author: Smith :

text:
    Alfred A. Cook, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67174.
    Promulgated April 3, 1934.

      Leo B. Kagan, Esq., for the petitioner.

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

Smith :

This proceeding is for the redetermination of a deficiency in petitioner’s income tax for 1929 in the amount of $1,200. The only error alleged is the respondent’s disallowance of a deduction from gross income of $5,000, representing a contribution which the petitioner made to the Association of the Bar of the City of New York. The issue was submitted on a written stipulation of facts which, for the purpose of our decision, may be summarized as follows:

The petitioner is, and was during 1929, a practicing attorney in New York City, admitted to practice before the courts of the State of New York and the Federal courts of that jurisdiction, and is the senior member of the law firm of Cook, Nathan & Lehman, whose offices are in New York City. The petitioner is, and was during 1929, a member of the New York State and American Bar Associations and the Association of the Bar of the City of New York. During 1929 he was a member of the executive committee of the last named association.

The Association of the Bar of the City of New York, hereinafter referred to as the association, was incorporated by special act of the state legislature in 1871. The incorporating act, as amended in 1924, states that the association was organized—

* * * for the purposes of cultivating the science of jurisprudence, promoting reforms in the law, facilitating the administration of justice, elevating the standard of integrity, honor and courtesy in the legal profession, and cherishing the spirit of brotherhood among the members thereof.

The association has both active and associate members. All members pay annual dues, which vary according to the length of time during which the individual has been a member of the bar. The association is supported by income from different sources, including rents, income from trust funds, and dues. It maintains a library for the use of its members, and other facilities for legal research. It also maintains an auditorium, where lectures on legal topics are delivered by distinguished lawyers.

The real property owned by a bar association, used for the purposes of carrying on its activities, is exempt from the general property tax under the provisions of subdivision (7), section 4, of the Tax Law of the State of New York.

In January 1929 the United States District Court for the Southern District of New York directed the grand jury to conduct an investigation into matters pertaining to the administration of the bankruptcy laws. The grand jury submitted a report stating that there appeared to exist malpractices of a serious character and recommended a public hearing before the United States District Court.

At a meeting of the association on February 13, 1929, a resolution was passed authorizing the president of the association to name a special committee to aid in the investigation of the administration of the bankruptcy laws in cooperation with other associations of the bar. The committee was entitled “ Special Committee in Relation to the Investigation of the Bankruptcy Law.” By order of the court dated March 25, 1929, the bar associations were permitted to intervene in the investigation proceedings.

Subsequently, upon completion of the inquiry, counsel for the bar associations submitted an exhaustive report setting forth the abuses and malpractices in the administration of the bankruptcy law in the Southern District of New York and recommending certain corrective measures.

As a result of the investigation, disciplinary action was taken against certain attorneys practicing before the United States District Court for the Southern District of New York and certain reforms in the procedure were instituted.

No part of the income of the association nor of the special committee referred to above inured to the benefit of any private stockholder or individual, except in the matter of reasonable compensation for services performed. Chief counsel for the bar associations served without compensation.

The petitioner in 1929 contributed $5,000 to be used by the association in the manner above described. In his income tax return for that year he claimed the amount as a deduction from gross income. The respondent has disallowed the deduction.

The petitioner contends, first, that the item of $5,000 is deductible under section 23 (n) (2) of the Revenue Act of 1928 as a contribution to a “ corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.” Obviously, the answer to this question depends upon whether the Association of the Bar of the City of New York is a corporation organized and operated exclusively for educational purposes.

The facts above stated with respect to the purpose for which the association was organized and the manner in which it operated are all of the evidence before us bearing upon these questions. This evidence does not prove that the association was either organized or operated exclusively for educational purposes. We do not know in what activities it actually engaged or to what extent it was social as distinguished from educational in its activities. See Herbert E. Fates, 9 B.T.A. 828. "Cherishing the spirit of brotherhood among the members” would seem to permit of a wide latitude in fields unrelated to religious, charitable, scientific, literary, or educational endeavors.

We cannot find, as petitioner Urges, that the particular purpose for which the contribution in question was made to the association comes tinder any of the statutory classifications. (The exposure of and correction of the maladministration of the bankruptcy laws was undoubtedly a highly commendable civic undertaking and served the public interest. But the statute does not authorize the deduction of all contributions for civic betterments, or public, as distinguished from private, purposes. The contribution, to be deductible, must be to a corporation organized and operated exclusively for the purposes stated.

