author: Sternhagen :

text:
    Irving Fisher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61622.
    Promulgated April 20, 1934.

      Henry F. Parmelee, Esq., George E. Elliott, Esq., and John H. Weir, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Sternhagen :

1. The respondent treated the transactions between the petitioner and Jennings and each of the others as sales of shares, and the prices received as including taxable gain to the extent that they exceeded the proper basis of cost or March 1, 1913, value. The petitioner’s attack centers upon the contention that the transactions were not sales by him, but were loans to him of the amounts received and that the transfers by him of the shares were merely by way of collateral security for such loans. If they were loans to him they were plainly not income. But the burden to establish them as loans is upon the petitioner, not only because the respondent has officially determined that the transactions were sales, but also because they are expressly so designated in the contracts of the parties thereto.

The evidence intended to support the petitioner’s view as to the character of the transactions is, aside from the written, documents, the oral testimony of petitioner himself and of the lawyer who drew the first contract with Jennings; none of the parties on the other side of these transactions was offered as a witness. The oral testimony is that the petitioner, wanting the use of money with which to acquire more Rand shares, wanted to borrow it. He was an economically independent man of learning and intelligence, a university professor of economics, a writer, and an inventor whose patents had been fruitful. He was not a necessitous man and under no constraint except that of his own desire. 'When he learned from his lawyer that the terms upon which he and Jennings had tentatively agreed would amount to a usurious contract, he conscientiously and voluntarily gave up the idea of borrowing and, with the aid of his lawyer, worked out a plan of sale which would distribute the opportunity for profit between himself and the buyer. Although he had a right to reacquire at a fixed price in accordance with a prescribed scale, graduated with time, this was entirely at his election. There was no duty upon him to take back the shares either at a fixed time or upon request and no duty upon him to pay back any of the amount received by him for the shares. His obligation ifco pay was conditioned upon his exercise of the option.

Clearly upon the face of the transaction this was not a loan, and we are unable to find from anything dehors the contract that the parties intended to and actually did contract only for a loan. As between the petitioner’s deliberate writing to express his intention and his oral statement of his intention, the writing must prevail. The evidence all establishes that the contract of sale is exactly what the parties intended it to be. There is an entire lack of evidence that the petitioner was imposed upon or was in a position where he might be imposed upon, so that he could invoke a court of equity to relieve him from the oppression of an unconscionable promise. He was the originator of the plan (for we must identify him ,in this respect with his own lawyer) and both its substance and form were at his instigation and to some extent his own drafting.

Were it to be held that after all his care these were but loans, they would be no less usurious than the original plan which he deliberately sought to avoid. While no ruling by this Board that these were usurious contracts would have sanction to stamp them as such in respect of their validity or enforceability, such a determination should not be lightly made in any event, for .it would not only affect this petitioner and his .taxes, but each other party to the contract, both as to his tax basis and his civic character under the usury statute. While such considerations would give way before unmistakable facts, they require attention when the question is merely one of characterization from circumstance. The charge of usurious lending should not be applied indirectly to all of these parties by an official decision unless it is amply supported by the evidence; and this we can not find. Certainly a construction of the contract as a valid sale demands recognition over that of a usurious loan.

So far as the evidence shows, the entire conduct of these parties has been consistent with the concept of a sale. They were not extending credit to petitioner, but “regarded this as a very good investment” in the Remington Rand stock. One, for example, as testified by petitioner, “ believed that he was making a very great investment and went in too deep. He got the money which he advanced to me, whether you call it a loan or a purchase, by borrowing at the bank on the collateral of the stock which I transferred to him which, of course, is a dangerous thing to do, and when the stock market crash came, he was wiped out, and at that time I agreed to sell him or to modify the contract so as to sell him outright 1,000 shares of Remington Rand at $20 a share so that the whole title and interest would belong to him, and he paid me for that by a note which subsequently I had to take care of myself because he could not pay it at the bank, in order for him to release the collateral on his loan. He had got in deep water with his loan, and I offered to help him out by endorsing his note, so that eventually I have assumed his obligation.” This is wholly inconsistent with the effect of a loan to petitioner on collateral, for the stock market crash would have been disastrous to petitioner as borrower as well as to his creditor who had hypothecated the collateral.

The petitioner argues that the disparity between market quotations at which presumably he could have sold his shares and the prices fixed in the contracts demonstrates that there was no sale. If the disparity between price and actual value were substantial, a court would give it weight in a proceeding by a borrower against an oppressive lender to set aside a deed and have it adjudged a mortgage or to escape the consequences or a usurious loan. But treating the disparity as large enough to be moving, it has its explanation not in oppression but in the reserved option to buy back. This, the contracting parties said in the contract, was of its essence. If petitioner had been willing to sell outright he could have sold at the market. But instead he wanted an assured right to buy back at a fixed price, and for the reservation of this right he apparently was willing to make a concession in price. At least, he did lower the price and the sale was other than a simple one, and it may be assumed that the price was commensurate with the terms as a whole. But this departure from a simple sale is yet a sale and not a loan, and the low price does not signify that a loan was intended.

That title to the shares passed to the purchasers admits of little doubt. It needs only the assumption of death or bankruptcy to make this clear. What petitioner had, was not a right of redemption but a right of purchase at an agreed price. Before this right was perfected, the shares were not his assets and the proceeds of the prior sale were.

The Commissioner, we think, correctly treated,the contracts as contracts of sale and the amounts received by petitioner as sale price with the gain included in income. This necessarily dismisses the petitioner’s claim for deduction of $17,150.88 as interest upon loans.

2. In two instances the sales by the petitioner were below cost, involving a loss of $8,565.20 in 1927 upon a sale to Jennings and $1,395.78 in 1928 upon a sale to Greene. The Kevenue Act of 1926, section 214 (a) (5), provides:

Sec. 214. (a) In computing net income there shall be allowed as deductions:
* * . * * * * *
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade' or business; but in the case of a nonresident alien individual only if the profit, if such transaction had resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any, loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.

The substance of section 118, Kevenue Act of 1928, is similar. Since the petitioner in all of his contracts had an option to acquire substantially the identical shares sold, no deduction for loss may be allowed.

3. The basis for petitioner’s 15 percent deduction for charitable contributions is not limited to ordinary income, but includes capital gains, Bliss v. Commissioner, 68 Fed. (2d) 890; Harbison v. Commissioner, 68 Fed. (2d) 1004 (both C.C.A., 2d Cir.); Aaron Straus, 27 B.T.A. 1116 (review pending, C.A.D.C.). Thus limited, the petitioner’s deduction should be allowed.

4. The omission by petitioner of substantial items from his 1927 return was clearly negligent and respondent has added the penalty prescribed by Kevenue Act of 1926, sec. 275 (a). This was correct. Petitioner- can not escape his responsibility for- a correct return by committing its preparation entirely to his secretary. Board v. Commissioner, 51 Fed. (2d) 48; 14 B.T.A. 374, 393; Edmond A. Hughes, 24 B.T.A. 1022 (review pending C.C.A., 5th cir.); D. C. Bothwell, 24 B.T.A. 1351 (review pending, C.A.D.C.).

Reviewed by the Board.

Judgment will he entered- under Rule 50.

       Without discussing specifically the numerous decisions cited by • the parties, it is sufficient to cite in support of our opinion, Conway v. Alexander, 7 Cranch. 218; Russell v. Southard, 12 How. 147; Wallace v. Johnstone, 129 U.S. 58; Houghton v. Burden, 228 U.S. 161; Chase & Baker Co. v. National Trust & Credit Co., 215 Fed. 633; In re Grand Union Co., 219 Fed. 353; Stark v. Bauer Cooperage Co., 3 Fed. (2d) 214; General Motors Accept. Corp. v. Mid-West Chevrolet Co., 66 Fed,, (2d) 1; Guilford-Chester Water Co. v. Guilford, 107 Conn. 519; 141 Atl. 880.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Sue Carol (Mrs. Nick Stuart), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63963, 71025.
    Promulgated April 20, 1934.

