 is by H. and L. Epstein, Inc., from the deficiency determined against it and that under Docket No. 44268 is by the Army and Navy Store Trust from the deficiencies determined as heretofore set out. By these two proceedings are presented every issue raised by these petitioners upon the deficiencies asserted. Under Docket No. 44267 these two individual petitioners have attempted to appeal jointly from the several deficiencies asserted against them individually and covered by their two separate appeals. A motion by respondent to dismiss the appeal under Docket No. 44269 as improperly joining two separate appeals and as covering issues upon which appeals were already pending before this Board, was taken under advisement at the hearing. This motion is now granted.

An order of dismissal will be entered m Docket No. JjJ$69. In Docket Nos. J¡J¡£67 and J¡,J$68 judgment will be entered under Rule 50.


author: Smith:

text:
    Florence A. Stephenson, Trustee, Estate of Thomas Jefferson Stephenson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42382.
    Promulgated February 28, 1933.

      George Clark, Esq., and Ralph R. Eltse, Esq., for the petitioner.

      C. A. Ray, Esq., for the respondent,
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in estate tax of $798.36. The respondent duly asserted claim to the increased deficiency that will result from including in the decedent’s gross estate certain jointly owned property of the value of $7,500, which he asserts was erroneously excluded in determining the deficiency. The sole question in issue is whether the value of property owned by the decedent and his wife as joint tenants has been properly included in his gross estate.

The petitioner is the widow of Thomas Jefferson Stephenson, who died a resident of California, December 25,1923. She filed an estate tax return for the estate of the decedent in which she reported a gross estate consisting entirely of jointly owned property of $123,242.91. From the gross estate was deducted funeral expenses, $700; attorneys’ fees, $125; and specific exemption, $50,000, leaving a net estate of $72,417.91. In making such return the petitioner did not concede that there was any net estate subject to a Federal estate tax. The respondent determined that there was erroneously included in the gross estate $7,500 representing jointly owned property, the joint tenancy having been created in 1910, and determined that the net estate subject to tax was $64,917.91, upon which he determined a deficiency in estate tax of $798.36. By an amended answer the respondent contends that he was in error in excluding from the gross estate the jointly owned property in the amount of $7,500, above referred to, and now has moved to increase the deficiency by such erroneous exclusion from the gross estate.

Several of the joint tenancies were created long prior to 1916.

In this proceeding the petitioner contends that where the joint tenancies were created prior to 1916 and prior to the time when there was any Federal estate tax, the value of the interest of the decedent in such joint estate at the date of his death may not be included in the gross estate.

Section 402 of the Revenue Act of 1921 provides in part as follows:

That the value of the gross estate of the decedent shall he determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(d) To the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or deposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money’s worth: Provided,, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than a fair consideration in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy in the entirety by the decedent and spouse, or where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of one-half of the value thereof.

The record before us does not show that the petitioner contributed anything to the acquisition of the jointly owned property.

In Gwinn v. Commissioner, 287 U. S. 224, it was held that the gross estate of a California decedent who died October 5, 1924, should include one-half of the value of property held by decedent and her son as joint tenants since 1915, each having contributed equal amounts to the purchase of the property. The court said:

The clear language of the 1924 statute repels the notion that it has no application to joint tenancies created prior to September 8, 1916. * * *
Jjs $
* * * The death became the generating source of definite accessions to survivor’s property rights. * * *

The observation of the Supreme Court is equally applicable to the estate of a decedent dying in 1923, the pertinent language of the Revenue Act of 1921 not being substantially different from that of the Revenue Act of 1924 bearing upon the question involved.

It is further to be noted that in Third National Bank & Trust Co. of Springfield v. White, 45 Fed. (2d) 911, it was held that the value of the entire property held in tenancy by the entirety was subject to estate tax though the transfer was completed before the statute imposing the tax was enacted. There the tenancy by the entirety was created in 1915. This decision of the District Court was affirmed by the Circuit Court of Appeals for the First Circuit, 58 Fed. (2d) 1085, and by the Supreme Court, without opinion, on December 19, 1932.

From the above mentioned decisions there can be no question that the interest of the decedent in jointly owned property is includable in the gross estate of a decedent dying in 1923, even though that interest was acquired long prior to the effective date of the act.

There being no proof that any part of the property held by the decedent and his wife as joint tenants originally belonged to the petitioner, or that it was acquired by her from the decedent for a fair consideration in money or money’s worth, the action of the respondent in including all of such jointly owned property in the decedent’s gross estate is sustained. The deficiency should be recomputed accordingly.

Judgment will be entered under Rule SO.


author: Steenhagen:

text:
    Grey Bull Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47376.
    Promulgated March 7, 1933.

      John W. Drye, Jr., Esq., for tbe petitioner.

      L. W. Greason, Esq., for tbe respondent.
   OPINION.

Steenhagen:

The respondent treats the petitioner as the owner in the first instance of the proceeds from the sale of the livestock in its charge, and the distributions as dividends to shareholders. We are of opinion, however, that the evidence proves that the situation was otherwise. The petitioner, while it had broad powers under its charter, did only what was provided in its contracts with the individuals. The individuals were both shareholders in the petitioner as a corporation and contractors with it as an agent, bailee, or agister. Before the corporation could find income to itself and thus indirectly for its shareholders, it was obligated to fulfill its contractual duties, LaMonte v. Commissioner, 32 Fed. (2d) 220; Louis C. Rollo, 20 B.T.A. 799. These two aspects of its duties should not be confused as long as its conduct is bona fide and free from fraud or other compelling inequity. There is no suggestion here of either.

The corporation did not take title to the livestock. Whether in respect of it, the relation was that of general agency, bailment, or agistment, does not require decision here. Enough that it was not that of owner and that it involved only service for the owners. This service was apparently performed without compensation; but it was thus performed with the acquiescence of the corporate shareholders and there is no right in anyone else to complain. The contract which gave the control of the livestock also withheld the right to the proceeds and required distribution in accordance with the livestock contributed, irrespective of the corporate shares. The distribution was made on the books at once, not as a dividend, but through the Owners’ Trust Fund account, and actually paid out from time to time. It may be assumed that the owners took proper account of the distributions in their individual tax returns.

We think that the evidence proves that the corporation during the years in question had no income, and that for this reason there is no deficiency. This makes it unnecessary to commit ourselves to a decision whether the corporation was such a cooperative organization as to be exempt by virtue of section 231 (11) of the Revenue Act of 1924 or section 231 (12) of the Revenue Act of 1926, as to which there is considerable doubt.

Judgment will be entered for the petitioner.