For the reasons discussed we reject the petitioner’s contention that regardless of whether the association was organized and operated exclusively for the purposes enumerated in the statute, the contribution is, nevertheless, deductible as being made to or for the use of a trust fund or foundation organized and operated for such purposes. Moreover, we do not believe that the special committee appointed by the association, or the plan for financing the committee, was a “ trust ”, “ fund ”, or “ foundation ” as those terms are employed in the statute.

Evidence is also lacking from which we can determine that the contribution was an ordinary and necessary expense of the petitioner’s business.

It is stipulated that the petitioner was actively engaged in the practice of law in New York City and was a senior member of the law firm of Cook, Nathan & Lehman. We do not know what other business interests the petitioner had or what portion of his income resulted from partnership earnings. The computation attached to the deficiency notice shows that the petitioner had an ordinary net income in 1929 of $327,488.75 and a capital net gain of $294,225.20. The deficiency notice further states that “ Income from the partnership Cook, Nathan & Lehman, has been increased to $6,073.51.” There is no evidence whatever that the gift of $5,000 made to the association actually benefited or was expected to benefit either the business of the partnership or any private business in which the petitioner was interested. Even if the contribution were a deductible expense of the partnership, it would not be in its entirety a deductible expense in computing the petitioner’s individual net income. In these circumstances the respondent’s action in disallowing the deduction is sustained. See S. C. Toof & Co., 21 B.T.A. 916; Old Mission Portland Cement Co., 25 B.T.A. 305; Capital Traction Co., 27 B.T.A. 926; Michigan Central R.R. Co.. 28 B.T.A. 437; Adam, Meldrum & Anderson Co., 29 B.T.A. 419. Cf. also Weyl v. Commissioner, 48 Fed. (2d) 811; Colonial Trust Co., Executor, 19 B.T.A. 174; James J. Forstall, 29 B.T.A. 428.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Marquette:

license: Public Domain

text:
    Grace A. Cowan, Executrix, Estate of Glen P. Cowan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67228.
    Promulgated April 3, 1934.

      H. A. MiMlls, G.P.A., for the petitioner.

      James K. PolJc, Jr., Esq., and H. B. Hunt, Esq., for the respondent.
   OPINION.

Marquette:

On December 23, 1929, the decedent disposed of one block of stock to an old friend and business associate and on the 30th day of the same month he made a disposition of other stock to his brother-in-law, and each of them paid him the same amount, one dollar. It is conceded that each transaction was consummated for the sole purpose of producing a deductible loss, and in this way the reduction of decedent’s income tax. In such case the transactions should be closely scrutinized (Harold F. Seymour, 27 B.T.A. 403), and clear proof is required; that the transactions were bona fide and not a subterfuge, and that fair value was paid. Commissioner v. Hale, 67 Fed. (2d) 561. If a taxpayer meets these requirements, he succeeds in his purpose (Bullen v. Wisconsin, 240 U.S. 625); otherwise, he does not.

The first transaction was a transfer to Stephens of class A stock and class B stock of the Byers Machine Co. Prior to December 1929 Stephens had no interest in that company. Before he came to the office of the decedent, the latter and Bender had determined to endeavor to sell the stock to him. The scene is thus described by Stephens:

Q Under what circumstances was that purchase made? You just relate what occurred.
A Well, I think one day I was talking to Mr. Bender and Mr. Cowan came in and says, I want to take — he said to me, “ I want you to take some of my Byers stock over.” So in another week or so Mr. Bender had the dope ready and I took it.
Q Did Mr. Cowan make any actual offer to sell stock to you?
A Well, he said he had a certain amount he would have to get some way off of his books, as I understood it, and he offered it to me for one dollar.
* * * * * * *
Q Was that the only discussion which you had with Mr. Cowan as to the supposed sale of the Byers Machine Company stock to you?
A I think so. I don’t think there was much talk about it. I just know I had heard from time to time that it wasn’t going so good; I wasn’t so hot about it.
Q You mean the Byers Machine Company?
A Yes.
Q Mr. Stephens, did Mr. Cowan make any explanation to you at the time in connection with his proposed sale of the Byers stock for one dollar?
A You mean-
Q My question is as to whether or not there was any further discussion, any comment made by Mr. Cowan in regard to the supposed sale?
A No, I don’t know as there was, only just to get it off his books.
Q Did he make an actual sale to you?
A Oh, yes.
Q What consideration was paid by you, and in what form?
A I gave the one dollar bill to Mr. Bender.

Stephens further testified that, while the decedent did not so tell him, he understood that the sale was made for tax purposes. It thus appears that Stephens did not desire the stock for any purpose and we can not assume that he would have paid a price commensurate with the value of the stock as disclosed by the record. He took over the stock solely as an accommodation to his old friend and business associate. Both the decedent and Stephens were men of means, and the consideration of a dime or a cent would have been just as onerous to the one as beneficial to the other. In our opinion the passing of the dollar bill gave no additional virtue to the transaction. The delivery of the dollar was a mere formality. Especially is this true when we consider the value of class A stock.