      John O. Ristine, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

Van Fossan :

These proceedings were brought to redetermine deficiencies in the income taxes of the petitioner for the years 1929 and 1930 in the amounts of $1,306.52 and $1,510.46, respectively.

The sole issue is whether or not the petitioner, as an income beneficiary for life from property held under a trust created by will, is entitled to a deduction from her individual income for depreciation on such property, in the absence of a specific provision for depreciation in the will and of any deduction therefor in the fiduciary returns filed by the trustee.

The facts were stipulated substantially as follows:

The petitioner is the daughter of Samuel Lederer and Caroline Lederer, of Chicago, Illinois. Samuel Lederer died in 1925, and in his will, which was admitted to probate in the courts of Illinois, left one half of his property to his wife, Caroline, outright, and one half to his said wife as trustee for the petitioner. The petitioner was named in the will as Evelyn Lederer Keefer. The trust was created and in operation during the years 1929 and 1930 and Caroline Lederer acted as trustee during those years.

The material provisions of the will of Samuel Lederer are as-follows:

Third: I give, devise and bequeath an undivided one half of my estate, of every kind and nature, real, personal and; mixed, after all my just debts ,and funeral expenses sliall have been paid, to Caroline Lederer, as Trustee, and to the Central Trust Company of Illinois, as successor-in-trust, for the following uses and upon the following conditions:
I do hereby authorize my said trustee and her successor-in-trust to hold, manage, invest and re-invest the said trust fund's in such securities or property, real or personal, as in the judgment of my said trustee or her successor-in-trust shaE best serve the interest of said trust estate, with full power to sell the whole or any part of said trust estate, whether the same shall consist of real or personal property, at public or private sale, upon such terms and conditions as shall seem to my trustee or her successor-in-trust for the best interests of said trust estate; and I do hereby specifically direct that no security shall be required of my said trustee or her successor-in-trust for the faithful performance of said trusteeship, and that no purchaser or purchasers from my trustee or her successor-in-trust shall be required to look to the application of the purchase money. And I do hereby authorize and direct that my said trustee, or, upon her death, inability or refusal to act, then her suceessor-in-trust, shall pay to my dear daughter, Evelyn Lederer Keefer, semi-annually, the net income arising from said trust fund during her life. Upon the death of my said daughter said trust or trusts herein created shall immediately cease anil determine and my trustee or her successor-in-trust shall thereupon immediately pay the principal of said trust estate and income, if any, to my wife, Caroline Lederer, if she shall be living at the date of the death of my said daughter; or, if she shall have died prior to that date, then to any child or children of the body of my daughter, share and share alike; or, if my said daughter shall die after the death of my wife leaving no child or children her surviving, then the trustee shall pay to each of my sisters the sum of five thousand dollars ($5,000.00), and shall transfer, pay and deliver the balance of said trust estate to the legal heirs of my said daughter.

The will made no specific provision for the deduction or allocation of depreciation on the trust property prior to the distribution of income to the petitioner.

Included among the assets turned over to the trustee under the will of Samuel Lederer were undivided one-half interests in certain apartment houses or hotels located in Chicago, Illinois. The depreciation sustained in each of the years 1929 and 1930 on these properties was $9,160, or $4,580 for the undivided one-half interest in the said properties held by the trustee under the trust provisions of the said will.

Caroline Lederer, as trustee, filed with the respondent fiduciary returns of income for the years 1929 and 1930. In the returns no deduction was claimed for depreciation on any of the properties included in the trust agreement of the will, and no depreciation thereon has been allowed by the respondent to the trust for the said years.

The petitioner filed an individual Federal income tax return for the years 1929 and 1930. The petitioner’s net income for the years 1929 and 1930 was determined by the respondent to be $41,373.76 and $34,613.83, respectively, with no allowance or deduction for depreciation sustained on the trust property.

During the years 1929 and 1930 the petitioner did not receive any income from her undivided one-half interest in the said trust created by the will of Samuel Lederer, deceased.

Section 23 (k) of the Revenue Act of 1928 is as follows:

SEO. 2 3. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
# * * * * *
(k) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the ease of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

Counsel for the respondent contends (1) that where a trustee collects income consisting of rents from real property, which she pays over to the life beneficiary under a will which does not specifically provide that the trustee make any allowance for depreciation on the buildings in determining the income distributable, the life beneficiary may not deduct as an expense depreciation sustained on the buildings, and (2) that even in the event that such depreciation is allowable, the life beneficiary can not take the full depreciation if such deduction exceeds the income distributable to her from the trust estate, and apply the excess against her income from other sources.

We see no merit in the first contention. In fact, from the very language of the statute, the situation relating to depreciation allowances prior to 1928 and the discussion preceding the enactment of section 23 (k), we are led unquestionably to exactly the opposite conclusion. The respondent’s theory would thwart the very purpose for which the section was passed.

Prior to 1926 the allowance for depreciation deduction was authorized in this language: “ In computing net income there shall be allowed as deductions: * * * (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

In the Revenue Act of 1926, however, the provision was enlarged by adding the following words:

In the case of improved real estate held by one person for life with remainder to another person, the deduction provided for in this paragraph shall be-equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary.

In reporting the proposed revenue act H.R. 1, Senator Smoot, chairman of the Finance Committee, stated:

Depreciation in case of life tenant and remainderman.
Section 214 (a) (8) : The present law allows depreciation as a deduction. The committee recommends that it be made clear that in the case of improved real estate held by one person for life with remainder to another the depreciation deductions shall be equitably apportioned between the life tenant and the remainderman.

Article 161, Regulations 69, sets forth the Commissioner’s interpretation of the added portion of section 214 (a) (8):

* * * In the case of improved real estate held by one person for life with remainder to another person, the deduction for depreciation shall be equitably apportioned between the life tenant and the remainderman. Thus, if the improvement on real property devised to one for life with remainder over has an estimated useful life which exceeds the expectancy of the life tenant (as shown by the Actuaries’ Combined Experience Table of mortality and expectation of life), the fair market value of the improvement at the time of its acquisition by devise shall be apportioned between the life tenant and the remainderman, and the life tenant will be entitled to depreciation on the part of such fair maijket value apportioned to him in case he uses the improvement in his trade or business, a ratable portion of the amount so allocated to be claimed as depreciation each year, while the remainderman, upon the termination of the life estate, will be entitled to depreciation on the balance of such fair market value of the improvement provided the property is used by him in his trade or business. In case the useful life of the improvement is less than the expectancy of the life tenant, the life tenant is entitled to depreciation thereon as if he were the owner of the fee.

The Bureau of Internal Revenue thereafter issued a ruling (G.C.M. 1424) holding that:

Only a legal life tenant, as distinguished from a life beneficiary under a trust, is entitled to the depreciation allowance provided for in section 214 (a) (8) of the revenue act of 1926.

In that opinion it is stated:

It follows in the instant case that the trustee may take a proper deduction for the depreciation of the improved realty in computing the net income of the estate (although if the entire income of the trust is distributed annually the benefit of the deduction is necessarily lost), but the life beneficiary must return as her income the amounts paid to her undiminished by any allowance for depreciation (Baltzell v. Mitchell, 3 Fed. (2d) 428; T. D. 3668 (C. B. IV-1, 191). The remainderman can take no deduction for depreciation during the existence of the trust, although upon its termination he may claim a depreciation deduction as provided in article 161, regulations 69.

Thus, it was evident that under the 1926 Act the owner of a life estate pursuant to a trust created by will or other instrument was deprived of the benefit of a, deduction for depreciation, That sitúation was brought to the attention of Congress, as appears from the “Hearings Before the Committee on Ways and Means, House of Representatives, (Interim, 69th — 70th Congresses).”

