author: Kern:

text:
    L. D. Coddon & Bros. Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82791.
    Promulgated February 23, 1938.

      W. H. O-ppenheimer, Esq., and B'enno F. Wolff, Esq., for the petitioner.

      Gerald W. BrooTes, Esq., for the respondent.
   OPINION.

Kern:

In 1933 petitioner satisfied an indebtedness which, it owed in the sum of $19,250, and which was secured by a mortgage on real estate of the value of $20,000 used by it in its business, for the sum of $12,000. It is the contention of the respondent that $7,250, the amount of the obligation of petitioner in excess of the $12,000 which was satisfied by agreement of petitioner and its mortgagees by this payment, should be included in the gross income of petitioner as defined in section 22 (a) of the Revenue Act of 1932, set out in the margin. This contention is based upon the principle enunciated in the opinion of the Supreme Court in United States v. Kirby Lumber Co., 284 U. S. 1, to the effect that the retirement by a corporation of its obligations at less than the issue price results in taxable income to the corporation in the amount of the excess of the issue price of the obligations over the amount paid for their purchase and retirement. The petitioner contends that this amount does not represent gross income, for the following reasons: (1) That the transaction by which the original debt was satisfied at less than its face value was merely an adjustment of purchase price and therefore a capital transaction; (2) that even if income were presently recognizable, the settlement was accompanied by a shrinking of assets and consequently resulted in no “freeing of assets” which would otherwise have been subject to the lien of the obligation; and (3) that the shrinkage was, in fact, so great that the transaction as a whole resulted in loss and not in gain to petitioner. Petitioner’s contentions are based respectively on Des Moines Improvement Co., 7 B. T. A. 279; Commissioner v. American Chicle Co., 65 Fed. (2d) 454; and Bowers v. Kerbaugh-Empire Co., 271 U. S. 170.

Petitioner’s first contention is founded on a case decided by us prior to the decision by the Supreme Court in United States v. Kirby Lumber Go., supra. Since the latter decision our conclusions in this general subject have been modified. Consolidated Gas Co. of the City of Pittsburgh, 24 B. T. A. 901. In the case of B. F. Avery & Sons, Inc., 26 B. T. A. 1393, the doctrine of Des Moines Improvement Co., supra, was limited to a case in which all of the transactions between vendor and vendee took place in one year. Since, in the instant case, the transactions between the vendor corporation and its successors in interest, the tenants in common, on one side, and the vendee partnership and its successor in interest, the.corporation which is petitioner herein, on the other, took place over a period of some thirteen years, the doctrine of Des Moines Improvement Co., supra, as limited by our opinion in B. F. Avery & Sons, supra, is not applicable.

The petitioner earnestly contends that the decision of the Supreme Court in United States v. Kirby Lumber Co., supra, is not controlling in the disposition of the instant case because there was a “shrinking of assets”, i. e., a loss in the market value of the property covered by the mortgage, equal to the difference between the face value of the mortgage obligation and the amount paid by petitioner to satisfy it. In support of this contention petitioner urges that the language used by the Circuit Court in Commissioner v. American Chicle Co., supra (C. C. A., 2d Cir.), was not repudiated by the Supreme Court in Helvering v. American Chicle Co., 291 U. S. 426, although it reversed the lower court’s judgment. The Circuit Court took the view that no gain was presently realized by1 the discharge of an obligation at less than its face value where it was incurred in the purchase of property still retained by the taxpayer; that while cost was determined, the other “term of the equation” necessary to the realization of income was lacking. The Supreme Court, in effect, rejects this view of the postponement of “realization” until disposition of the thing bought, for it finds “nothing to distinguish this cause in principle from U. S. v. Kirby Lumber Co." whereas the Circuit Court, in language quoted by the Supreme Court, had distinguished that case as applying only to a money and not a property transaction.

While it may be conceded that the language of the Supreme Court in that case is not altogether free from ambiguity, any doubt we might have has been laid by the case of Commissioner v. Coastwise Transportation Co., 71 Fed. (2d) 104; certiorari denied, 293 U. S. 595, the facts of which were fully found by the Board and present a question almost identical with that presented by the instant case. That decision was contraryho the contention of petitioner and to the decision of the Circuit Court in Commissioner v. American Chicle Co., supra. We have also ruled adversely to the contention of petitioner in Consolidated Gas Co. of the City of Pittsburg, supra, and Transylvania Railroad Co., 36 B. T. A. 333. From an examination of these cases the present state of authority seems to be that where a solvent debtor is under direct obligation to make payments for physical property purchased by him or by his assignor, which is still held by him, and satisfies this obligation by paying less than the amounts called for by the obligation, the property continuing to be of a value sufficient to pay the indebtedness, the transaction will result in taxable income to the debtor in the amount by which the face value of the obligation exceeds the amount paid by him for its satisfaction. Whether income will be realized at the time of the partial forgiveness of the debt even if the property bought has a value less than the remaining obligation, we do not now decide, but it seems clear that realization should not be postponed until disposal of the property.

The doctrine of Bowers v. Kerbaugh-Empire Co., supra, is limited to completed transactions, as the Supreme Court said in the American Chicle case. Since the property mortgaged to secure the obligation which was satisfied by the payment of less than its face value in this case was still held by the petitioner in 1933, the doctrine of that case is not applicable. Commissioner v. Coastwise Transportation Co., supra. Therefore, the fact that the market value of the real estate of petitioner was considerably less in the taxable year than the original price paid for it is immaterial.

The cases cited by petitioner having to do with similar transactions, in which the debtor is insolvent or in which the debt involved is a mere lien on the property sold and not a personal, direct obligation of the taxpayer, are not pertinent except to give examples of the limitations contained in our statement of the general rule applicable to the instant case, supra.

Judgment will be entered for the respondent.

       SBC. 22. GROSS INCOME.
      (a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the united States and judges of courts of the united States taking office after the date of the enactment of this Act, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly.


source: Caselaw Access Project

author: Harron :

license: Public Domain

text:
    Robert H. Morse, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86551.
    Promulgated February 23, 1938.

      P. Michael Code, Esq., for the petitioner.

      J. M. Morawshi, Esq., for the respondent.
   OPINION.

Harron :

All of the policies here in question were originally issued payable to the “Estate of the Insured”, petitioner (the insured) reserving the right of revocation.

On June 24, 1932, more than two years after the policies had been fully paid up, the petitioner surrendered his reserved right of revocation and irrevocably designated his son, John, as beneficiary under policies Nos. 4269 and 4270, and his daughter, Barbara Joan, as beneficiary under policies Nos. 2190 and 4268. From that time on John and Barbara Joan unquestionably had a vested interest in the respective policies which no act of petitioner could impair without their consent. Cf. Missouri State Life Insurance Co. v. California State Bank, 216 S. W. 785; Blum v. New York Life Insurance Co., 95 S. W. 317; Condon v. New York Life Insurance Co. of New York, 166 N. W. 452.

After the interest of the beneficiaries had been irrevocably vested and no power of revocation was reserved in the insured, neither' petitioner nor anyone claiming under him, such as a judgment creditor or a receiver in bankruptcy, could force a surrender of the policy and payment of the cash surrender value without their consent, Maurice v. Travelers' Insurance Co., 201 N. Y. S. 369; Timayenis v. Union Mutual Life Insurance Co., 21 Fed. 223. Thereafter petitioner had no right to take the cash surrender value of the policies, the entire interest therein having passed to the named beneficiaries, cf. D'Arcy v. Connecticut Mutual Life Insurance Co., 69 S. W. 768; Condon v. New York Life Insurance Co. of New York, supra.

Losses to be deductible must be realized and under tbe facts before us we bold that petitioner realized no loss on tbe insolvency and receivership of Old Colony Life Insurance Co. in 1932. In our view of tbe case it becomes unnecessary to discuss the various other contentions of tbe parties.

Decision will be entered for the respondent.


author: Van Fossan:

text:
    William H. Grimditch, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78002, 78003, 78004, 78005, 78006, 78015, 78016, 78047.
    Promulgated February 23, 1938.

      Charles C. Norris, Esq., and Philip D. Dechert, Esq., for’ the petitioners.

      B. P. Hertzog, Esq., for tbe respondent.

       Proceedings of the following petitioners are consolidated herewith: J. H. Carmine; E. W. Shepherd; Thomas A. Kennally; D. J. MacKillop; Estate of Mrs. C. L. McWhorter, Deceased, Charles L. McWhorter, Executor; Charles D. McWhorter; and Louis M. Kelly.

   OPINION.

Van Fossan:

The issue presented is whether the amounts of money received by the petitioners upon redemptions of first and second preferred stock of the corporation in 1931 are taxable as dividends within the purview of section 115 (g) of the Revenue Act of 1928. The answer to this question depends upon whether in point of time and manner the redemptions were essentially equivalent to the distribution of taxable dividends. It is a question of fact. Commissioner v. Babson, 70 Fed. (2d) 304; certiorari denied, 293 U. S. 571.

The courts and the Board have consistently held that each case of the type here presented must stand on its own particular facts. No definite rule of construction has been laid down by which to determine all cases. Hyman v. Helvering, 71 Fed. (2d) 342 (D. C. App.); Albert T. Perkins, 36 B. T. A. 791; Orie R. Kelly, 36 B. T. A. 507.