On this point the petitioner introduced evidence in an effort to show that it was worthless. If so, the loss had been suffered prior to the transaction with Stephens. But this thought does not seem at that time to have occurred to the decedent or to any other stockholder, and the evidence fails to disclose any identifiable event which would indicate that the stock was worthless. On the other hand, the balance sheet of the corporation and the quotations of the Cleveland Stock Exchange clearly indicate a value far in excess of one dollar. It may be the market might not have been able to sustain the weight of a sale of all the decedent’s stock made at one time, but such a sale was not necessary. If decedent desired bona fide sales they could have been made over a period of time and in small blocks. Perhaps, though the point is by no means clear, some of the sales made in December were supported by procured purchasers. The fact remains that in 1980 this stock was sold as high as $1 per share.

We are convinced that one dollar was by no means commensurate with the value of the class A stock purported to have been sold. If a consideration of one dollar in a transaction between individuals of means, who are old friends and business associates, can convert into a sale what in fact was a gift, then any lesser consideration would have the same effect. We can not assent to such a proposition, especially where the sole purpose of the transaction was to avoid income tax. Although there is testimony that Stephens was under no obligation to return the stock, he states that in the early part of 1932 he sold the stock for one dollar to Bender, who appears at that time to have been in the employ of the decedent’s estate, and at no time did Stephens attempt to ascertain what value the stock possessed. While Stephens testified that Bender had expressed a desire to become a director of the corporation, it is pertinent to point out that when Bender testified he made no reference to this later transaction, nor was he called upon to testify concerning it. We think the respondent properly denied the claimed loss. Wishon-Watson Co., 25 B.T.A. 321; aff'd., 66 Fed. (2d) 52; Commissioner v. Hale, supra; Ten-Eyck v. Whitbeck, 135 N.Y. 40; 31 N.E. 994; In re Lynch's Estate, 220 Pa. 14; 69 Atl. 290; Salmon v. Wilson, 41 Cal. 595; Sires v. Sires, 43 S.C. 266, 21 S.E. 115.

No evidence was introduced as to the value in December 1929 of the decedent’s stock in the Detroit Properties Corporation. The balance sheet for December 31, 1928, discloses that the corporation had a small surplus. It wa,s testified that the corporation was then solvent. It is clear that its assets had become frozen, and that, by reason of the panic in the fall of 1929, additional money could not be raised to supply the necessary working capital. On the other hand, it appears that the stockholders and not the creditors of the corporation secured the appointment o,f a receiver in 1930, and that this was done for the purpose of protecting their interests as stockholders. This is evidence that the stock had value. How much we do not know. This sale of the stock was made by the decedent to his brother-in-law without any prior negotiations. The proposition was made at a social gathering and on the 30th day of December. The brother-in-law testified that when asked to buy the stock for one dollar he stated he would buy anything at that price. We are of opinion that much of what we have said relative to the transaction with Stephens applies equally here, and we do not think the evidence is sufficient to overcome the respondent’s determination.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Aiujndell:

text:
    Walter F. Henningsen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56668, 62845.
    Promulgated April 4, 1934.

      Mav/rice W. Seitz, Esq., and Howard S. Bell, O.P.A., for the petitioner.

      Willis B. Lamford, Esq., for the respondent.
   OPINION.

Aiujndell:

The question of whether the dividends taxed by respondent to petitioner were income to him depends upon the ownership of the stock, petitioner contending that one half of it belonged to his wife, since he had made her a gift thereof prior to the taxable years.

The evidence admits of no doubt of petitioner’s intention to give his wife a half interest in the stock. This he manifested in several ways — by oral statements, by the written statement of November 9, 1927, by entries in the joint account, and finally, when it came into his possession, by having one half of it issued to her. It is equally clear that there was an acceptance by the wife of all evidences of •the intended gift that were tendered. She received and kept the statement of November 9, 1927; she knew of petitioner’s use of the dividends to reduce the indebtedness on the stock and acquiesced therein; the first time she filed a separate return she reported the dividends as her income; she received certificates for her interest when they became available through release by the creditor. Thus the only matter at all debatable is whether petitioner effectively executed his intent. “While delivery is essential, manual delivery of the thing given is no more necessary in the case of a gift than in the case of a sale. A deed of gift is as effective to pass title as a bill of sale. * * * Nor will the failure to record the gift by a transfer of the stock on the books of the corporation prevent title from passing as between the donor and the donee.” Estate of James F. Foster, 13 B.T.A. 496. See Waite v. Grubb, 43 Or. 406; 73 Pac. 206, holding that:

* * * The situation, relation, and circumstances of the parties and of the subject of the gift may be taken into consideration in determining the intent to give and the fact as to delivery. * * * Where the intent to bestow is obvious and clear, and the language and deportment of the donor indicate a belief upon his part that he has done all that is necessary to accomplish his purpose, they come to the aid of the act of delivery, if slight and ambiguous, but not to dispense with it as an essential element of a valid gift. * * *

Leitch v. Diamond Nat. Bank, 234 Pa. 557; 83 Atl. 416, quotes with approval Thornton on Gifts to the effect that the law takes cognizance of the close relation of husband and wife “ and will construe an act to amount to a delivery where it often would not if the donor and donee were not members of the same family.” The petitioner here obviously could not make manual delivery of the stock certificates prior to the taxable years, as the stock was pledged as security for an indebtedness and in the hands of the creditor. But he did deliver to the donee a written instrument declaring her to be half owner of the stock. It was not worded as artfully as would be an instrument prepared by one skilled in such matters, but, considered in the light of petitioner’s intent as evidenced by his contemporaneous statements and actual delivery when the certificates came into his possession, it is our opinion that a completed gift of a one-half interest in the stock was effected prior to 1928. See J. T. Hedrick, 24 B.T.A. 444. Consequently petitioner is taxable upon but one half the dividends on the stock in 1928 and 1929.

Beviewed by the Board.

Decision will be entered under Bule 50.


author: Black:

text:
    N. J. Basch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45928.
    Promulgated April 4, 1934.

      O. G. Maxwell, Esq., for the petitioner.

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

Black:

Respondent has proposed for assessment against petitioner a liability of $060.19 under section 280 of the Revenue Act of 1926 as transferee of the assets of the N. J. Basch Co., a corporation, for unpaid income tax due from that company' for the year 1926.

Petitioner admits by stipulation that he is a transferee of the N. J. Basch Co., and that he is liable as such transferee if the N. J. Basch Co. had a deficiency in tax for said year, but he denies that there was' such a deficiency.

In cases under section 280 the burden of proof is upon the Commissioner to show that the petitioner is liable as a transferee of the property of a taxpayer, but not to show that the taxpayer was liable for the tax. See section 602, Revenue Act of 1928.

Petitioner contends in this case that the respondent erred in not making proper allowance for the cost of good will purchased by the transferor in 1908.

The petitioner in 1889 started a clothing and men’s furnishings store in Danville, Illinois, on $1,500 capital. The business was run largely upon a cash basis and prospered under his individual ownership until 1903, when it was incorporated under th.e laws of Illinois as the 1ST. J. Basch Co., with a capital stock of $40,000, divided into 400 shares of the par value of $100 each. The subscribers to the capital stock were 1ST. J. Basch (petitioner) 295 shares, $29,500; I. V. Landman, 50 shares, $5,000; N. B. Oppenheim, 50 shares, $5,000; and Gertrude Basch (petitioner’s wife) 5 shares, $500. Landman and Oppenheim, although subscribers to the capital stock, really purchased their stock from Basch and paid him for it on the installment plan.

According to the agreement of the parties, Landman and Oppen-lieim were each to have a one-eighth interest in the business, for which they were each to pay $5,000 to petitioner. The stock of goods which belonged to Basch inventoried $39,680.30; fixtures, $1,484.55; and accounts receivable, $5,300, making a total of $46,464.85. These were conveyed to the corporation at 100 cents on the dollar in payment for its entire issue of $40,000 capital stock, and petitioner was to receive $10,000 in cash, to be paid to him by the corporation. The corporation subsequently paid this $10,000 to petitioner, of which $3,535.15 was paid to N. J. Basch for the good will of his business.

The corporation operated the business successfully until 1926, when it sold out for $66,704.61. Of this $66,704.61, $12,500 was for good will. All of this $12,500, which the corporation received for good will, the respondent held to be profit. In making its income tax return for 1926 the corporation claimed a March 1, 1913, value of good will of $5,000, which the respondent disallowed and added to income, causing the deficiency. Petitioner alleged in his petition that the disallowance of this March 1, 1913, value of $5,000 for good will was error, but on the hearing based his case on cost of good will in 1903, which he fixed at $3,535.15, being the difference between $50;000 and the value of the assets acquired by the corporation, viz., $46,464.85.

No evidence was introduced of the value or fair market price of the corporation’s good will as of March 1, 1913.