In presenting the amendment the Senate Finance Committee made the following comments:

Sec. 23 (It) and (L). Depreciation and Depletion — Life Estates and Trusts.
Tlie House bill makes no change in existing law with respect to these deductions. The committee proposes to amend and clarify the law governing the manner in which the deductions shall be apportioned as between life tenant and remainderman or trustee and beneficiary. There is uncertainty and considerable hardship in these two classes of cases under the existing law.
In the case of life tenant and remainderman the bill provides that the deductions should be imposed as in the case of a fee owner and shall be allowed to the life tenant during the time he holds the property and to the remainder-man thereafter.
In the case of property held in trust the deduction is to be given to the beneficiary unless his share of the distributable income is reduced because of the depreciation of the trust property, in which case, and to the extent that it is so reduced, the deduction shall be allowed to the trustee.
A clerical change is made in section 24 (b) of the bill to obviate any conflict between that section and the provisions of sections 23 (k) and 23 (1).

The conference report on the proposed change is as follows:

Amendment No. 30: Under the existing law difficulty has been experienced in determining and allowing the deduction for depreciation in cases where property is held by one person for life with remainder to another person; and the deduction, in the case of property held in trust, is allowable only to the trustee. The Senate amendment provides that a life tenant, for the purpose of this deduction, Shall be considered as the absolute owner; so that he will be entitled to the deduction during his life, and that thereafter the deduction, if any, will be allowed to the remainderman. In the case of property held in trust, the allowable deduction is to be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the will, deed, or other instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income which is allocable to the trustee and the beneficiaries, respectively. • For example, if the trust instrument provides that the income of the trust computed without regard to depreciation shall be distributed to a named beneficiary, such beneficiary will be entitled to the depreciation allowance to the exclusion of the trustee, while if the instrument provides that the trustee in determining the distributable income shall first make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose, the allowable deduction will be granted in full to the trustee. The bill contains similar provisions as to the deduction for depletion. The Senate amendment provides for an equitable apportionment of the deduction in these cases; and the House recedes.
Amendments Nos. 31 and 32: The purpose and effect of these amendments, which relate to the deduction for depletion in the case of property held by one person and the remainder to another person and in the case of property held in trust, is similar in effect to amendment numbered 30; and the House recedes.

From the legislative history above set forth, it is clear that Congress intended to grant to both life tenants and beneficiaries under trust instruments the same privilege of deducting the depreciation allowance as that enjoyed by any other individual. The allowance to the income beneficiary, however, was subject to any specific provision relating thereto which might be contained in the trust instrument, or, lacking any such provision, to any division of trust income designated therein. The section has no other limitations whatever to the income beneficiary’s right to the depreciation allowance.

Article 201 of Regulations 74 provides:

*. * * In the case of property held by one person for life with remainder to another person, the deduction for depreciation shall be computed as if the life tenant were the absolute owner of the property so that he will be entitled to the deduction during his life, and thereafter the deduction, if any, will be allowed to the remainderman. In the case of property held in trust, the allowable deduction is to be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the will, deed, or other instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income which is allocable to the trustee and the benefiearies, respectively. For example, if the trust instrument provides that the income of the trust computed without regard to depreciation shall be distributed to a named beneficiary, such beneficiary will be entitled to the depreciation allowance to the exclusion of the trustee, while if the instrument provides that the trustee in determining the distributable income shall first make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose, the allowable deduction will be granted in full to the trustee.

The will of Samuel Lederer made no provision for the deduction of depreciation by the petitioner’s trustee. The petitioner is the sole beneficiary of the trust and thus, pursuant to the regulations, she is entitled to the entire depreciation allowance upon the trust property, to the exclusion of the trustee. Section 23 (k) plainly gives her the benefit of such an allowance and we see no proper ground for defeating the manifest intent of the statute.

The second reason assigned for denying the petitioner the depreciation allowance is that she is not entitled to take the full amount thereof if it exceeds the income distributable to her from the trust estate. The language of the section enumerating the various kinds of allowable deductions is wholly general in character. ' It is styled “deductions eeom gross iNCome” and employs the broadest terms in designating such deductions. None of these allowable deductions is restricted to the income from the property or obligations to which they relate. If the expenses of a trade or business exceed the receipts therefrom, the surplus amount may be included in the taxpayer’s return as a deduction from other income. Similarly the indebtedness on which interest is allowed as a deduction is not required to be connected with income-producing property or a trade or business. “ Taxes generally ”, with specific exceptions, are deductible regardless of the nature of the assessment or its relation, if any, to income.

Thus, while depreciation may emanate from certain property, the allowance of the deduction therefor is not limited to the income produced by that property. As we have seen, the enlargement of the depreciation section to include life tenants and income beneficiaries was made by Congress to place them on a parity with the legal owner of property. Being thus granted the benefit of the deduction, they may use it to offset .income or profits derived from any source whatever.

Petitioner had no income from the trust during the taxable years, but she had other income. The depreciation of $4,580 for each of the years 1929 and 1930 is such proper deduction and is allowable.

Reviewed by the Board.

Decision will be entered wader Bule SO.

       Sec. 5 (a) (7) of the Revenue Act of 1916; see. 214 (a) (8) of the Revenue Acts of 1918, 1921 and 1924.


author: Smith :

text:
    Charles A. Frueauff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69614.
    Promulgated April 20, 1934.

      J. W. Fisher, Esq., for the petitioner.

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

Smith :

This is a proceeding for the redetermination of a deficiency in income tax for 1929 of $2,509.92. The question in issue is whether the petitioner is liable to income tax in respect of the rental value of an apartment occupied by him rent free.

From the organization of Twenty-Nine Washington Square, Inc., through the taxable year 1929 the petitioner was the owner of all of its capital stock. The corporation owned and operated an apartment house in New York City. The president of the corporation was J. Irving Walsh. He had entire charge of renting and operating the building. The petitioner was vice president. His only activities in connection with the corporation in 1929 consisted of the countersigning of a few checks and the signing of the income tax return. From the time of the organization of the corporation and through the year 1929 he occupied an apartment of 15 rooms, the fair rental value of which in 1929 was $10,457.98. He paid no rental to the corporation for the apartment and no question was ever raised by the corporation as to his liability therefor. In his income tax return for 1929 the petitioner did not include in his gross income any amount for the rental of the apartment. In the audit of his return the respondent has added to the petitioner’s gross income $10,457.98 “ as compensation to the petitioner from Twenty-Nine Washington Square, Inc., for alleged services rendered by petitioner to the said corporation.” The deficiency found by the respondent is predicated principally, if not entirely, upon the above stated adjustment.

The parties have stipulated as follows:

At December 31, 1928, Twenty-Nine Washington Square, Inc. had a deficit of $20,405.82. At December 31, 1929 said Twenty-Nine Washington Square, Inc., had a deficit of $18,096.60 a reduction of $2,309.22, the amount of the net earnings for the calendar year 1929.

Section 22 of the Revenue Act of 1928 defines gross income as including “ gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, * * * or gains or profits and income derived from any source whatever.”

No question is raised by the petitioner that the fair rental value of the apartment in 1929 which he occupied in the apartment house owned and operated by Twenty-Nine Washington Square, Inc., was any less than the amount determined by the Commissioner, namely, $10,457.98. It is his contention, however, that he did not receive the apartment rent free as compensation for any services performed by him; that no agreement was ever made between himself and the corporation that the apartment was to be furnished him rent free as compensation for services.

We think that it is not material that the petitioner had no agreement with the corporation that the apartment should be furnished him rent free, in lieu of other compensation for nominal services performed. The rental value of the apartment in 1929 was $10,457.98 and he received that income from the corporation. If it was not received as compensation for services we think it was, nevertheless, income taxable under the provision of the law which required the inclusion in gross income of. “ income received from any source whatever.” No contention is made that the rental value of the apartment constituted a gift by the corporation to the petitioner. Nor does it qualify under any other provision of the statute relating to tax-exempt income.