The court, in McGuire v. Commissioner, 84 Fed. (2d) 431, observed:

Neither artifice, subterfuge or bad faith need be present to bring a transaction within the meaning of the statute here involved, for as we read the law a taxpayer may well act with the utmost good purpose and without evil intent and yet the transaction may in effect be the equivalent of the distribution of a taxable dividend.

Thus the intention or motive of the corporation is not controlling. The crux of the statute is whether in making such redemptions the corporation is thereby in effect distributing its earnings, the shareholders thus avoiding the taxes that are due on such distribution.

It may be conceded that the plan conceived by the corporation in the present cases gradually to diminish the interests of the older stockholders in the corporation and increase the interests of the younger men was accomplished by the transactions, but a business plan wholly legitimate in its inception may so operate a.s to effect a distribution essentially equivalent to a taxable dividend. The results are controlling. Hyman v. Helvering, supra.

With this in mind a review of the facts is enlightening. The preferred stock, both first and second issues, was redeemed not once but twice in the taxable year. The stock first redeemed was simultaneously reissued and in the same year again redeemed and then reissued. Also, simultaneously with the first redemption of preferred, a dividend was declared in common stock. Thus the corporation during this year paid $2,200,000 in cash to its preferred stockholders by means of the stock redemptions, as compared with $694,992 paid in cash as dividends on all its stock. The corporation’s net income for the year was in excess of $4,000,000. In 1930, when the net income was in excess of $4,500,000, only $269,692 was paid out as cash dividends. See J. Natwick, 36 B. T. A. 866.

In January 1931 there were 20,000 shares of common stock and 5,000 shares each of first and second preferred stock outstanding, while at the end of the year after the two redemptions of the preferred stock, effecting the distribution of $2,200,000 in cash, had occurred there were outstanding 29,824.5 shares of common stock ánd 4,970.75 shares each of first and second preferred. In other words, the preferred stock at the end of 1931, after the two redemptions, was reduced less than 1 percent and the common stock outstanding was increased by almost 50 percent. See Hill v. Commissioner, 66 Fed. (2d) 45, affirming 27 B. T. A. 73.

Moreover, there were accumulated undivided earnings largely in excess of the amounts distributed. The surplus on hand January 1, 1931, was more than three times greater than the preferred stock redeemed shortly thereafter and there was but slightly less surplus on hand after the second redemption of preferred stock in the latter part of the year. At the time of the first redemption in 1931 the corporation had a surplus of $7,737,731.78. After the second redemption in that year there remained in the surplus account the sum of $7,696,179.11.

Although cash dividends were paid during the period from 1917 to 1931 in the aggregate amount of $2,026,144.42, of which $694,992 was paid in 1931, the earnings of the corporation during the same period totaled $17,967,562.41, of which $4,072,227.73 was earned in 1931. See C. A. Goding, 34 B. T. A. 201, where the stock redeemed represented a distribution of earnings of approximately three times the amount distributed as cash dividends. During this period from 1917 to 1931 total preferred stock redemptions effected total distributions to stockholders of $3,575,000, of which, as above pointed out, $2,200,000 was paid in 1931.

When these facts are faced it would seem beyond question that the redemptions of preferred stock accomplished a distribution of profits.

Petitioner Grimditch, for example, at the end of-the year 1931, without considering compensation stock, had substantially increased holdings of both common and preferred stock and received $45,-787.50 in cash by means of the two redemptions.

The contention that the redemptions should not be treated as dividends, because at the time they were made some of the preferred stockholders were not owners of common stock, lacks merit. The stockholdings need not be identical. Moreover, in all of the instances referred to, the record owners are the wives of the holders of substantially the same proportion of common stock, which had been turned over to them as gifts shortly before the stock was redeemed. Otherwise, there is little difference in the percentage ownership of common and preferred stock. See Randolph v. Commissioner, 76 Fed. (2d) 472.

Furthermore, as was held in the case of Hill v. Commissioner, supra, it is not essential that there be a direct relationship between the issuance of the stock and its subsequent redemption.

The petitioners have pointed to many cases where redemptions have been held not essentially equivalent to taxable distributions. They rely strongly on the recent case, H. F. Asmussen, 36 B. T. A. 878, where the corporation had a “plan” with somewhat similar objectives to that in the present cases. Aside from the similarity of the plans the facts in the two cases have little in common. The facts in that case revealed no such results as we find here. The other decisions cited also turn on the facts therein present. We find none that suggests that, under the facts of these cases, petitioners’ contentions should be sustained.

We are of the opinion that the redemptions of first and second preferred stock of the corporation during 1931 were made at such time and in such manner as to be essentially equivalent to the distribution of taxable dividends.

Reviewed by the Board.

Decisions will be entered for the respondent.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      * * * * * * *
      (g) Redemption of stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In ease of the cancellation or redemption of stock not issued as a stock dividend this subsection shaU apply only if the cancellation or redemption is made after January 1, 1926.


author: Van Fossan :

text:
    Josephine C. Bowen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87219.
    Promulgated February 23, 1938.

      John C. Evans, Esq., for the petitioner.

      Frank T. Horner, Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Van Fossan :

This proceeding was brought to redetermine a deficiency in the income tax of petitioner for the calendar year 1934 in the sum of $40.80.

The question for our determination is whether the following described transactions constituted a “sale or exchange” of certain mortgage interests for bonds of the Home Owners’ Loan Corporation, or a payment therefor.

The facts in the case are stipulated in substance as follows:

On or about June 1, 1921, one William Downie and his wife borrowed from one Walter J. Taylor the sum of $2,800 and on that date executed a note payable in five years. This note was secured by a first mortgage in the principal sum of $2,800 on real property located at 9745 Prairie Avenue, Detroit, Michigan.

On October 20,1922, Downie and his wife executed a warranty deed to one Angus McLean, guardian of Lyman Fuller and Hugh M. Fuller, minors, conveying the above mentioned property to him subject to the aforesaid mortgage.

On August 30, 1927, Taylor and his wife assigned the mortgage and mortgage note to petitioner, who paid therefor the sum of $2,800, that being the principal sum then owing on the mortgage note.

On the same date, McLean and his wife and Joseph J. Brown and his wife borrowed from petitioner the sum of $700 and executed a note on that date for that amount payable in three years and giving petitioner as security for the repayment of the $700 a second mortgage on the same real property.

On December 4,1933, Brown, who was then the owner of the property, made application to the Home Owners’ Loan Corporation for a loan thereon.

On December 16,1933, the Home Owners’ Loan Corporation mailed petitioner’s attorney a form letter stating that the application had been made and seeking certain information with respect to the mortgages. In answer to one of the questions in this questionnaire petitioner stated that she was willing to take bonds of the Home Owners’ Loan Corporation for her equity in the property.

On January 19, 1934, the principal balance owing on the two mortgage notes above referred to was $3,500.

On that date the Home Owners’ Loan Corporation addressed to petitioner a letter offering the sum of $3,100 net in the bonds of the Home Owners’ Loan Corporation for her first and second mortgagee’s equity in the property.

On January 23, 1934, petitioner executed a “Mortgagees’ Consent to Take Bonds” in the amount of $3,100 net in full settlement of her claim under the two mortgages as aforesaid.

On February 1,1934, petitioner executed a discharge of the June 1, 1921, and the August 30, 1927, mortgages and delivered the same together with the notes for $2,800 and $700 secured thereby to the Home Owners’ Loan Corporation. These discharges were recorded in the office of the register of deeds for Wayne County, Michigan, on June 5, 1934.

On May 16,1934, petitioner signed an “Authorization For Delivery of Bonds of Home Owners’ Loan Corporation” and transmitted the same to the Home Owners’ Loan Corporation. It was recited therein that the loan to Brown and his wife “has been duly and regularly closed and that the obligation and instrument securing the same of said borrower or borrowers have been received and that the above-mentioned holder of this authorization is entitled to the bonds * *

On the same date, May 16, 1934, Brown and his wife executed a note to the Home Owners’ Loan Corporation bearing that date and as security therefor gave a mortgage to the corporation on the real property above referred to in the amount of $4,306.08. This mortgage was duly recorded on June 5, 1934.

On May 28, 1934, Brown and his wife executed a “Statement of Applicant for Compliance with section 4 (1) of Home Owners’ Loan Act as Amended” to the effect that the mortgage was in involuntary default and that he was unable to carry or refund the indebtedness and that the default was due to unemployment or to economic conditions or misfortune beyond his control.

On June 29, 1934, petitioner received an even date letter from the Home Owners’ Loan Corporation advising that it was holding funds payable to her in the amount of $3,100 and requesting that they be advised as to what banker or trust company petitioner wished the permanent bonds delivered through.

On April 2, 1934 (sic), (August 2, 1934?) petitioner actually received Home Owners’ Loan Corporation bonds in the principal amount of $3,075 and cash in the amount of $21.75 in consideration of the surrender of the notes for $2,800 and $700, respectively, and the execution of the discharge of the mortgages above referred to. The bonds and cash were delivered to petitioner through the Manufacturers’ National Bank of Detroit.

A similar series of transactions occurred with reference to other property, as follows:

On August 8, 1927, Selina Williams borrowed from petitioner the sum of $2,600 and gave an even dated note for that amount as evidence of the indebtedness and executed a mortgage in the principal amount of $2,600 on lot 60, Gamble and Fisher Subdivision in the city of Detroit, Michigan, as security.for the repayment.