Section 204 (b), Revenue Act of 1926, provides in part: “ The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property * * * or (B) the fair market value of such property as of March 1, 1913, whichever is greater.” Respondent contends that, in construing the above provision of the statute, it is necessary in such a case as we have here to prove (1) cost of property, (2) its fair market price or value as of March 1, 1913, and (3) sale price; and that, inasmuch as petitioner has not offered any evidence as to the value of petitioner’s good will on March 1, 1913, petitioner cannot prevail in this proceeding, evén though it is conceded that the good will when purchased in 1903 cost $3,535.15, as claimed. In support of this proposition respondent cites United States v. Flannery, 268 U.S. 98; McCaughn v. Ludington, 268 U.S. 106; Burnet v. Houston, 283 U.S. 223; Anniston City Land. Co., 2 B.T.A. 526; Audubon Park Realty Co., 6 B.T.A. 875; Joseph E. Wallis et al., Executors, 18 B.T.A. 432.

All the above cited cases involve the application of the Revenue Act of 1918 and are not in point here. Section 202 (a) (1), Revenue Act of 1918 provided that in determining gain or loss on property owned prior to March 1, 1913, the basis should be the fair market price or value of such property as of that date. Therefore, in every case where property owned prior to March 1, 1913, was sold, it was necessary in determining gain or loss to show the fair market value of such property on March 1, 1913. This provision of the law was changed, however, in subsequent revenue acts.

The revenue act applicable to the present proceeding is the Revenue Act of 1926, and as has already been stated section 204 (b) of that act provides that in determining gain or loss on the sale of property acquired prior to March 1, 1913, the basis shall be (1) cost or (2) March 1, 1913, value, whichever is the greater.

Therefore, in the present proceeding if the petitioner could have proved that the March 1, 1913, value of the good will of the 1ST. J. Basch Co. was greater than its cost of $3,535.15, he would be entitled to use the larger basis in determining the gain or loss on the sale of good will in 1926, thus decreasing the amount of his taxable gain. However, petitioner has not proved that the March 1, 1913, value of the good will of the 1ST. J. Basch Co. was greater than its cost. Therefore, cost is the correct basis to use, which in this case is $3,535.15.

Decision will be entered wider Ride 50.


author: Marquette :

text:
    Fort Ring Oil and Gas Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60096.
    Promulgated April 4, 1934.

      Charles D. Hamel, Esq., and Lee I. Parle, Esq., for the petitioner.

      Frank B. Schlosser, Esq., and E. G. Sievers, Esq., for the respondent.
   OPINION.

Marquette :

The petitioner asserts that expenditures for drilling producing oil and gas wells upon a footage basis were capital expenditures, to be included in the basis for determining the cost deductible from the sale price in ascertaining gain or loss on sale. It appears that in its returns for the fiscal years ended June 80, 1925, 1926, 1927, and 1928, it deducted the cost of drilling all wells, including the intangible cost of turnkey drilling, as well as the footage drilling. The cost of physical equipment in and about such wells was capitalized and not' deducted. During the year 1929 petitioner filed amended returns for the years 1925 to 1928, inclusive, in which it treated as capital items drilling costs incurred in said years on both turnkey and footage drilling. During the fiscal year ended June 30, 1929, the petitioner sold its oil and gas wells and received therefor $142,759.95. In its return for said year petitioner treated all drilling costs as capital expenditures. The respondent has restored the turnkey drilling costs, which had been deducted, to capital and has refused to so restore to capital the footage drilling costs, deducted as expense. He relies upon the provisions of article 243 of Regulations 74 as authority for such action.

The petitioner claims that no reasonable distinction exists between the expenditures for turnkey drilling and those for footage drilling; that neither constitutes “ incidental expenses * * * paid for wages, fuel, repairs, hauling, etc.”, within said regulation. This question has been decided adversely to the petitioner’s contention by the Board and the courts in Old Farmers Oil Co., 12 B.T.A. 203, and Hughes Oil Co. v. Bass, 62 Fed. (2d) 176; certiorari denied, 289 U.S. 726, wherein it was held that turnkey drilling’ costs were not within the incidental costs covered by the regulation. Consequently these costs were properly capitalized by the respondent. Development costs in the case of footage drilling stand upon a different basis and, under the regulation, the taxpayer may elect whether such costs shall be deducted as an expense or charged to capital account, returnable through depletion. This regulation has been held valid in Sterling Oil & Gas Co. v. Lucas, 51 Fed. (2d) 413; aff'd., 62 Fed. (2d) 951; and Ramsey v. Commissioner, 26 B.T.A. 277; aff'd., 66 Fed. (2d) 316; certiorari denied, 290 U.S. 673. In the last cited case the Circuit Court of Appeals discussed the scope and purpose of this regulation and, in holding it to be valid, said :