The petitioner makes the contention that the rental value of the apartment constituted a nontaxable distribution by the corporation to him under section 115 of the statute. The petitioner’s reasoning is that the corporation had no surplus earnings from which a dividend could be paid and that the amount was in effect-a partial liquidating dividend. We think there is no merit in this contention. The evidence of record does not disclose that the corporation made or intended to make any distribution to the petitioner within the contemplation of section 115.

In Ralph Kitchen, 11 B.T.A. 855, the question was presented as to whether the value of lodging and meals supplied to the general manager of a hotel should be included in such manager’s gross income. We held that it should be. Whether the rental value of the apartment constituted compensation for services performed or had some other consideration, we think that the amount constituted taxable income of the petitioner.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Maequette : Leech,

text:
    Reynard Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fontaine Fox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67386, 70795, 71084.
    Promulgated April 20, 1934.

      Charles E. Kelley, Esq., for the petitioners.

      B. U. Steele, Esq., for the respondent.
   OPINION.

Maequette :

At the hearing counsel for petitioners conceded that the premises occupied by Fox had a fair rental value of $3,000 a year, but no more, and asserted that this amount should be included in Fox’s gross income as additional compensation and not as a dividend. We have found the value to be as claimed. In reaching this conclusion we have disregarded the fact that Fox spends about five months of each year in Florida, for the reason that the premises were his to occupy whenever he chose. On the other hand, the evidence shows that the residence was not built for rental purposes, but for the use of Fox according to his individual artistic tastes and at a cost in excess of that of an ordinary house of its size and construction. Taking into consideration these facts, the location of the property, and the further fact that the studio was the workshop of the corporation, and the occupancy thereof by its officer and the producer of its income was occupancy by it and not by Fox, the individual, we have arrived at a fair rental value of $3,000 a year. This is also the value placed on the use of the premises by a real estate agent who was thoroughly familiar with the property and whose testimony is uncontradicted.

While the occupancy of the studio by Fox was that of the corporation, the residence was occupied by him as an individual, and the fair rental value of its use was taxable income to him. Ralph Kitchen, 11 B.T.A. 855. See section 213 (b) (11) of the Revenue Acts of 1921, 1924, and 1926, and section 22 (b) (8) of the Revenue Act of 1928.

The respondent has treated this income as additional compensation in one year and as a dividend in the next. We think he was right in his first determination. The residence was built not for the temporary use of Fox, but for his use at all times, and this irrespective of whether the corporation had a surplus or made earnings and profits. It would be anomalous to hold that when there was sufficient surplus the value of the right of occupancy constituted a dividend, and when there was no such surplus the value of the right was additional compensation. The value of this occupancy was clearly additional compensation and should be so taxed to Fox, and it matters not whether the corporation is or is not entitled to a further .deduction on account of the increased compensation arising from this occupancy. Mary B. Brauer et al., Executors, 6 B.T.A. 579; Hayner v. United States, 62 Ct. Cls. 189; Livingston v. United Stales, 67 Ct. Cls. 536.

The respondent has also included the rental value of the premises in the gross income of the petitioner corporation, apparently upon the theory of constructive receipt. In this we think he was in error, and such rental value should be excluded in recomputing the tax of the corporation.

The corporation is not entitled to a further deduction on account of this additional compensation unless it has shown that the total salary of $33,000 constituted a reasonable compensation for its president. Sec. 23 (a) of the Revenue Act of 1928. Botany Worsted Mills v. United States, 278 U.S. 282. While the respondent is raising no question as to the reasonableness of the $30,000 salary, he has denied to the corporation the right to deduct an additional $8,000 as compensation, resulting from the occupancy of the premises in the first year by its president, and has evidently reached the same conclusion as to the second year, as there he has determined the rental value to be a dividend. As opposed to respondent’s determinations we have no evidence that the salary thus increased is still reasonable. It is true, as was stated at the hearing by counsel for the petitioners, that in a previous year, not well identified, such a deduction was taken by the corporation and allowed. But the respondent had the right and it was his duty to change his determination if the facts, in his judgment, so required. Botany Worsted Mills v. United States, supra; Holmquist v. Blair, 35 Fed. (2d) 10. Here the respondent has altered his determination, but the burden of proof remained on the petitioner. Austin Co. v. Commissioner, 35 Fed. (2d) 910. In our opinion the petitioner has not met this burden and the corporation should not be permitted to take as a deduction the additional $8,000 compensation to its president.

The corporation is entitled to take as a deduction depreciation on the buildings, both of which were used in its business, the one to furnish a residence to its president, and the other as a shop or office. Sec. 23 (k), Revenue Act of 1928. We have found the normal life of the residence to be 25 years. Counsel for the respondent stated at the hearing that there was no dispute as to the basis for the computation of depreciation. This will be settled under Rule 50.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Leech,

dissenting: The majority opinion, although it approves the charging of the petitioner, Fox, with additional compensation for the rental value of the corporation’s residence which he used during the taxable years, reverses the action of the respondent in including this identical rental value in the corporation’s income for the same years. I think the decision upon this latter action inconsistent with the former and erroneous. This amount, recognized as compensation to Fox from the corporation, must be treated as having been constructively paid to the corporation as rental, and therefore taxable income, to it, before it can be held to have been paid by the corporation to Fox. Cf. Burnet v. Wells, 289 U.S. 670.

Sea well agrees with this dissent.


author: Adams :

text:
    J. M. Harrison, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50594.
    Promulgated April 20, 1934.

      Paul L. Holden, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

Adams :

The petitioner, J. M. Harrison, Inc., in its income tax return reported the transaction between it and the Ross Industries Corporation as a tax-free exchange, and here contends that it constituted a reorganization and exchange of property by one corporation solely for stock in another corporation a party to the reorganization within the meaning of section 112 (i) (1) (A)' and section 112 (b) (4) of the Revenue Act of 1928. ■ (The pertinent paragraphs of the act are set out in the margin.)

The respondent contends that it was a sale upon which gain or loss shall be recognized.

The respondent urges that the transaction did not result in the acquisition by Boss Industries Corporation of actual property of petitioner as contemplated by section 112 (i) (1) of the Revenue Act of 1928, and therefore fails to constitute a reorganization. He further urges that “it does not appear that a plan of reorganization existed.”

Counsel for the respondent argues that the only things of value involved in the transactions by which the Boss Industries Corporation acquired the Harrison patents and the contracts to manufacture under them were the patents themselves, and that the petitioner on its books never assigned any value whatever to the contracts, which had cost it nothing. We are not impressed with this argument. In 1928 petitioner had been granted the exclusive license to manufacture, use, and sell within the United States and Canada, all the articles covered by these patents. Under the terms of the contract the license would expire March 1, 1930, but petitioner was given the option to renew it for a further period of three years upon notice to J. M. Harrison. The Boss Industries Corporation could not, therefore, use the patents for approximately four years after it acquired them, unless it also acquired the exclusive license held by petitioner. The fact that petitioner did not set up on its books as assets the license and contracts here in question is not controlling. They constituted its sole source of revenue, which in 1928 exceeded $33,000, and from January 1 to March 15, 1929, was more than $10,000. They were valuable assets at the time they were acquired by the Boss Industries Corporation, and constituted property as that term is used in the statute.

The facts bring this case clearly within the provisions of section 112(b) (4), provided there was a statutory reorganization to which J. M. Harrison, Inc., and the Boss Industries Corporation were parties, and provided further that such reorganization was accomplished in pwrswanóe of a plan of reorganisation.