On August 30, 1933, Frank Lachowski, the contract purchaser of the property securing the mortgage last above mentioned made an application to the Home Owners’ Loan Corporation for a loan on the premises.

On December 19,1933, the Home Owners’ Loan Corporation mailed petitioner a similar questionnaire concerning the mortgage as was mailed petitioner in the Brown case and petitioner also here indicated her willingness to take bonds of the Home Owners’ Loan Corporation for her equity.

On December 19,1933, the principal balance owing on the mortgage was $2,600.

Shortly thereafter, petitioner received from the Home Owners’ Loan Corporation a letter similar to the one she had received in the Brown case offering the sum of $2,000 net in bonds of the Home Owners’ Loan Corporation in satisfaction of her mortgagee’s interest in the last above mentioned property.

On February 7, 1934, petitioner executed a “Mortgagee’s Consent to Take Bonds” in the sum of $2,000 net as full settlement of her claim against the property under the mortgage.

On June 27, 1934, petitioner properly executed a discharge of the mortgage last above described and delivered it together with the $2,600 note to the corporation.

On July 19, 1934, petitioner signed an “Authorization of Delivery of Bonds of Home Owners’ Loan Corporation” and transmitted the same to the Home Owners’ Loan Corporation. This authorization is identical in form with the authorization in the Brown case and likewise states that the loan “has been duly and regularly closed and that the obligation and instrument securing the same of said borrower or borrowers have been received and that the above-mentioned holder of this authorization is entitled to the bonds * *

On July 23, 1934, Lachowski executed a “Statement of Applicant for Compliance with Section 4 (1) of Home Owners’ Loan Act as Amended.” The form of this statement is to the same effect as that used in the Brown case.

On September 11, 1934, petitioner received bonds of the Home Owners’ Loan Corporation in the principal amount of $1,975 and cash in the amount of $12.30 in consideration of the execution of the discharge of the mortgage and the surrender of the $2,600 note. The bonds and cash were delivered to the petitioner through the Manufacturers’ National Bank of Detroit.

Petitioner paid a service fee of $4 to the agent through which the Home Owners’ Loan Corporation made delivery of the bonds and $20 to one Lloyd L. Axford for legal services rendered in connection with the settlement of the mortgages.

In filing her income tax return for 1934 petitioner claimed a deduction of $1,024 for loss sustained in the above related transactions. The amount of the loss was arrived at by deducting the total amount received in settlement of the mortgages from the total cost of these mortgages. The amount of the loss thus figured was $1,000, to which was added $24 expenses incident to the settlement.

The Commissioner disallowed this deduction in part on the grounds, as he advised the taxpayer, that “inasmuch as the property exchanged represented capital assets as defined in section 117 (b) of the Eevenue Act of 1934, and the assets were held for more than five years but not more than 10 years, the loss is recognized to the extent of 40 per cent or $409.60 as provided in section 117 (a) of the Eevenue Act of 1934.”

It is apparently conceded that, in order for the loss properly to be considered as a capital loss, the transaction must have been a “sale or exchange” as distinguished from a “payment.”

The question presented then, is whether the transaction, as outlined, constituted a “sale or exchange” so as to bring a resulting loss within the provisions of section 117 of the Eevenue Act of 1934, as a capital loss, or whether the transaction effected a “payment” resulting in an ordinary loss under section 23 (e) (2). The amount of the loss is not in controversy.

Petitioner contends that she suffered an ordinary loss and not a capital loss by reason of the transaction because the corporation bonds which she received in return for a discharge of her mortgages were given as payment of a debt or obligation and that the loss resulting is an ordinary loss arising out of the transaction entered into for profit.

Eespondent, on the other hand, claims that the loss resulting from the transaction is a capital loss arising out of the “sale or exchange” of a capital asset.

We are of the opinion that the contention urged by the respondent is the only tenable one.

The applicable part of the statute under which the corporation operates (48 Stat. 128, 130) and of which we take judicial notice, authorizes it to acquire “in exchange” for bonds issued by it, home mortgages and other obligations and liens secured by real estate. Consistently, throughout the act the transaction is denominated an exchange. While this is not conclusive, it is persuasive.

In addition, what actually transpired, we believe, can spell nothing but exchange. As to petitioner there was no payment. The usual and ordinary meaning of the word “payment” is the discharge of an obligation in money, unless the agreement provides for its discharge by other means. The fixed terms of the obligations in question could not have contemplated their satisfaction in terms of the corporation’s bonds.

What petitioner did here was to exchange one form of indebtedness for another. This Board has frequently had before it cases where owners of bonds and other like evidences of indebtedness have accepted for such bonds or indebtedness other forms of property. In these cases the Board has consistently referred to the transaction as an “exchange.” Sunflower Packing Corporation, 2 B. T. A. 1104; Turners Falls Power & Electric Co., 15 B. T. A. 983; Henry Heldt, 16 B. T. A. 1035; Nat Webb, Jr., 22 B. T. A. 1249; Chemical National Bank of New York, 30 B. T. A. 178.

Petitioner relies strongly on the case of John H. Watson, Jr., 27 B. T. A. 463, and subsequent cases following the rule there established, that the redemption of a bond, either at maturity or pursuant to an authorized call prior to maturity is not a sale or exchange, but a payment. The present situation is not analagous for there was no discharge of petitioner’s obligations by reason of cash settlements. True, the mortgages were satisfied and on the exchange petitioner received bonds having a money value, but petitioner was not paid. She received bonds in exchange for her interests in the mortgages.

In John H. Watson, Jr., supra, it was said in regard to the terms there under consideration:

The words “sale or exchange” are ordinary words of well established meaning. Taken in their context they are susceptible of no misconstruction. Payment of the amounts specified in the bonds, either at maturity or pursuant to an authorized call prior to maturity, is not a “sale or exchange” of such bonds. It is merely the payment of an obligation according to its fixed terms.

The quoted observations are equally pertinent here.

The result of the present transaction was not a payment as contemplated by the original agreement nor a payment as a result of a novation. The parties themselves changed and the transaction was accomplished by the corporation offering the mortgagee certain bonds in lieu of, or exchange for, the mortgage indebtedness.

Though the original mortgages have been satisfied the obligation to petitioner still exists. The debtor-creditor relationship persists as to both parties, that is, petitioner must look to the corporation for payment, and the original mortgagor must pay the corporation. We have but a substitution, or shifting, of liability rather than a dissolution of liability as contemplated in a payment.

The above is the substance of the transaction notwithstanding the recital in the “Mortgagee’s Consent To Take Bonds”, that the bonds will be accepted “to release all the claim * * * against said property”, and the fact that “discharges” were recorded. The latter we believe to be but a matter of form.

We have carefully considered the petitioner’s arguments based upon the theory that the corporation was acting in the place and stead of the mortgagors, but do not find ourselves in accord with this view.

No argument has been advanced, nor could any be successfully maintained, that petitioner’s interest in the mortgages was not a capital asset within the scope of section 117 (b). Obviously, the mortgages were property within the definition.

Accordingly, we hold the transaction to be within the terms of the statute as a “sale or exchange”, and the loss, therefore, a capital loss.

Decision will be entered for the respondent.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rude. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      *******
      40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years;
      * * * * * * *

       SEC. 117. CAPITAL GAINS AND LOSSES.
      *******
      (b) Definition of Capital Assets. — Por tbe purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with Ms trade or business), but does not include stock in trade of the taxpayer or other property of a Mnd which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.


author: Tyson:

text:
    Estate Planning Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82191, 83418.
    Promulgated February 25, 1938.

      Albert Eubschman, Esq., and Louis Goldring, Esq., for the petitioner.

      F. L. Van Haaften, Esq., L. H. Bushbrooh, Esq., and Donald P. Moyers, Esq., for the respondent.
   OPINION.

Tyson:

These proceedings have been consolidated. For the year 1932 respondent has determined a deficiency in income tax in the amount of $2,356.13. For the year 1933 respondent has determined a total deficiency of $3,998.61, consisting of income tax in the amount of $3,115.65 and excess profits tax in the amount of $882.96.

For both years the only assignment of error is the respondent’s disallowance of a claimed deduction of $24,000 as interest paid at 4 percent on a $600,000 bond issue of the petitioner. The respondent determined, for both years, that there were no tangible or substantial assets behind such bonds, that they were issued without consideration, and that the interest payments thereon were mere distributions of profits and not deductible from income.

The fundamental issue here is whether the bonds constituted an indebtedness within the meaning of section 23 (b) of the Revenue Act of 1932, reading in part: “All interest paid * * * on indebtedness.”

The petitioner was incorporated under the laws of the State of New York in October 1925, with its office to be located at Buffalo. It was authorized to issue a total of 100 shares of no par value for such consideration as might be fixed by the board of directors. It was authorized to issue its bonds, debentures, or obligations. On December 24,1928, there was filed in the office of the Secretary of State of New York a certificate of change of location of petitioner’s office to New York City, which certificate was executed on December 20, 1928, by Clinton Davidson as the holder of record of all of petitioner’s outstanding shares entitled to vote.