Whether an oil well is a permanent improvement is at least a debatable question. The incidental costs here involved are irretrievably gone when the. well is finished, whether it be a dry hole or a producer. A dry hole is neither an improvement nor a betterment; neither is a producer after the oil is exhausted. The truth is that the hole upon which the money is expended is simply a means of reaching the oil sands, and it is the oil which increases the value of the property; the hole is of value only if oil is found, and then only as long as the sands will produce. A producing field is of more value than a nonproducing one, partly because the expenses of reaching the sands have been incurred, but largely because the presence of oil has been proven. While dictionary definitions are helpful, they do not exclude an examination of the context to ascertain the purpose of the statute, nor forbid an inquiry into administrative interpretation as an aid in construction of doubtful words or passages. A priori, therefore, we are of the opinion that the holes through which the oil is recovered are not so conclusively “permanent improvements or betterments” as to preclude a regulation permitting the deduction of irrecoverable expenses of drilling them, as ordinary expenses incurred in carrying on a trade or business, allowed by Sec. 214 (a) of the acts in question.
* * * * * * *
The industry, the Commissioner, the Board of Tax Appeals, and the courts for years have acted upon the assumption that this regulation is valid. It is a fair solution of a debatable question. If it is to be changed at this late day, it should be done by Congress and not the courts.

We must next inquire whether the petitioner exercised its option under the regulation to deduct footage contract cost as a development expense. The facts disclose. that for its taxable years 1925. 1926, 1927, and 1928, in its original returns it consistently treated all drilling costs, both turnkey and footage drilling, upon the same basis, that is, as a development expense, and that in its amended returns for said years and in its return for the year 1929 it treated all drilling costs as capital items. It argues that in so far as its tax liability for the years 1925 to 1928, inclusive, is concerned, the accounting method to be used is immaterial, since both the original and amended returns for those years disclose net losses; that the costs of footage drilling, like those for turnkey drilling, having been erroneously deducted as current expense, should be restored to capital. If by this it means that because turnkey drilling charges were erroneously charged to expense when they should have been capitalized, it is entitled to go back and charge to capital development expense for footage drilling which, under its option, it could charge to expense, we are unable to agree. As we have shown before, turnkey drilling charges are not within the option granted by the regulation and must be capitalized. Therefore, the only option it could exercise thereunder would be to deduct the footage drilling as a development expense or charge it to capital account. It chose to deduct it in each of the years 1925 to 1928, inclusive, and we think it exercised its option under the regulation by making its returns upon that basis for four successive years. It should not now be heard to say that it exercised such option when it filed its amended returns for those years in 1929. Such deductions may not now be capitalized to change the basis in determining gain or loss upon the sale of the properties in 1929.

The petitioner relies on Sterling Oil & Gas Co. v. Lucas, supra, as the authority in its favor. While it is true that the court in that case held that the taxpayer had not made an election as to the method to be used in treating its drilling costs, such decision was made upon facts most of which are absent in this case, and we do not think it' is controlling. If any weight was given to the fact that no tax was assessed in that case, as here, we think it is entitled to no weight in this case, for the taxpayer consistently, over a period of four years, elected to charge off footage drilling costs and was apparently satisfied with the result. While no tax was assessable in the prior years, the change which the petitioner seeks results in an increased loss in each of the years 1927 and 1928, which loss becomes deductible in 1929, the year before us. We think the petitioner is now precluded by the regulation above set forth from making the change in its returns, and the action of the respondent is approved.

Judgment will be entered) for the respondent.

       Abt. 243. Charges to capital and. to expense in the case of oil and gas wells. — Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as a development expense or charged to capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital' account, in so far as such expense is represented by physical property it may be taken into account in determining a reasonable allowance for depreciation. The cost of drilling nonproductive wells may at the option of the operator be deducted from gross income as a development expense or charged to capital account returnable through depletion and depreciation as in the case of productive wells. An election once made under this option will control the taxpayer’s returns for all subsequent years. Where deductions for depreciation or depletion have either on the books of the taxpayer or in his returns of net income been included in the past in expense or other accounts, rather than specifically as depreciation or depletion, or where capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. [Article 223 of Regulations 69, promulgated under the Revenue Act of 1926, is identical with the above regulation.]


author: VaN Fossan:

text:
    Marbelite Corporation of America, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65942, 70552.
    Promulgated April 4, 1934.

      Frank Mergenthailer, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

VaN Fossan:

In these cases taxpayer asks redetermination of deficiencies of $6,992.97 and $501.56 for the years Í929 and 1930, respectively. As developed by the hearing, there is but one question: Was petitioner affiliated with another corporation during the period March 16, 1928, to February 19, 1929? Other questions were either abandoned or will be governed by the decision on the principal question.