A proper solution of the questions presented requires that we should determine first whether the facts show a statutory reorganization. Section 112 (i) (1) defines reorganization as being a merger or consolidation, and includes within the meaning of these terms the acquisition by one corporation of substantially' dll the properties of another corporation. The facts as found here do not bring this transaction within the definition of a consolidation as that term is used in the statute. We believe, however, that they show a merger as that term is defined in section 112(i) (1) (A), and a statutory reorganization was thereby effected. If they do not show a true merger, certainly they come within the holding of the Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, wherein the Court said that the statute undertook to expand the meaning of merger or consolidation so as to include some things which partake of the nature of a merger or consolidation, but rather beyond the ordinary and commonly accepted meanings of these words, so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation.

We think this was such a merger as the Supreme Court had in mind in the opinion in the above cited case. A statutory reorganization was effected and both J. M. Harrison, Inc., and the Eoss Industries Corporation were parties to such reorganization. As such, they are entitled to the benefits of the exemption provisions of section 112 of the Eevenue Act, provided, however, that such reorganization was accomplished in pursuance of a plan of reorganization.

In our opinion, the statute requires that although the facts show an actual merger or consolidation, yet, if the parties did not intend to merge or consolidate and their dealings were not in pursuance of a plan having a merger or consolidation for its purpose, then, and in that event, a statutory reorganization was not accomplished.

This renders it necessary for us to examine as to whether what the parties actually did was done in pwsuance of a plan to merge or consolidate as these terms are used in the statute.

On March 15,1929, the president of J. M. Harrison, Inc., presented to that company’s directors a proposal on the part of the Eoss Industries Corporation to purchase a part of the assets of J. M. Harrison, Inc. The directors passed a resolution on that date looking to the acceptance of this proposal, in which they referred to the transaction as a merger with the Eoss Industries Corporation. The language which thejr used in this resolution is not controlling as to the legal effect of what they did, but this must be determined from an examination of all the facts incident to the transaction. Following this action, on March 21, J. M. Harrison, Inc., and the Eoss Industries Corporation entered into a contract providing for the exchange by J. M. Harrison, Inc., of substantially' all of its properties for 1,000 shares of the preferred stock of the Eoss Industries Corporation, and it was agreed in that contract that J. M. Harrison, Inc., would immediately dissolve, and this contract was executed by the parties. These transactions between the parties constituted a reorganization in pursuance of a -plan to reorganize, and both J. M. Harrison, Inc., and the Ross Industries Corporation were parties to that plan. These facts meet the requirements of the statute that a reorganization, in order to bring it under the exemption provision of section 112, must be accomplished in pursuance of a plem of reorganization.

The situation presented here is very similar to that in the case of Tulsa Oxygen Co., 18 B.T.A. 1283.

It is distinguishable from Minnesota Tea Co., 28 B.T.A. 591, in that in that case the Minnesota Tea Co. did not agree to dissolve and continued as a going concern, and there was not such a merger as to constitute a statutory reorganization.

We find for petitioner on this issue.

Keviewed by the Board.

Decision will he entered under Rule 50.

Aeundell and Leech concur in the result.

       SEC. 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.
      SEC. 112. RECOGNITION OP GAIN OR LOSS.
      (a) General Buie. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      * * * * * * « ;
      (b) * * * (4.) * * * No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      * * * * * * * *
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.


author: Lansdon :

text:
    Francis Ernest Drake, Executor of the Estate of Mrs. Ivor O’Connor Drake, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Francis Ernest Drake, Executor of the Estate of Mrs. Francis E. Drake, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 14139, 22308, 34670, 42625, 49028.
    Promulgated April 24, 1934.

      George 8. Atkinson, Esq., for the petitioner.

      Shelby S. Faulkner, E'sg., for the respondent.
   OPINION.

Lansdon :

The petitioner contends that the decedent’s surrender, by waiver, of her dower and other interests in O’Connor’s estate, to take under the trust provisions of bis will, made her purchaser of the payments made to her at the price or value of her interests so surrendered, and that except and until she has first had returned to her payments equal in amount to those interests she cannot be held to have received any taxable income in virtue of them. He. also contends that the decedent’s interest in that estate is determinable by the laws of the Kepublie of France, in virtue of an alleged marital domicile there established and maintained by O’Connor to the date of his death.

Although no sufficient, proof has been introduced by petitioner to convince us that O’Connor ever abandoned his domicile in Dallas, Texas, that question is of no importance here in view of the law which controls the issue, as recently declared in Commissioner v. Butterworth, 290 U.S. 365, in a,decision of the Supreme Court holding contrary to the contention of the petitioner. That decision overrules, by specific reference, Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 760; and Allen v. Brandeis, 29 Fed. (2d) 363, supporting petitioner’s view. In its decision the Supreme Court pointedly states and answers this issue as follows:

Is a widow who accepts the provisions of her husband’s will and receives part or all of the income from an established trust in lieu of her statutory rights a beneficiary within the ambit of the statute? We think she is. It is unnecessary to discuss her rights or position under other circumstances. We are dealing with a tax statute and seeking to determine the will of Congress.
When she makes her election the widow decides to accept the benefits of the will with the accompanying rights and liabilities. In no proper sense does she purchase an annuity. For reasons satisfactory to herself, she expresses a desire to occupy the position of a beneficiary and we think she should be so treated.

Upon authority of that decision we hold that the payments here in dispute were properly included in the decedent’s taxable income. Annie C. Atwood, 29 B.T.A. 740.

The petitioner’s contention that the payments to decedent from the O’Connor estate were impressed with an oral trust which obliged her to share it with the minor children is without merit, in view of the written terms of the will above quoted in our findings of fact, which makes it her separate property, free from all claims. Upon this issue the respondent is affirmed.

The next contention made by petitioner is that deductions should be allowed from the decedent’s income for the sums paid to Ivor Elizabeth Trezevant, in compromise of claims made against the O’Connor estate and to prevent a suit in the courts contesting the will.

The deductions here contended for were payments made pursuant to the terms of the contract set out in our findings of fact. Under this contract the decedent obligated herself to make the payments here in issue from her income during their joint lives, through her agents, E. O. Tenison and the City National Bank of-Dallas, Texas, after it had accrued to her. It is obvious, under this agreement, that there 'was no assignment of income such as would transfer title before it was earned, as obtained in Shellabarger v. Commissioner, 38 Fed. (2d) 566, which the petitioner has cited as authority for his contentions. In the Shellabarger case two sisters, sole beneficiaries under their father’s will, made a settlement between themselves respecting the distribution of their father’s estate before the will was admitted to probate. Their settlement agreement allowed the will to stand, but in consideration for such concession the favored sister under it agreed to divide equally with the other the cash legacy and benefits from trusts created of the residuum of the estate. Although in that case one sister, Maude, was allowed to collect the income, the court found as a matter of law that, because of the nature of the settlement and the rights surrendered by the other, without which the will would not have been probated, an assignment was effected, and that she received half of the income as trustee. The language of the court in explaining its basis for that conclusion is as follows:

While the whole of the net income from the trusts was received by Maude, the half did not accrue to her as income but on the instant of receiving- it she held it in trust for Georgia and the bank, and it was in good faith paid over as received, pursuant to her vested and binding contract.

Other decisions cited by petitioner are Young v. Gnichtel, 28 Fed. (2d) 789; O'Malley-Keys v. Eaton, 24 Fed. (2d) 436; Marshall Field, 15 B.T.A. 718. See also on this point Commissioner v. Field, 42 Fed. (2d) 821.

In all of the cases relied upon by the petitioner to sustain his contentions, the courts found that a novation in ownership of the income before its accrual had been effected; but in no case, so far as we can find, have the courts or this Board held that the title to income in any respect was affected where its owner merely obligated himself, in a simple contract, to pay it, or part of it, over to another. after it accrued to him. George M. Cohan, 11 B.T.A. 743; Arthur H. Van Brunt, 11 B.T.A. 406; Julius Rosenwald, 12 B.T.A. 350; Marion Stone Burt Lansill, 17 B.T.A. 413; H. F. Marie Clausen, 28 B.T.A. 559; James McDonald, 28 B.T.A. 1234; Frank Turner, 28 B.T.A. 91; Edith R. Wood, 27 B.T.A. 1308; Oscar Mitchell, 27 B.T.A. 101.