The minutes of a meeting of petitioner’s board of directors, consisting of Clinton Davidson and Flora S. Davidson, held on December 20, 1928, in New York City, set forth, inter alia, the ratification of the issuance of 30 shares of petitioner’s stock to Clinton Davidson and the direction that the amount of $180, incorporation expense and certain taxes paid by Davidson, be set up on the books as the consideration for the issuance of such shares and, further, that there had been presented to petitioner the following proposal:

December 20, 1928.
Tbe Estate Planning Corporation,
60 Wall Street,
New York, N. Y.
Gentlemen:
I hereby offer to transfer to yon tbe business carried on by me in tbe City and State of New York as a financial and estate planning advisor and life insurance broker, together with such of tbe assets and good-will of said business and subject to such liabilities as of September 1, 1928 as are shown by the statement submitted herewith, the business carried on by me since that date to be taken as carried on for the benefit of the corporation. The price is $600,000, and I offer to accept in payment therefor the debenture bonds of the corporation for that amount bearing interest from September 1, 1928 at the rate of 4% per annum payable quarter-annually on the first days of March, June, September and December in each year until the principal sum shall have been fully paid. Said bonds to be due September 1, 1948 subject to tbe right of tbe corporation to redeem tbe same wholly or in part at par and accrued interest at its option in advance of said date and to contain such other terms and conditions as may be agreed upon between us.
Tours very truly,
[Signed] Cunton Davidson.

The same corporate minutes further set forth that petitioner was organized for the purpose of taking over the business carried on by Davidson, the acceptance of Davidson’s offer, and the authorization for the issuance of petitioner’s bonds to Davidson, and also set forth a resolution that Clinton Davidson be employed as general manager of petitioner from September 1, 1928, to December 31, 1929, and that “all commissions allowed him by Insurance Companies on initial premiums of policies written during that period to be turned over by him to the Company, but that he may retain the right to any and all renewal commissions on such policies and that he be paid no salary for the four months ending December 31, 1928 and a salary for the year 1929 of $20,400 payable monthly, to be in full for his services to the corporation in every capacity.”

In December 1928 petitioner issued to Clinton Davidson its debenture bonds, dated September 1, 1928, of a total face value of $600,000. Each of such bonds contains, inter alia, a promise to pay the principal sum of $10,000 on September 1, 1948, unless previously paid, and interest thereon at 4 per centum per annum and the express agreement that the payment of the principal and interest, whether due or past due, shall be in all respects subordinate to any and all claims against the company based on debts, obligations, or liabilities incurred by it in the regular course of its business.

Such bonds were issued by petitioner to Davidson for the latter’s business. Prior to 1932 the bonds were transferred by Davidson to himself as trustee of a trust established for the benefit of members of his family. The payments as interest during each of the years 1932 and 1933 as provided for in the bonds were made by petitioner to Davidson as trustee.

During the years 1932 and 1933 the petitioner paid no salary to Clinton Davidson, its president, and no deduction was claimed on its returns for those years as “Compensation of Officers.” The tax returns for those years describe petitioner’s business as “Planning Investments and Distribution of Estates” and set forth petitioner’s balance sheets, which disclose total assets in the amounts of $592,-286.60 and $596,812.39, respectively, including therein the amount of $515,564.86 as good will, and the liabilities set forth include bonds $600,000 and common stock $1,000. The petitioner’s capital stock tax return for 1933 shows common stock, 50 shares no par value, $1,000, and a declared value of $40,000 on which, a capital stock tax of $40 was paid.

The petitioner contends that the sole question presented for determination by this Board is whether the certificates issued by petitioner to Clinton Davidson in December 1928 in the face amount of $600,000 were in fact bonds or preferred capital stock, and cites Commissioner v. O. P. P. Holding Corporation, 76 Fed. (2d) 11, affirming 30 B. T. A. 337, as a case involving the identical question on similar facts and therefore determinative of whether the payments here involved constituted interest and were deductible as such.

In the O. P. P. Holding Corporation case, supra, it was held that the certificates there in question were not in the nature of preferred stock, but were bonds in both form and substance and created a debtor-creditor relation so that the interest paid on such bonds was deductible from the O. P. P. Holding Corporation’s gross income. The bonds of the O. P. P. Holding Corporation were issued as the larger part of the purchase price paid for Oneida Co. stock and, in effect, the court further held that such stock had a value substantially equal to the total amount of the consideration paid therefor.

Upon consideration of the characteristics of the certificates issued by petitioner to Davidson in December 1928, and upon applying the reasoning in Commissioner v. O. P. P. Holding Corporation, supra, we conclude that, in form, such certificates were bonds. Also see Helvering v. Richmond, Fredericksburg & Potomac Railroad Co., 90 Fed. (2d) 971, affirming 33 B. T. A. 895, and Commissioner v. Proctor Shop, Inc., 82 Fed. (2d) 792, affirming 30 B. T. A. 721.

However, in our opinion, this proceeding presents not merely the question of whether the certificates constitute bonds, as contended by petitioner, but the further and more fundamental one of whether or not any legal consideration passed from Davidson to the petitioner for the issuance to him of the bonds. The respondent has determined that the $600,000 face value bonds issued by the petitioner to Davidson in December 1928 were issued without any consideration, and he contends that consequently there was no “indebtedness” of the petitioner to the holder of its bonds within the purview of section 23 (b) of the Revenue Act of 1932.

If no consideration passed, then, under former decisions of this Board and the courts, the interest paid on the bonds was not deductible from the gross income of petitioner as “interest paid * * * on indebtedness” within the meaning of section 23 (b), supra.

In Simon Benson, 9 B. T. A. 279, it was held that notes which were the subject of gifts, and without legal consideration, did not create enforceable debts and the interest provided for therein and paid by the donor was not deductible as “interest paid * * * on indebtedness” within the meaning of a section of the applicable revenue act identical with section 23 (b), sufra. Cf. Gilman v. Commissioner, 53 Fed. (2d) 47, affirming 18 B. T. A. 1277.

In Eugene C. Eppley, 25 B. T. A. 300, it was held that payments made as interest under a void contract were not deductible as interest, because the contract did not create an indebtedness within the meaning of the applicable revenue act.

In Sand Springs Railway Co., 21 B. T. A. 1291, it was held that where bonds were issued by a corporation without consideration and such bonds were not held by a purchaser in good faith for a valuable consideration the amounts paid by the corporation as interest on such bonds were not deductible as “interest”, since there was no enforceable indebtedness.

We think that cited authorities establish the principle that payments made as interest are not deductible from gross income unless made upon obligations supported by a legal consideration.

Our inquiry then becomes, Did Davidson pay to petitioner a legal consideration for the issuance to him of its bonds ?

Petitioner’s corporate minutes of December 20, 1928, recite that bonds in the amount of $600,000 were to be issued to Davidson for the transfer to petitioner of Davidson’s business as financial and estate planning adviser and life insurance broker, together with such of the assets and good will of said business and subject to such liabilities “as are shown by the statements submitted herewith.” The statement of the assets and liabilities mentioned is not in evidence and other than the above recitations in the minutes there is no evidence as to the character of the business transferred, or its value, except the testimony of Davidson himself on direct examination as follows:

Q. To whom were the bonds issued, Mr. Davidson?
A. They were issued to me.
Q. For what were they issued?
A. For my business, which was worth more than the amount of the bonds.

This evidence is not sufficient, in our opinion, to establish the fact that a legal consideration passed from Davidson to petitioner for the bonds. Whether or not Davidson’s business, as a fact, possessed any value is a vital one in this proceeding and “is a fact to be established as are other facts in dispute. It is not a sufficient showing for petitioner to say” that his business had value. “Such a characterization, standing alone, proves nothing. The taxpayer must give us the facts on which he predicates the conclusion and these facts must bring to the Board a conviction that the petitioner’s conclusion was correct.” M. Rea Gano, 19 B. T. A. 518, 528.

That further pertinent facts as to the character of the business transferred and its value could have been adduced is evidenced by the following testimony on redirect examination of Davidson, given immediately after he had testified that “The written agreement is contained in these minutes which was signed by me.”

Q. Was there any oral agreement other than this written agreement?
A. No.
Q. Is there any other facts in connection with it that yon have personal knowledge of, that will clarify this agreement?
A. There are plenty of facts as to why I sold the business at that price, and why the corporation was willing to pay that price. There are plenty of facts in regard to that
Q. Never mind that.

The petitioner has failed to establish error in the respondent’s prima facie correct determination that petitioner’s bonds were issued for no consideration. Upon such determination of fact and the application thereto of the principle established by certain of the above cited authorities, the respondent’s disallowance of the claimed interest deduction is approved.

Decision will be entered for the respondent.


author: Aenold :

text:
    E. P. Raymond, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86251.
    Promulgated February 25, 1938.

      Howard O. Bede, O. P. A., for the petitioner.

      E. O. Adams, Esq., for the respondent.
   OPINION.

Aenold :

In order for the petitioner to meet the requirements of the statute the loss must have actually been “sustained.” Section 23 (e) of the Revenue Act of 1932; Alfred, Hafner, 31 B. T. A. 338; Forbes v. Commissioner, 62 Fed. (2d) 571. This requires proof of disposition by sale or exchange, or of some “identifiable event” establishing worthlessness. Howard v. Commissioner, 56 Fed. (2d) 781; Commissioner v. R. J. Darnell, Inc., 60 Fed. (2d) 82; Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85; Gowen v. Commissioner, 65 Fed. (2d) 923; certiorari denied, 290 U. S. 687. Proof of mere shrinkage in value will not suffice. Daniel J. Byan, 19 B. T. A. 52.