The facts, stipulated in part and in part presented by oral evidence, are as follows:

The petitioner is a corporation, organized under the laws of the State of Delaware, with its principal place of business in Los Angeles, California. In the years 1929 and 1980 it was engaged in the business of manufacturing and selling ornamental cement street lighting standards. The chief outlet for its products was through manufacturers and contractors engaged in installing public improvements, and action was generally required on the part of legislative bodies of municipalities to approve public improvement projects in which the products of the taxpayer were used.

The petitioner, in the early part of 1928, organized a corporation under the laws of the State of Illinois, called “ The Marbelite Corporation of Illinois ”, with an authorized capital of common voting stock consisting of 4,000 shares of a par value of. $100 per share, for the purpose of manufacturing and selling the products of the taxpayer in the States of Illinois, Wisconsin, Michigan, and Indiana. The outlet for the products of the Illinois corporation was similar to that of the petitioner, i.e., through municipal improvement projects.

On March 16, 1928, the petitioner entered into a written contract with Bassler, Bippus & Bose, a law firm practicing in Chicago, which recited that Bassler, Bippus & Bose had rendered valuable services to the petitioner and that the petitioner desired to pay therefor in stock instead of cash and provided that the petitioner would cause the Illinois corporation to issue to Bassle,r, Bippus & Bose a certificate of stock for 1,000 shares of its stock, par value $100,000, and that the certificate of stock would have written upon it the following statement:

This certificate of stock is issued in accordance with the terms of an agreement between the Marbelite Corporation of America and the parties named in said certificate, and all rights which may accrue under this certificate or by virtue of its issuance, are subject and subordinate to the terms and conditions of the contract hereinbefore mentioned.

The contract further provided that if the total business done by the Illinois corporation within the States of Illinois, Michigan, Wisconsin, and Indiana should amount to a sum less than $1,000,000 within a five-year period from the date of the contract, Bassler, Bippus & Bose would endorse and return to the petitioner the certificate of stock so issued.

Bassler, Bippus & Bose had rendered no “ valuable services ” to petitioner prior to the date of the contract, excepting certain legal services for which they had been otherwise compensated.

Prior to the execution of the agreement mentioned herein-before, the Illinois corporation, out of its total authorized capital stock of 4,000 shares, had issued to the petitioner 2,995 shares of its common par value capital stock, and it was the owner of all the outstanding stock of the Illinois corporation, including five shares thereof issued to its directors as qualifying shares.

Thereafter on March 16, 1928, 1,000 of the 2,995 shares of stock theretofore issued to the petitioner were duly transferred to Bassler, Bippus & Bose, pursuant to the terms of the petitioner’s contract with them. The certificate so issued by the Illinois corporation to Bassler, Bippus & Bose bore the statement set forth in the above agreement of March 16, 1928, and certified that the partnership' of Bassler, Bippus & Bose was the owner of 1,000 shares of the capital stock of the Illinois corporation. No stock other than the 8,000 shares mentioned above was ever issued by the Illinois corporation.

On March 16, 1928, the Illinois corporation entered into a written contract with Bassler, Bippus & Bose which recited that:

Whereas, the party of the second part is in a position to, by reason of its friends, acquaintances and associates, render valuable services to the party of the first part in the sale and disposal of objects manufactured by it from concrete;

and contained the following material provisions:

First: That the party of the second part will use its best endeavors to obtain business for the party of the first part, will aid the party of the first part in the sale and disposal of lighting standards and other objects manufactured by it from concrete, and will not aid or assist any company that is a competitor of first party in the sale or disposal of any objects that might be manufactured, sold or disposed of in competition with the articles manufactured, sold and disposed of by the party of the first part.
Second: That in consideration of the services so to be performed by the party of the second part, the party of the first part agrees to pay to the party of the second part, monthly, an amount equal to three per cent (3%) of the amount collected by it from the sale and disposal of the articles manufactured by it for a period of five years from date hereof.

The two contracts referred to were by mutual agreement canceled on February 19, 1929, the stock was endorsed and returned to petitioner, and the firm of Bassler, Bippus & Rose was paid $5,750.

Petitioner contends that the contracts of March 16, 1928, though entirely innocent on their face, were in fact nothing more than “ logrolling contracts ”, illegal as contrary to public policy and void ah initio. On this premise it is argued that Bassler, Bippus & Rose never acquired title to the 1,000 shares of stock of the Illinois corporation; that the petitioner was at all times the owner; and, consequently, was affiliated with the Illinois corporation and entitled to file consolidated returns.