Respecting the case at bar, it is obvious that under the terms of the will the decedent was without power to assign or transfer the income in issue to her daughter. The recitals from the will herein-above quoted show that the testator intended that all sums payable to the widow and daughters should be their separate property and not subject to assignment or anticipation. In this situation a novation such as is here contended for could not be effected, even if the parties so intended. Commissioner v. Blair, 60 Fed. (2d) 340; Hazel T. Power, 23 B.T.A. 428; aff'd., 61 Fed. (2d) 625.

The payments here involved were properly included in the decedent’s gross income, and since they do not fall within any deductible class provided for in the statutes, we must hold that they do not constitute allowable deductions in any of the years in review. Lindley v. Commissioner, 63 Fed. (2d) 807; White v. Commissioner, 61 Fed. (2d) 726. On this issue the contention of the petitioner is denied.

During the years 1920 to 1927, inclusive, buildings and other physical assets belonging to the three trusts suffered depreciation, which the petitioner contends should be allowed as deductions from the decedent’s taxable income in the years to which they relate. The respondent has rejected these claims under authority of Codman v. Miles, 28 Fed. (2d) 823, and other court and Board cases cited in his brief.

The petitioner contends that Falk v. Commissioner, 64 Fed. (2d) 151; affirmed in Helvering v. Falk, 291 U.S. 183, supports his contention. In that case the court reversed this Board’s decision on an issue involving depletion of a mining lease and held that the beneficiaries whose income was from royalties on production from a reserve, certainly recoverable before the expiration of a lease, were, in fact, the equitable owners of the reserve and as such were therefore entitled to the depletion deductions allowed mine properties as worked out. To the same effect, under similar facts, was our decision in Ida L. Kuhn, 24 B.T.A. 216; Cf. United States v. Ludey, 274 U.S. 295. These decisions are based on facts which show that the taxpayers owned economic interests in mineral reserves and that proceeds from such reserves therefore constituted a return of capital. This is the controlling principle also in Palmer v. Bender, 287 U.S. 551, and Lynch v. Alworth-Stephens Co., 267 U.S. 364. In the Falk case, supra, the Supreme Court, in discussing section 219 (b) of the Revenue Act of 1921, said: “ But we cannot accept the view that this was intended to impose a tax upon the part of the proceeds which represents the return of capital assets.” In the instant proceeding the petitioner has no economic interest in the de-preciable assets in question. The income is not proceeds from the disposition of any part of the property, but arises solely from the use thereof. The cases cited relate only to allowance for the depletion of assets in which taxpayers own economic interests. They do not overrule Weiss v. Wiener, 279 U.S. 333, where deduction for depreciation is denied to a taxpayer who had made no capital investment in the property nor sustained any loss in connection with its use.

The rule respecting depreciation claims where a beneficiary receives income only with no remainder interest in the producing corpus is that he owns no interest subject to depreciation. Codman v. Miles, supra; Whitcomb v. Blair, 25 Fed. (2d) 528; Kaufman v. Commissioner, 44 Fed. (2d) 144; Roxburghe v. United States, 64 Ct. Cls. 228; Rita M. Kohler White, 23 B. T. A. 391; Josephine K. Laflin, 26 B.T.A. 136; aff'd., 69 Fed. (2d) 460; Ethel Fisher Dixon, 25 B.T.A. 1164. Clearly the issue here is within the latter class of cases and the petitioner’s contention must, therefore, be denied.

The petitioner further contends that, in any event, the decedent’s three children, under the laws of France, would be entitled to a three-fourths interest in all of their deceased father’s property; and that in view of such facts we should now hold that the decedent received only one fourth of the income paid to her in her own right and the rest in trust for the children. In our opinion the laws of France have no application here. The will of O’Connor was duly probated by a court of competent jurisdiction in the State of Texas, in a proceeding to which the decedent was a party and which we have no jurisdiction to review. In this appeal we are concerned only with the taxability of the income from the trust in the hands of the decedent, and not in the question whether or not the trustees properly paid it to her. Acacia Park Cemetery Assn. v. Commissioner, 67 Fed. (2d) 700; Roxburghe v. United States, supra; Irwin v. Gavit, 268 U.S. 161; Merchants Loan & Trust Co. v. Smietanka, 255 U.S. 509; Baltzell v. Casey, 1 Fed. (2d) 29; Louise P. V. Whitcomb, 4 B.T.A. 80.

The respondent has stipulated that deductions from the decedent’s income should be allowed as follows: $13,561.37 as additional losses from stock sales in 1920; $600 on account of undistributable gain from O’Connor’s estate in 1924; $3,668.22 representing drainage taxes paid in 1926; $2,257.81 as overstatement of Liberty Bond interest in 1927.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Jed C. Adams, Member.

text:
    Pierce Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pierce Navigation Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Pierce Pipe Line Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 49702.
    Docket No. 49703.

      Docket No. 49704.
    Entered : April 25, 1934.

   order.

On March 8, 1934, petitioners filed a motion for leave to reopen the above entitled proceedings, after trial, but on which no decision has been had, to the extent of enabling them to amend their petitions by pleading the statute of limitations with respect to the proposed deficiencies for each of the calendar years 1918,1919, and 1920, and for leave to present evidence in support of such allegations.

In accordance with a memorandum this day filed in these proceedings, it is

Ordered that said motion be and the same hereby is denied.

Jed C. Adams, Member.


author: Adams:

text:
    Pierce Oil Corporation, Petitioner, v. Commissioner of Revenue, Respondent. Pierce Navigation Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Pierce Pipe Line Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49702.
    Docket No. 49703.
    Docket No. 49704.
    Before Sternhagen, Smith, and Adams.
   Adams:

The above entitled proceedings involve deficiencies in income and profits taxes determined by the respondent for the years 1918,1919, and 1920. After prolonged negotiations in the Bureau of Internal Revenue, the Commissioner sent a notice of deficiency to petitioners under date of June S, 1930. On July 31, 1930, petitions were filed with the Board and a hearing on the merits was commenced May 22, 1933, and continued until concluded, July 28, 1933. Final briefs were filed January 2, 1934.

Thereafter, on March 8, 1934, the petitioners filed a motion to reopen the proceedings, on which no decision has been had, to enable them “ to amend their petitions by pleading the Statute of Limitations with respect to the proposed deficiencies for each of the calendar years 1918, 1919 and 1920, and for leave to present evidence in support of such allegations.” This motion was accompanied by affidavits of Adrian C. Humphreys, Eugene Untermyer, Stanley Worth, and Samuel W. Everett. No proposed amended petition was attached.

The motion was set for argument April 11, 1934, at which time the parties appeared by their counsel before this Division, specially constituted to hear and act upon the motion.