Petitioner argues that the common stock owned by him in the old company had no value on August 25, 1933, that under the plan of reorganization the common stock was wiped out and the only thing he received in place of the stock was an option to purchase an equivalent number of shares of the new corporation at $115 per share, and that said option is not “securities” within the intent or meaning of that word as used in section 112 (b) (3) of the Revenue Act of 1932. The parties at the hearing conceded there was a reorganization.

We are satisfied that the transaction by which the petitioner surrendered his stock in the old company and received rights or options to purchase stock in the new company was a “reorganization” within the meaning of the statute. Counsel’s opening remarks at the hearing and the petitioner’s exhibits indicate that there was a statutory reorganization. The petitioner, however, argues that the provisions of section 112 (b) (3) are inapplicable because his option to purchase shares in the new corporation does not fall within the statutory term “securities.”

With, this we are unable to agree. The books are replete with definitions more than broad enough to include the right which petitioner received within the meaning of the word “securities.” The definition of a security in Webster’s New Intei'national Dictionary is, “An evidence of debt or of property, as a bond, stock certificate, or other instrument, etc.; a document giving the holder the right to demand and receive property not in his possession.” This petitioner exchanged stock in the old corporation pursuant to the plan of reorganization which was introduced in evidence as Exhibit 2. An integral part of said plan is the section thereof entitled “Issuance and Distribution of New Securities”, which specifically provided for the issuance of (a) common shares of the new corporation, (b) options to purchase common shares of the new corporation for $115 at any time (without limit), and (c) options to purchase common shares of the new corporation for $155 on or before December 31, 1942. The aforesaid securities, as denominated by the plan of reorganization, were to be exchanged for the outstanding preferred and common stock of the old company and options to purchase stock in the old corporation. In view of these circumstances we are of the opinion that the right or option which petitioner acquired in exchange for his stock falls squarely within the accepted definition of “securities” and also within the spirit and intendment of the reorganization provisions of the statute. Cf. Daniel H. Burnham, 33 B. T. A. 147; affd., 86 Fed. (2d) 776; certiorari denied, 300 U. S. 683.

As was said by the court in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599, “The word, ‘securities’ was used [in 203 (e)] so as not to defeat the exemption in cases where the interest of the transferor was carried over to the new corporation in some form.” The “form” in which this petitioner’s right “was carried over to the new corporation” was the right, unlimited as to time, to demand the issuance to him of 100 shares of stock of the new corporation at $115 a share, a right which we have already said yielded him $107 in the following year.

This case is distinguishable from Estate of C. T. Grant, 36 B. T. A. 1233, and the case of Union C. DeFord, 19 B. T. A. 339, as in each of those cases the old stock was found and determined to be worthless in the taxable year and the right to participate in the new corporation was found to be without value. Such is not the case here.

In addition to the foregoing considerations we are of the opinion that we would be forced to the same conclusion because of the prima facie presumption of correctness that attaches to the respondent’s determination. In order to overcome this presumption of correctness the petitioner must adduce evidence showing the worthlessness of his investment. Petitioner testified that he considered Ms investment only “practically” worthless in the taxable year; he did not testify that his investment was worthless. He alleges in his petition that he sold his rights in 1934 for $107, which is certainly adverse to his contention that the rights were worthless in 1933. Furthermore, petitioner submitted no evidence that the balance sheets in his exhibits fail properly to reflect the financial condition of the old and new company. In our opinion these exhibits substantiate the respondent’s determination that the petitioner’s investment had some value during the taxable year.

For the above and foregoing reasons we are of the opinion that the respondent’s determination must be approved.

Judgment will be entered for the respondent.

       Sec. 112 (b) (3). * * * No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.


author: Disney ; Murdock, Van Foss an,

text:
    Frank C. Paine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81606.
    Promulgated February 25, 1938.

      John W. Townsend, Esq., and Joseph Wig gin, Esq., for the petitioner.

      Thomas F. OaTlaha/n, Esq., for the respondent.
   OPINION.

Disney ;

The question as to the bona fides of the sale should first be considered. There is conflict of evidence in this regard. Respondent stresses the facts that the sale was made by petitioner’s third cousin, a member of a firm of stockbrokers, that although the stock was sold for $10, the expenses of the sale were $48.50; that the stock was purchased by this third cousin (for his wife) and that later, in 1933, the petitioner purchased more stock in the New England Boat Co., buying 25 shares at $100 per share, and that the purchaser in 1933 received $510 as a liquidating dividend. These circumstances do cast doubt upon the bona fides of the sale. Nevertheless, we believe that the petitioner has shown such bona fides. The stock did not again vest in petitioner. The sale to the wife of a distant relative obviously does not negative bona fides. Although less was received from the stock than the expenses of the sale, yet the sale was at public auction, and the petitioner might have received more than the expenses of sale. The acquisition of stock later in 1933 is shown to have been in effect an advancement of money for expenses, rather than a real sale of stock, this being done by the petitioner and others interested in the success of the Yankee. The stock sold in 1930 passed completely out of the ownership of the petitioner. We are of the opinion and hold that the sale was bona fide.

Is petitioner entitled to a loss upon the sale of the stock either as a loss incurred in trade or business, or as one taken upon a transaction entered into for profit ? He does not contend that the matter be considered an ordinary and necessary business expense as such. The statute relied upon, section 23 (e) (1) and (2) of the Revenue Act of 1928, is set forth in the margin.

We shall first examine the matters here presented as to whether they show a loss incurred in a transaction entered into for profit. The petitioner at the outset concedes that the New England Boat Co. was not engaged in a business venture or enterprise and that its purposes and activities constituted a sporting and not a business venture; but he takes the view that his connection therewith is not determined by the character of the activities of the New England Boat Co. In this we think he is correct, for he might have a valid business and profit-seeking connection with the New England Boat Co., though the company itself was engaged in sport. The question just here is as to the nature of petitioner’s individual activity in the matter, as to whether to him it was a transaction entered into for profit. He concedes and testified that he did not expect to make a profit from the sale of the stock of the New England Boat Co.; that he did not expect any ordinary dividends, though he did expect liquidating dividends; that he expected to take a loss of from $25,000 to $50,000 on the deal; and that he was willing to invest that amount in that form of advertising.

The taking of a loss does not negative the idea of a profit transaction ; but the expectation of profit must be present. Samuel Riker, Jr., Executor, 6 B. T. A. 890. In the face of the positive evidence of petitioner himself that he expected to take a loss of a minimum of $25,000, there is no room for a conclusion that there was any expectation of profit. Using the words “any transaction entered into for profit” in their usual and generic sense (Heiner v. Tindle, 276 U. S. 582; Helvering v. Midland, Mutual Life Insurance Co., 300 U. S. 216), they force the conclusion, when applied to petitioner’s testimony, that the transaction here was not entered into for profit. It will not do to say that in some indirect manner it was hoped that this transaction, though in itself expected to be a loss, would ultimately benefit the petitioner by way of enhanced reputation. Practical considerations of taxes require that direct effects be considered here.

We hold that the transaction here does not fall under the category of transactions entered into for profit. Even if hope of ultimate benefit by enhancement of reputation were considered as making the transaction one entered into for profit, petitioner here has not shown loss, for, since the profit was not expected directly in the New England Boat Co. stock, it necessarily must have been expected, if at all, in the benefit to business by enhancement of reputation — and the record plainly proves such enhancement of reputation, instead of loss in that respect.

The same considerations largely dispose of petitioner’s second contention, that there was loss “incurred in trade or business.” If we assume for a moment that the transaction was within petitioner’s trade or business, it must be because of including within that term a transaction in indirect advertising for the ultimate benefit of the trade or business, for petitioner was not in the business of purchase and sale of corporate stocks. The same logic which prompts a contention that cost of such advertising to enhance reputation is a part of the business dictates that favorable result from such advertising means, to some extent at least, gain, and not loss, in business. Petitioner on brief argues there is here considered “a business promotional plan, somewhat in the nature of advertising.” Since the record shows to an indefinite, but at least considerable degree, actual enhancement of reputation, it can not be said that such business promotional plan, in the nature of advertising, has resulted in a loss to petitioner. Petitioner may have realized enhanced reputation of value more than the investment or loss in stock.

We think the very difficulty of evaluating profit or loss in such an intangible as necessarily enters into consideration here indicates well that such advertising expense is to be dealt with as business expense or capital expenditure, and not as a transaction entered into for profit or in trade or business. We have held that in case of extraordinary expenditure for advertising, resulting in benefit to a business in the year of expenditure as well as subsequent years, such expenditure is properly to be regarded as capital investment as to the future years and in part as current operating expense properly chargeable against current income, and that proper allocation must be shown by the petitioner. Colonial Ice Cream Co., 7 B. T. A. 154; Richmond Hosiery Mills, 6 B. T. A. 1247; affd., 29 Fed. (2d) 262; Northwestern Yeast Co., 5 B. T. A. 232. Petitioner presents no such allocation here, and, as above seen, he does not ask that the matter be treated as one of business expense. In Welch v. Helvering, 290 U. S. 111, the Supreme Court affirmed the Circuit Court (63 Fed. (2d) 976) and the Board, 25 B. T. A. 117, which sustained the Commissioner’s ruling that payments made by an individual of debts of a bankrupt corporation with which he had been associated, in order to reestablish his relations with customers and to solidify his credit and standing, were not deductible as ordinary and necessary expenses and were “rather in the nature of capital expenditures, an outlay for the development of reputation and good will.” The Supreme Court said: “Reputation and learning are akin to capital assets, like the good will of an old partnership.” We hold that petitioner has not shown loss incurred in trade or business.