The grounds on which petitioners base their motion are clearly set out in the affidavit executed by Eugene Untermyer, one of petitioners’ counsel, and attached to the motion herein, in which he says:

I am informed and verily believe that no claim for abatement was at any time filed in bebalf of the taxpayers for any of said years.
I was informed' at and prior to the hearing, and then believed that the taxpayers had from time to time given waivers extending the period for assessment and that, such period, as extended, had not expired prior to the mailing of the 60-day letter. On this assurance, the taxpayers, at and prior to the hearing, refrained from pleading the Statute of Limitations.
I made no inquiry to ascertain whether such waivers had been duly signed by the Commissioner in view of the decision made some time before the hearing in Commissioner of Internal Revenue v. Hind,, (C. C. A., 9th Cir., decided October 13, 1931), 52 Fed. (2d) 1075, holding that a waiver was a unilateral act and did not require the signature of the Commissioner to afford its validity.
Since that time, however, and at or about the time that the hearing was being held, the Circuit Court of Appeals for the 3rd Circuit, in Commissioner of Internal Revenue v. United States Refractories Corporation, 64 Fed. (2d) 69, held that a waiver in respect of income, excess profits or war taxes had no validity unless it was also signed by the Commissioner of Internal Revenue and that a waiver given in that case, where the Commissioner did not sign the same, was null and void. The case was affirmed by the Supreme Court of the United States by an equally divided court sub. nom. Helvering v. United States Refractories Corporation, on October 23, 1933, 54 Sup. Ct. Reporter, p. 95.
The affirmance by the Supreme Court did not occur until many months after the hearings were closed, and such affirmance was not invited to my attention until about one month ago.
I thereupon communicated with the petitioners’ representative in Washington, Mr. Stanley Worth, to ascertain whether the waivers in question had been signed by the Commissioner and, if possible, to secure photostatic copies of the pertinent waivers. To my distinct surprise, I was advised, not only by Mr. Worth but by tbe Commissioner’s office, that neither access to the waivers nor photostatic copies thereof would be furnished to the taxpayers.

Upon these considerations, and others which we deem less material, petitioners urge the right and propriety of reopening this record to enable them to plead the statute of limitations and to show facts material to that issue.

It is not shown, however, that any new facts have been discovered which would justify the reopening of the case. It only appears that petitioners suspect, because of the refusal of the Commissioner’s office to permit them to examine the waivers on file, that such waivers have not been properly executed by the Commissioner, and that an examination of them would justify a plea of limitation under the authority of Helvering v. United States Refractories Corp., 290 U.S. 591. The motion, therefore, is not categorically for permission to prove significant facts of which the petitioners now have knowledge and evidence, but rather it is in the nature of a bill of discovery to enable petitioners after the hearing is closed and the proceedings submitted upon briefs to ascertain from their adversary whether there is in existence evidence of facts upon which they can predicate a plea of limitations.

From the record in the proceedings and from the moving papers, which for the purposes of the present motion we may assume to correctly state the facts, it appears that whatever basis there .may be for a plea of the statute of limitations was in existence and available to the petitioners either upon request or subpoena from the time when their petitions were originally filed, July 81,1930. And we do not overlook the fact that the original petitions were filed more than a year before Commissioner v. Hind, 52 Fed. (2d) 1075, was decided by the Circuit Court of Appeals, Ninth Circuit. In fact, the opinion of the Circuit Court reversed the Board’s opinion, which was promulgated November 9, 1929, 18 B.T.A. 96. So that at the time the original petitions were filed the Board’s position on this question was substantially the same as that later laid down in the United States Refractories Corp. case. On June 25, 1931, the Board decided United States Refractories Corp., 23 B.T.A. 872, and reaffirmed its position in the Hind case, and in Corn Products Refining Co., 22 B.T.A. 605. On January 14, 1933, the petitioners amended their petitions. On March 7, 1933, the Refractories Corf, case was affirmed by the Third Circuit, Commissioner v. United States Refractories Corp., 64 Fed. (2d) 69. On March 21, 1933, petitioners again filed an amendment to their petitions. On May 8, 1933, certiorari to the Supreme Court was granted in the Refractories Corp., case, and on June 21, 1933, a third amendment to their petitions was filed by petitioners. Neither the original petitions nor any of the amendments suggested the bar of the statute of limitations, although the very tribunal to which petitioners were appealing was consistently holding that the consent to extend the statute of limitations by waiver was not a unilateral act, and its latest decision on that question had been affirmed by the Circuit Court of Appeals and certiorari granted to the Supreme Court of the United States.

This condition continued throughout the long trial of the proceedings, but petitioners made no attempt to have this question determined, although the evidence contains the notice of deficiency of June 3, 1930, with statement attached in which it is stated that returns for the years 1918,1919, and 1920 were filed by the petitioner, and “ consents which will expire December 31, 1930, except as extended by the provisions of section 277 (b) of the Revenue Act of 1926, are on file for the years 1918, 1919 and 1920.” Moreover, the return for 1918 is in evidence and shows on its face that it was timely filed.

But for the giving of proper waivers, the respondent’s claims for taxes for the year 1918 expired by limitation in the year 1924, that for 1919 in 1925, and that for 1920 in 1926. Clearly, these facts are sufficient to cause anyone faced with a substantial demand to look to his rights, and we think they are enough to justify the assumption that one whose rights were affected thereby and who stood silent consciously elected either to ignore any questions which might be implicit in such facts, or to waive any rights, whether clear or doubtful, which he might have. If, therefore, diligence and conscious election have any place in the consideration of the present motion, they operate against the petitioners.

Petitioners urge that prior decisions require the granting of the motion and we are referred to Alameda Park Co. v. Lucas, 37 Fed. (2d) 805; Geuder, Paeschke & Frey Co. v. Commissioner, 41 Fed. (2d) 308; and Enameled Metals Co. v. Commissioner, 42 Fed. (2d) 213; aff'd., 282 U.S. 799. These decisions hold that where the evidence before the Board discloses prima facie that the statutory period of limitations has run and, before the Board’s judgment is entered, the petitioners move to amend their petitions so as to plead the statute of limitations in conformity with the facts, the motion should be granted. In none of the cases cited does it appear that the motion involved more than amendment to the pleadings to conform to the facts already in the record, and it is nowhere indicated that the Board should be required to reopen the trial for further proof after it has been finally submitted and briefs filed. These cases stop far short of holding that under such circumstances the case should be reopened for such further proceedings as may be necessary to enable the petitioners to discover whether facts are in existence upon which they may interpose the bar of the statute of limitations. We do not think the facts in the record disclose prima facie that the tax is barred by the statute of limitations. We cannot, therefore, regard the cases cited as controlling here.

It was urged by petitioners’ counsel in the presentation of this motion that proceedings before the Board are informal in their nature and it is the duty of the Board to disregard the ordinary rules of practice and procedure prescribed by it and by the Federal courts and look only to the substantial justice in the particular case.

The Board of Tax Appeals was created in 1924. By the Revenue Act of 1926 it was continued as an independent agency in the Executive Branch of the Government and its powers and jurisdiction were enlarged. As defined in that act and continued in subsequent acts, the character of the Board functions is preeminently judicial. Cf. Blair v. Osterlein Machine Co., 275 U.S. 220-227; Goldsmith v. Board, 270 U.S. 220. It is charged by statute to hear and decide any proceeding instituted before it and any motion thereon. Section 907 (a) of the Revenue Act of 1926 provides that “ the proceedings of the Board and its divisions shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board may prescribe and in accordance with the rules of evidence applicable in courts of equity of the District of Columbia.”

Pursuant to the power and duty thus conferred on it by the statute, the Board has adopted rules of practice and procedure for the conduct of proceedings coming before it. In formulating its rules of practice and procedure the Board has permitted as much informality and elasticity as is deemed consistent with the large volume of proceedings coming before it and the necessity for an orderly and well regulated procedure. See Garden City Feeder Co., 27 B.T.A. 1132.

Rule 17 is prescribed for the regulation of amended and supplemental pleadings. It is as follows:

The petitioner may, as of course, amend Ms petition at any time before answer is filed. After answer is filed, a petition may be amended only by consent of the Commissioner or on leave of the Board.
Upon motion made, the Board may, in its discretion, at any time before the conclusion of the hearing, permit a party to a proceeding to amend the pleadings to conform to the proof. All m'otions to amend, made prior to the hearing, must be accompanied by the proposed amendments or amended pleading. When motions to amend are granted at the hearing, the amendment or amended pleading shall be filed at the hearing, or with the clerk within such time as may be fixed.