We find a deficiency in the amount determined by the respondent, which deficiency has been paid.

Reviewed by the Board.

Decision will he entered for the respondent.

Murdock,

concurring: I think that Paine entered into the transaction for profit. The profit which he expected was to come from enhanced reputation in his business as a naval architect rather than from dividends or increased value of the stock. However, the record does not show that loss resulted from the expenditure, viewed as that kind of a transaction.

Van Foss an,

dissenting: On the facts found I am unable to follow the logic of the opinion of the Board that denies the deduction. It seems to me such a result can be reached only by a confusion of terms and a misapplication of definitions. I think petitioner is entitled to prevail.

       SEC. 23. DEDUCTIONS EROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      (e) Losses ly individuals— In the case of an individual, losses sustained during the taxable year and not compensated lor by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit though not connected with the trade or business.


author: Harp.on :

text:
    Old Colony Trust Company and Everett Morss, Jr., Executors of the Will of Everett Morss, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82769.
    Promulgated March 2, 1938.

      W. ¡S. Felton, Esq., for the petitioners.

      H. F. Noneman, Esq., for the respondent.
   OPINION.

Harp.on :

The question involved in this proceeding is whether $40,000 received by beneficiaries of the decedent is taxable as an asset of the estate or whether it is properly excluded from the value of the gross estate as insurance received by beneficiaries under policies taken out by the decedent upon his own life being not in excess of $40,000 so as to be within the exemption allowed by section 302 (g) of the Revenue Act of 1926.

Section 302 (g) of the Revenue Act of 1926 provides as follows:

Seo. 302. 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— '
* SÜ * * * * *
(g) * * * and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

In order to properly determine the principal question involved, it is necessary to consider a collateral question, namely, whether the agreement entered into between the decedent and the Sun Life Assurance Co. of Canada on August 27, 1928, was a contract of life insurance so that the $40,000 paid to decedent’s survivors by that company was received by them “as insurance under policies taken out by the decedent upon his own life.” Petitioners contend that the agreement was in part a contract of life insurance and argue that a contract which provides for the payment of a certain sum of money upon death is, in that respect, a contract of life insurance although the contract contains other provisions having nothing to do with life insurance. They contend that the type of agreement involved in this proceeding was commonly written at the time by numerous insurance companies, the consideration paid for the issue of such contract being customarily apportioned by an actuarial allocation.

The respondent contends that the agreement was not a contract of life insurance so that the proceeds, $40,000, paid to the decedent’s survivors were not- insurance proceeds and therefore that the entire amount thereof is properly included in the decedent’s gross estate. Respondent contends, in substance, that the contract was in fact an annuity contract although he points ’out that it is difficult to find a single term which accurately describes the contract. He suggests that the contract has some of the characteristics of a trust.

We are of the opinion that the contract made by the decedent was not a contract of life insurance. This seems evident from reading the contract. Further, there is no evidence that decedent applied for life insurance or submitted to the usual physical examination. The company appears to have been unconcerned with the element of life expectancy or physical condition, even though decedent was 63 years of age at the time he made the contract. The single payment in the amount of $42,000 does not appear to have been a “premium” for life insurance. It was not consideration given for an agreement to indemnify against the loss of life nor does the amount of the payment appear to have been proportioned to any life insurance risk. Cf. People, ex rel. Metropolitan Life Insurance Co. v. Knapp, 184 N. Y. S. 345; affd., 132 N. E. 916; Commonwealth v. Metropolitan Insurance Co., 254 Pa. 510; 98 Atl. 1072; Ritter v. New York Mutual Life Insurance Co., 169 U. S. 139.

Decedent paid a single sum of $42,000 to the company. The company agreed to several matters: To pay “the annuitant” the amount of $1,400, annually, for life, to be increased by such dividends as may be allotted by the company out of its surplus interest earnings; to pay to the annuitant or his assigns the principal sum of the contract, $40,000, at any time upon surrender of the contract; to pay to the beneficiaries of the annuitant at least the principal sum of $40,000 upon proof of death of the annuitant or a sum equal to the premium paid, $42,000, less the sum of all annuity payments made under the policy. It is noted that the amount of the annuity agreed to be paid, $1,400, is 3ys percent of the amount paid, $42,000. Thus it appears that the company guaranteed to the annuitant a return of 3y3 percent on the total amount paid to the company and a return of at least the principal amount of $40,000 either to the annuitant or his assigns during his life, on surrender of the “policy”, or to his beneficiaries upon his death. It further appears that the death of the annuitant operated to terminate the contract rather than cause an insurer’s obligation to become payable. The company had an obligation at all times to pay the principal sum set forth in the contract conditioned only on the surrender thereof. Death of the annuitant was not the sole contingency for payment of the principal sum. The contract was described on its face as a “Life Annuity With Principal Sum Payable at Death.”

An annuity contract is defined as an “agreement to pay a specified sum to the annuitant annually during life” in consideration of a single payment, which is not a “premium.” 3 Corpus Juris Secundum 1375; Commonwealth v. Metropolitan Life Insurance Co., supra; Carroll v. Equitable Life Assurance Society of United States, 9 Fed. Supp. 223; Rishel v. Pacific Mutual Life Insurance Co., 78 Fed. (2d) 881. We believe the contract under consideration is an annuity contract within the definition set forth above. The term “annuitant” is used throughout. Neither the terms “life insurance” or “insurance” or “insured” appear anywhere in the contract.

Counsel for petitioners argues that the contract was in part a contract of insurance. He would have us consider how reserves against the principal sum were set up. This factor appears to be immaterial because the method of handling reserves would not be wholly determinative of the question whether the contract was an insurance contract. It is true that the company set up reserves against the liability it assumed. It undertook some risk when it guaranteed payments of annuity and repayment of at least the principal sum of $40,000. But we think this was purely an investment risk related only to management in investing the fund. There is no evidence from examination of the contract that the company assumed any of the risks of life insurance. As stated before, the agreement to pay the principal sum of $40,000 was not contingent upon death but only upon demand and surrender of the contract. We do not believe that the provision made in the contract to pay the principal sum to the annuitant’s beneficiaries upon his death, in the event he did not make any demand for payment during his life to himself or his assignees, injected any aspect of life insurance into the contract. The provision was no more than one for disposition of a fund reserved to the annuitant under a contract that guaranteed payment of a principal sum, the consideration for which was the payment of a single sum. Cf. Guaranty Trust Co. of New York, Executor, 16 B. T. A. 314; Ballou v. Fisher, 61 Pac. (2d) 423. The decedent paid $42,000 to the company. Of this amount at least $40,000 and so much more of the amount paid as was not received in annuity payments “remained virtually at his disposal, use and control as long as he lived and passed at his death to the beneficiaries he named.” Cf. In re Thornton's Estate, 243 N. W. 389, 391. Such contracts are not insurance policies. In re Thornton's Estate, supra.

The petitioners deny tax liability upon the amount of $40,000 paid pursuant to the contract under consideration upon the assertion that section 302 (g), Revenue Act of 1926, exempts the receipt of that payment from taxation. The exemption referred to is one of legislative grace and the wording of the statute must be carefully considered. Congress has used clear terms in describing the nature of the asset it relieves from estate taxation and has stated it to be $40,000 “of the amount receivable by * * * beneficiaries as insurance under policies taken out by the decedent upon his own life." • (Italics supplied.) The decedent, in this proceeding, did not take out a policy of insurance on his own life when he executed the annuity contract here involved. Therefore the payment of $40,000 thereunder to the beneficiaries he designated was not, in our opinion, received by them as insurance. We therefore hold that respondent is correct in including the amount of $40,000 in the gross estate.

The petitioners are entitled to credits for amounts paid for estate, inheritance, or succession taxes to any state upon proof of payment. In computing the correct tax liability under Rule 50 consideration should be given to allowable credits under section 301 (b).

Decision will be entered umder Bule 50.


author: Sternhagen :

text:
    Pittsburgh Brewing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 83386, 88626.
    Promulgated March 3, 1938.

      Aaron Holmam.., Esq., and I. Newton Brozan, Esq., for the petitioner.

      Edward A. Tonjes, Esq., and H. P. Miller, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner complains of three errors charged to the respondent in the determination of the deficiencies for the fiscal years 1933 and 1934. These, however, all turn upon the proper use or recognition to be given to the depreciation of petitioner’s several plants in the years beginning 1920. The depreciation actually accounted for by the petitioner and deducted on its annual returns was computed without regard to such obsolescence as in 1918 and 1919 was properly attributable to the Prohibition Amendment, which became effective January 29, 1920. See Burnet v. Niagara Falls Brewing Co., 282 U. S. 648. Notwithstanding the fact that the petitioner had pending a claim with the Commissioner for large deductions in those years because of such obsolescence, its depreciation was computed, accounted for, and deducted irrespective, of such obsolescence. The depreciation deductions taken on the returns were not disputed by the Commissioner, and remained throughout all the prohibition years undisturbed. During the years 1920-1925, the depreciation deductions were substantial and applied to both the operating and inactive plants; after 1925, depreciation was no longer either recognized on the accounts or taken in the returns in respect of the nonoperating plants. The petitioner now claims that the recognition by the stipulation of 1932 of prohibition obsolescence for the years 1918 and 1919 requires a reduction pro tanto of the depreciation base of its plants, a reduction in the depreciation of all of the intervening years, and a higher remaining base at the beginning of 1933 which mathematically results therefrom. Essentially, therefore, the question is whether the petitioner’s base for 1933 and 1934, both for depreciation and for the computation of its gain upon properties sold, shall be computed with reference to the depreciation some, times actually deducted and sometimes properly deductible on its returns for prior years, as the respondent contends, or with reference to a corrected intervening depreciation computed as if the stipulated obsolescence deduction had actually been used in 1918 and 1919 anch recognized thereafter.

The petitioner constructs an elaborate argument upon the Supreme Court’s discussion of the general principles of depreciation in United States v. Ludey, 274 U. S. 295. That opinion involved a consideration of the Revenue Act of 1916, and the Court held that in the absence of an express statutory provision, “Congress doubtless intended” that the basis for determining the gain from the sale of a wasting asset should be determined upon a cost reduced by the depreciation sustained. The legislative intent in that case had not been expressed in the statute, and the Court was therefore required to make a judicial inference. Cf. Burnet v. Thompson Oil & Gas Co., 283 U. S. 301. But the present case is controlled by the Kevenue Act of 1932, which, in section 113 (b) (1) (B), provides that adjustment of the basis for gain or loss upon the sale of property shall in all cases be made “in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws.” There is no room for doubt, therefore, that the basis for gain or loss as well as the basis for future depreciation (which are identical, section 114 (a), Kevenue Act of 1932), must be adjusted by the intervening deductions allowable by law or any greater allowances which may in fact have been taken. Thus Congress has foreclosed any discussion of a theoretical computation of depreciation which might have been provoked by the opinion in the Ludey case.

The petitioner, however, points to the fact that the depreciation1 deductions taken by it upon its earlier returns were wholly ineffective because its losses otherwise determined exceeded its gross income. Since, therefore, no tax was due from it in any event, the petitioner argues that no depreciation deductions have been “allowed”, and hence the provision of 113 (b) (1) (B) is beside the point. This contention is not new. It has been considered and rejected, Hardwick Realty Co. v. Commissioner, 29 Fed. (2d) 498; dismissed, 279 U. S. 876; Franklin Lumber & Power Co., 18 B. T. A. 1207; 50 Fed. (2d) 1059. In United States Trust Co. of New York et al., Trustees, 31 B. T. A. 54, the Board said:

* * * If deductions for exhaustion, wear, and tear have been allowable in respect of such property since its acquisition by the taxpayer, all of those deductions must be used to diminish the basis. Cf. United States v. Ludey, 274 U. S. 295; Fidelity-Philadelphia Trust Co. v. Commissioner, 47 Fed. (2d) 36, affirming 18 B. T. A. 43. Thus it matters not that there was no income to be offset by the deductions allowable * * *.

If there were any doubt as to the legal effect of the statutory language, the intention is made clear by the discussion appearing in the Report of the Senate Finance Committee, set forth in the margin.

The evidence contains various mathematical computations of the parties and there seems to be no dispute as to the mathematical application of the principle which should be applied. There appears to be agreement as to the depreciation deductions actually taken and, therefore, to he regarded as allowed, during the period 1920-1925, and that these amounts are no less than the amounts properly allowable. There appears to be no disagreement as to the amounts which for the years 1926-1931 were properly allowable, although not in fact deducted, and also as to such amounts within this latter period as were in fact deducted and allowed. For 1932 the petitioner computed the depreciation upon its operating plant upon a basis reduced by the stipulated obsolescence. The principle of this is not disputed by the Commissioner.

In the respondent’s determination, however, appears a clear error. There was no composite depreciation used, and in a method of depreciating specific groups of assets there is no justification for applying the excessive amount computed as to one asset or group so as to reduce the basis of another. This the Commissioner has done, as shown by the findings, and the error must be corrected in a recomputation. It is manifest also that in such a system of specific depreciation the Commissioner may not reduce the basis of an asset in 1933 by applying an alleged figure of depreciation for a period prior to the acquisition of the specific asset in question. This error also must be corrected in a recomputation.

One of the results of the last mentioned error of the Commissioner is the occasion for the petitioner’s third complaint. The insurance of $1,500 received by the petitioner as a result of the Keystone fire has been treated by the Commissioner as income in its entirety because the Keystone plant appeared by his computation to have been entirely exhausted by depreciation. Such apparent complete exhaustion was, however, only the result of improperly applying depreciation of other properties to the Keystone plant. But at the time of the receipt of the insurance, the Keystone plant was not yet fully depreciated, and the insurance received should properly be applied against the remaining undepreciated base. No part of it is to be included in the petitioner’s income for the taxable year..,

In summary, it results from this opinion that a recomputation should be made in which the basis of petitioner’s properties in 1933 and 1934, both for the current deductions for depreciation and for the determination of gain upon such properties as were sold, shall be found by applying against the cost or properly adjusted basis all of the deductions taken by the petitioner on its returns, but not less than the amounts properly allowable where no deductions were actually taken; that such deductions are to be applied only against the specific assets depreciated and may not be shifted to other assets; that no depreciation for the purpose of reducing the basis in 1933 and 1934 may be recognized for any period prior to the acquisition of the specific asset in question; and that the Keystone insurance is to be applied to reduce the basis properly computed as above set forth and not to be treated as additional income.

The stipulation as to the allowance of petitioner’s bad debt deduction should be taken into account in the recomputation.

Judgment will be entered under Buie SO.

       Section 113 (b) (1). Adjusted Basis
      * ******
      In subparagraph (B), relating to depreciation, etc., for tbe period since February 28, 1913, tbe bill requires that adjustment be made “to the extent allowed (but not less than the amount allowable)” instead of “by the amount * * * allowable” as in the prior act. The Treasury has frequently encountered cases where a taxpayer, who has taken and been allowed depreciation deductions at a certain rate consistently over a period of years, later finds it to his advantage to claim that the allowances so made to him were excessive and that the amounts which were in fact “allowable were much less. By this time the Government may be barred from collecting the additional taxes which would be due for the prior, years upon the strength of the taxpayer’s present contentions. The Treasury is obliged to rely very largely upon the good faith and judgment of the tax payer in the determination of the allowances for depreciation, since these are primarily matters of judgment and are governed by facts particularly within the knowledge of the taxpayer, and the Treasury should not be penalized for having approved the taxpayer’s deductions. While the committee does not regard the existing law as countenancing any such inequitable results, it believes the new bill should specifically preclude any such possibility. Your committee has not thought it necessary to include any express provision against retroactive adjustments of depreciation on the part of the Treasury as the regulations of the Treasury seem adequate to protect the interests of taxpayers in such cases. These regulations require the depreciation allowances to be made from year to year in accordance with the then known facts and do not permit a retroactive change in these allowances .by reason of the facts developed or ascertained after the years for which such allowances are made. * * * [Report No. 665, 72d Cong., 1st sess., p. 29.]


author: Muedock :

text:
    Irving M. Day, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83054.
    Promulgated March 3, 1938.

      Nathan F. George, Esq., for the petitioner.

      I. Tullar, Esq., for the respondent.
   OPINION'.

Muedock :

The Commissioner has disallowed the loss for the reason that in his opinion the petitioner made a gift of 100 shares of the stock to each of his four children. The petitioner has attempted to show that he sold the stock to a third party and his children purchased the stock from that third party. It is apparent from the testimony that Charles H. Jones & Co., the third party, acted only to accommodate tlie petitioner, and received the stock only for the limited purpose of immediately transferring it to the petitioner’s children. It acted in accordance with its prior agreement with the petitioner, which agreement also fixed its compensation. A valid sale may be made to a purchaser which, at the time of purchase, has contracted to sell to another, but where, as here, the entire agreement is between two parties, essentials of a sale may be missing. The petitioner furnished the money to be used in the transaction. His daughter could not have used that money for any other purpose. The petitioner never received any consideration for the stock. He never intended to receive any. The determination to have the children acquire the stock was his, not theirs. They never had any dealings with Charles H. Jones & Co. The petitioner gave the order to buy and sell. The evidence does not indicate that Charles H. Jones & Co. was in law a purchaser of the stock. The introduction of that firm was to color the gift in order to make it look like a sale. The essentials of a bona fide sale are missing. The transaction was not a sale but was, as determined by the Commissioner, a gift. The petitioner did not realize a loss which was deductible for income tax purposes. Cf. Joseph Blumenthal, 30 B. T. A. 125; Slayton v. Commissioner, 76 Fed. (2d) 497.

Decision will be entered for the respondent.


text:
    Grauman’s Greater Hollywood Theatre, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86728.
    Promulgated March 9, 1938.

      Arthv/r F. Driscoll, Esq., and T. Newman Lawler, Esq., for the petitioner.