While Rule 17 does not define the “ conclusion of the hearing ”, it cannot be said to extend beyond the time when the trial has been concluded and the briefs filed. This we believe is a reasonable rule and fairness and orderly procedure require that it be adhered to in a case such as this. To disregard the rule under such circumstances would be an invitation to litigants to try their cases piecemeal and unreasonably extend the proceedings. Moreover, the petitioners here do not bring themselves within the rule, for the motion before us does not propose to “ amend the pleadings to conform to the proof ”, but seeks to reopen the case to amend the pleadings, and to offer proof in support of such amendment. At the same time it is apparent from the moving papers that the petitioners are by no means certain that the facts which they seek to discover will substantiate their plea in bar.

While the Board has not adopted a rule governing rehearings, its policy in respect thereto is that a rehearing is extraordinary, and will only be granted on good cause shown. Cf. Garden City Feeder Co., supra.

It has long been the policy of the Board to grant a severance and a preliminary hearing upon the issue of limitations and the plea of the statute of limitations will support a motion before trial for a severance to avoid the burden of trial on the merits. Conrad Hardware Co., 8 B.T.A. 512; Henry M. Leland, 8 B.T.A. 974; Greylock Mills, 9 B.T.A. 1281; A. J. DeMay & Co., 10 B.T.A. 455; Maple Coal Co., 10 B.T.A. 1336; Chadbourne & Moore, 16 B.T.A. 961; Greylock Mills (s.c.), 18 B.T.A. 75; Greylock Mills v. White (s.c.), 63 Fed. (2d) 866.

Here the petitioners chose to proceed to a long, expensive, and burdensome trial upon the merits, and after the trial was closed and the briefs filed they moved that the case be reopened to the extent of enabling them to amend their petitions by pleading the statute of limitations with respect to the proposed deficiencies, and for leave to present evidence in support of such allegations.

We have carefully considered the motion and the affidavits attached thereto in connection with the pertinent facts and circumstances of the case, and, for the reasons set out above, the petitioners’ motion is denied.


author: Lansdon:

text:
    Francis E. Drake, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46804.
    Promulgated April 26, 1934.

      George S. Atkmson, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined that under thé provisions of section 280 of the Revenue Act of 1920 the petitioner is liable for the unpaid taxes of the estate of Mrs. Ivor O’Connor Drake, hereinafter called the taxpayer, for the years 1920 to 1926, inclusive, in the amount of $128,868.35. As to the years 1920 to 1926, inclusive, the petitioner pleads (1) that his liability for such taxes, if any, was barred by the statute of limitations at the date of the deficiency notices; (2) as a general defense, that his alleged liability has been asserted before any final determination of the tax liability of the estate; (3) that the law under which the liability was determined is unconstitutional; (4) that the respondent failed to inform him whether liability for the alleged taxes is in law or at equity and in his notice of deficiency has failed to state the facts upon which his determination is based; (5) that on information and belief all the errors assigned in the proceedings at Docket Nos. 14139, 22308. 34670, and 42625, involving the income taxes of the taxpayer, were actually committed by the respondent and that upon due hearing no taxes were due from such estate for the years covered by the deficiency notice herein; and (6) that he is not a distributee of the estate of Mrs. Ivor O’Connor Drake.

This proceeding was heard in consolidation with proceedings at Docket Nos. 14139, 22308, 34670, 42625, and 49028, and it was stipulated that the entire record should be received, so far as applicable, as if made as to the contentions herein. The parties also filed a stipulation which we accept.

The petitioner and Ivor O’Connor Drake, the decedent involved in the proceedings above enumerated, were married in Paris, France, on September 25, 1918, and lived together as husband and wife in that city and country until the death of Mrs. Drake in September 1928. Petitioner has continuously resided in Paris since 1903, but during all such times has been a citizen of the United States and of the State of Texas.

In her will Mrs. Drake named the petitioner as sole beneficiary. Upon final settlement under the will, as such sole beneficiary, petitioner received cash and other property of the value of $50,717.31.

Some time prior to her death the decedent transferred commercial securities to the petitioner of the value of $173,182.36. In connection with the transfer the parties have stipulated as follows:

More than two years prior to the date of the death of decedent and not in contemplation of death, and while they were man and wife, decedent, Mrs. Ivor O’Connor Drake, and petitioner, Francis E. Drake, entered into a contract under the terms of which petitioner agreed to abandon his business or profession, and to devote his time to the decedent’s affairs, and in consideration of this agreement, and the carrying out of same, decedent agreed to give and did attempt to give and did deliver to petitioner tlie securities hereinafter set out as follows, no part of which has been listed hereinabove. (A list of the securities referred to followed this recital.)

No evidence other than the returns of Ivor O’Connor Drake for the years 1920 to 1926, inclusive, and the several deficiency notices issued by the respondent in relation thereto was introduced in support of the petitioner’s contention that the statute of limitations had tolled his liability, if any, for the unpaid Federal income taxes of Mrs. Ivor O’Connor Drake on September 12, 1929. The record shows that the returns of the taxpayer for all the years under review were timely filed and that the deficiency notice in respect of each was mailed by the respondent within the period of limitations applicable or such period extended by properly executed waivers. The notice of the petitioner’s liability was mailed on September 12, 1929. At that date appeals as to the liability of the taxpayer for each of the years involved were pending before the Board and in each case the statute of limitations was suspended from the date of the appeal to the date of final determination by the Board and 60 days thereafter. In these circumstances it is clear that the petitioner’s liability was timely determined by the respondent.

The contention that section 280 of the Revenue Act of 1926 is unconstitutional has been settled adversely to the plea of the petitioner by the Supreme Court. Phillips v. Commissioner, 283 U.S. 589.

Inasmuch as the estate of Ivor O’Connor Drake was completely distributed before the final determination of the liabilities asserted with respect thereto had been made, we are of the opinion that the Commissioner properly proceeded against the petitioner as sole dis-tributee prior to the final determination of the taxpayer’s deficiencies. If it had been finally determined that no deficiency as to the taxpayer, in fact, existed, then a decision of no liability herein would have been required. On this issue the action of the respondent is approved.

Since the facts show that the petitioner was the sole beneficiary under the will of Mrs. Ivor O’Connor Drake, and that as such beneficiary he received at least $50,717.31, it is obvious that petitioner was a distributee of the estate in question and as such was liable for the unpaid taxes thereon to the extent of the value of the property received therefrom.

Petitioner also attaches some significance to the fact that the respondent’s notice of deficiency failed to state whether the liability determined is at law or in equity. As the respondent has acted in exact conformity with the provisions of section 280 of the Revenue Act of 1926, relating to the manner and form of deficiency notices thereunder, this contention is without merit. As a further defense the petitioner adopts the general and special issues pleaded by the taxpayer in Dockets 14139, 22308, 34670, 42625, and 49028, all of which were consolidated with this proceeding for hearing. The deficiencies in controversy in such proceedings, having been duly redetermined by the Board, it follows, therefore, that this issue is not now material.

In the light of our conclusions above it remains only to determine the amount of the petitioner’s liability, which his counsel argues cannot be in excess of $50,717.31. Eespondent contends, however, that additional liability in the amount of $86,591.18 should be determined on the basis of the stipulated facts. He argues that the assets in the value of $173,182.36 transferred to petitioner by his wife represented earnings of a husband during marriage and that as such were the property of the marital community, of which the husband was a member, and, therefore, that one half of this amount belonged to the wife at the date of his death and then passed to the petitioner as the sole beneficiary of his wife’s estate. We are of the opinion that the transfer was a gift inter vivos, based upon a promise which passed title at once to the petitioner and under the law this made the securities his separate property. Hanlon v. Wheeler (Tex. Ct. App.), 45 S.W. 821; Green v. Ferguson, 62 Tex. 525.

The petitioner was a distributee of the estate of Ivor O’Connor Drake, in the amount of $50,717.31, and to that extent is liable for the unpaid Federal taxes thereon for the years 1920 to 1926, inclusive.

Reviewed by the Board.

Decision will be entered wider Bule 50.