      Philip M. Olark, Esq., and Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Sternhagen :

For the calendar year 1933 the Commissioner determined a deficiency of $15,204.33 in petitioner’s income tax and $5,216.35 in excess profits tax. Of several adjustments petitioner assails only the determination that its net income for 1933 includes $158,898.81, which is the total of a four-year accumulated reserve of “rent received in advance.” The facts are not in dispute and for the purpose of decision can be briefly summarized,

By a sublease made in June 1929, petitioner was entitled to receive from the sublessee annual rent in annually decreasing amounts, which for the entire term would average $111,049.92. The amount received in each of the earlier years was in excess of this average, and this excess it treated as advance rent and accounted for it as such on its books. On its income tax returns it reported $111,049.92 as rent in its gross income, and clearly showed the excess in its balance sheet as “Bent Beceived in Advance”, accumulating the amount year after year. This omission from its gross income of part of the amount received as rent was unquestionably incorrect, for the taxpayer received it without qualification or restriction, and no self-imposed label gave it right to postpone its recognition as taxable income. C. H. Mead Coal Co., 31 B. T. A. 190.

But despite the plain disclosure of the error on the returns, the Commissioner made no correction, and the statutory period of limitation was permitted to expire against any deficiencies which might have resulted from the omissions. There is no reason in the record to doubt that the taxpayer’s error was artless. It is reasonable to believe that a taxpayer could be intelligent and yet not sophisticated enough in the income tax to realize the mistake. Indeed the acceptance by the Bureau of the return without itself recognizing that the manifest omission was erroneous bespeaks the good faith of the error.

In 1933, after four years’ accumulation of $158,898.81 of this so-called advance rent, the sublessee went bankrupt, and petitioner terminated the sublease and reentered the leased property. It then credited the accumulated amount to surplus. The Commissioner included the amount in 1933 income, and argues that the taxpayer is estopped to refute the inclusion.

The question is on all fours with Sugar Creek Coal & Mining Co., 31 B. T. A. 344, for there the taxpayer had guilelessly in prior years omitted royalty income from its return, and the Commissioner sought, because the statute of limitations had closed the prior and proper years, to include the omitted earlier income in a later year. It was held that this could not properly be done and that the taxpayer was not estopped to resist it. The Sugar Greek case was accepted by the Commissioner, XIV-1 C. B. 20, has been followed by the Board, Union Pacific Railroad Co., 32 B. T. A. 383, 392; Estate of William Steele, 34 B. T. A. 173, 175; Wobber Brothers, 35 B. T. A. 890, 892; and has been cited with approval by the courts. Salvage v. Commissioner, 76 Fed. (2d) 112; affd., 297 U. S. 106; Commissioner v. Union Pacific Railroad Co., 86 Fed. (2d) 637, 640.

The inclusion of $158,898.81 in petitioner’s income for 1933 is in error and is reversed.

Judgment will be entered u/nder Rule 50.


author: Aktjndell:

text:
    William M. Greve, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75686.
    Promulgated March 9, 1938.

      Lawrence, A. Baker, Esq., and Henry Ra/omel, Esq., for the petitioner.

      F. D. Strader, Esq., for the respondent.
   OPINION.

Aktjndell:

The facts in this case are quite similar to those in the case of Henry Wilson, 16 B. T. A. 1280. In that case the respondent sent a notice of deficiency by registered mail addressed to Mrs. Henry Wilson at 110 Market St., Oakland, California. She had never lived at that address, and the notice was returned undelivered to the respondent and was remailed by ordinary mail addressed to the petitioner at 110 Market St., San Francisco, California. The latter address was the business address of a partnership of which the petitioner’s husband was a member. The second letter, with its enclosures, was received by the petitioner. We held, on the facts in the Wilson case, that no statutory deficiency notice had been sent to the petitioner and that we had no jurisdiction. The opinion on the jurisdictional question reads as follows:

It is clear from tlie evidence that the address used by the Commissioner in the issuance of the original deficiency notice was not, and never had been, the residence or other address of the petitioner. Under several of our prior decisions such mailing could not be considered a compliance with the provisions of section 274 (a) of the Revenue Act of 1926, and consequently could not be considered a compliance with the provisions of, section 283 (a) of the same Act. See Walter G. Morgan, 5 B. T. A. 1035; Utah, Orpheum Co., 6 B. T. A. 343; Wyoming Central Association, 8 B. T. A. 1064; W. S. Trefry, 10 B. T. A. 134. The petitioner also calls attention in her brief to our decision in the case of Henry M. Day, 12 B. T. A. 161. This last decision is somewhat different from those previously cited, in that a deficiency notice was attempted to be delivered by hand, and we held that the method of notice provided by statute was exclusive, with the result that no other method, though it might be effectual in giving actual notice, could be deemed to be a compliance with the statute.
Since the original mailing did not under our decisions constitute such a notice as the statute contemplates, in that it was not mailed to the correct address, and since the second notice enclosing the first did not constitute a compliance with the statute in that it was not registered, it is apparent that no notice, either for the year 1922 or 1923, such as that provided for by statute, was ever sent to the petitioner. As a consequence, we must hold that there is no basis for a proceeding before this Board in the case of this petitioner for either of the years 1922 or 1923, and, being without jurisdiction, we dismiss the proceeding.

The reasoning quoted above is applicable here. The original mailing, having been directed to a wrong address, did not constitute a statutory notice of deficiency, and the second notice did not constitute a compliance with the statute in that it was not registered. There having been no statutory notice of deficiency, there was no basis for a proceeding before this Board, and, being without jurisdiction, we must dismiss the proceeding. Our memorandum opinion previously entered was based largely on the case of Corinne Porter Scruggs, Executrix, 29 B. T. A. 1102, in which the notice of deficiency, although not addressed to the proper person, was sent by registered mail as required by the statute and came into the hands of the petitioner. The facts in that case are readily distinguishable from those in this case and in the Wilson case, supra, and the conclusion reached in the Scruggs case, based on the facts therein, is not decisive of the question raised on the facts present in this proceeding.

Cases cited by the respondent are also distinguishable. In Commissioner v. New York Trust Co., 54 Fed. (2d) 463, the notice of deficiency was actually received by the taxpayer and no question of error in the notice was raised until the case came on for trial before the Board. In that case the trustee was “the taxpayer.” Some of the communications prior to the formal determination of a deficiency had been addressed by the Commissioner to the beneficiary in care of the trustee and some to the trustee. All, including the deficiency notice, were directed to the correct address of the trustee and were received by it. The court pointed out that “the notice of deficiency was not only received by the taxpayer, but it apparently was fully understood as referring to the liability of the trust company as trustee for this beneficiary.” In its petition in that case the trustee raised no question as to the adequacy of the deficiency notice or as to jurisdiction. The court toot the. view that the filing of the petition was in effect a general appearance by which the petitioner, by invoking jurisdiction, waived any defect in the notice. It was held that under the facts there the taxpayer would not be permitted to change its position in an effort to prevent the collection of the tax. We need not here pass on the matter of whether a taxpayer can waive defects in a notice and thereby confer jurisdiction. It is plain that in this case there has been no waiver. The Commissioner was put on notice of error in his deficiency letter when the postal authorities were unable to deliver it. He was given further notice of his error and also notice that there was no waiver of the error when Baker returned the letter to the Commissioner. These matters occurred within the statutory period and the Commissioner then had ample time to send a proper notice. No change of position can be charged against this taxpayer. He has maintained at all times that there was no proper notice of deficiency. Nor can it be said that he entered a general appearance. His petition stated the facts on which he claimed a lack of proper notice and specifically raised the question of jurisdiction. This method of procedure is in effect approved in the case of Hulburd v. Commissioner, 296 U. S. 300, affirming 21 B. T. A. 1123. There the Commissioner sent a notice of transferee liability to the estate of a decedent without having first made a determination against the decedent, who was the transferee. The propriety of the determination against the estate, rather than the decedent, was questioned in the petition filed with the Board. The petition so filed was pointed to by the Supreme Court, which said that when such a protest was made “the remedy available to the Commissioner was obvious and ample.” The opinion reads in part:

* * * In such circumstances, the cases cited by the government, where a formal defect has been ignored in circumstances tending toward an inference of waiver or estoppel [Commissioner v. New York Trust Co. (C. C. A.) 54 Fed. (2d) 468; * * *], have no relation to the case at hand. We are not required at this time to approve or disapprove them. In this case there was neither waiver nor estoppel, but a steady insistence that the deficiency had been assessed against the estate and no one else, and that the liability of the estate had ended. * * *

In this case, as in the Hulburd case, there has been neither a waiver nor estoppel, but an unwavering insistence by the taxpayer that there was no proper notice of deficiency, and that insistence antedated the running of the statute of limitations.

The case of Olsen v. Commissioner, 88 Fed. (2d) 650, is likewise distinguishable. In that case the registered notice of deficiency was actually received by the taxpayer, as the court said, “in due course”, although it had been directed to a wrong address.

Upon farther consideration of the jurisdictional question in this case, we are of the opinion that we erred in the conclusion reached in the memorandum opinion heretofore entered. That opinion is accordingly hereby vacated and the petitioner’s motion to dismiss for want of jurisdiction is granted.

An order of dismissal will be entered.