It is thus readily perceived that, reduced to plain words, taxpayer seeks to plead in this litigation with the Government over taxes its own participation in an illegal contract to avoid the consequences of such contract on its tax liability. There is a complete barrier to such action. As stated by the Court of Appeals for the Ninth Circuit in Johnston v. McLaughlin, 55 Fed. (2d) 1068:

It is a fundamental principle of law that no person can take advantage of his own wrong. The appellant here bases his action upon the wrong committed by the Du Pont Milling & Sales Corporation acting through its duly appointed officers. This cannot be done. If an individual taxpayer had made the tax return showing an income never actually received for the purpose of deceiving his present or prospective creditors, he could not be heard to urge in a suit against the government that he had made a false return in order to defraud his creditors. The rule is the same with reference to a corporation.

Respondent has given full faith to the transfer of stock to Bass-ler, Bippus & Rose and has denied affiliation. We approve his action and affirm the deficiencies.

Decision will he entered for the respondent.


author: Morris:

text:
    Guaranty Trust Company of New York, Executor of the Last Will and Testament of Edwin H. Brown, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72199.
    Promulgated April 4, 1934.

      'William O. Robertson, Esq., for the petitioner.

      Owen W. Sw'echer, Esq., for the respondent.
   OPINION.

Morris:

This proceeding is for the redetermination of a deficiency in income tax of $192.32 for the year 1931. It is alleged that the respondent erred in the following particulars: (1) In the dis-allowance of a deduction of $1,682.45 representing expenditures for taxes, insurance, and miscellaneous items on real estate, and (2) in the elimination from income of the sum of $4,006.93 representing income from rents of said realty, such adjustments having been made by him upon the alleged ground that the real estate with respect to which the expenditures were made and the income received was devised by the decedent in equal shares to his wife and two children, and therefore the expenses therefor are deductible by and the income thereon is taxable to the devisees under the will. .

The decedent died on January 3, 1930, and the petitioner, a trust company, organized and existing under the laws of the State of New York, is his duly appointed executor under his last will and testament.

After providing for specific legacies aggregating $1,550,000, articles eighth and ninth of such will provide:

Eighth: Inasmuch as a large part of my estate consists of mortgages upon real estate guaranteed by title insurance corporations, I direct that such guaranteed mortgages shall be divided equally among my said wife and my said two sons as far as practicable, and as to the remainder of my estate, both real and personal, and also as to said guaranteed mortgages if advisable for any reason, I hereby give and grant unto my executor hereinafter named full power and authority in its discretion to lease, mortgage, sell and convey the same separately at different times, and to execute and deliver all leases, mortgages, deeds and conveyances, bills of sale, grants and other instruments suitable or proper for transferring good, sufficient and valid titles thereto.
Ninth: The entire residue of my estate I give, devise and bequeath to my wife, Adeline R. Brown, and my two sons, Oaxton Brown and Stanley Brown, in equal parts.

On October 13, 1931, the legatees elected to take the estate in kind at the values to be fixed for inheritance tax purposes and subsequently thereto all pxcept reserves for taxes and administration expenses were distributed. In or about the fall of 1931, following the election of the legatees to take distribution of the assets of the estate in kind, a corporation was caused to be organized under the laws of the State of New York, to which was conveyed substantially all of the realty owned by the decedent at the time of his death. That conveyance was made by the legatees themselves and there was obtained from the executor a writing to the effect that any legacies which were charged upon the realty had been paid and the executor had no interest whatever therein. Since that time the realty has been administered under a corporate name. Prior to the making of the election by the legatees the executor sold at least one piece of property owned by the decedent. In another case the legatees sold a parcel of property, but the purchasers required a quitclaim deed from the executor reciting that the executor claimed no part of the realty described in the deed to be used for the payment of legacies.

The executor expended $7,682.45 in 1931 for taxes, insurance, and miscellanéous items upon tbe real estate held by it and it received rent of $4,006.93 from leases upon such real estate in that year. Since the election of the legatees to take the properties in kind was made, no payments of realty taxes or insurance, etc., have been made by the executor upon such real estate.

The respondent’s deficiency notice, in eliminating those items from his determination, says:

The taxes and insurance claimed on the estate return in the amount of $7,682.45, representing expenditures made by the estate with respect to real estate devised by the testator in equal shares to his wife and two children, have been disallowed for the reason that all expenses in connection with such equity are only deductible by the devisees. Accordingly, the rents reported from this property in the amount of $4,006.93 have been eliminated from income.

The net inventory value of the estate, exclusive of realty, was $1,470,000 and the realty had a value of approximately $370,000.

The petitioner contends that where the language of the instrument blends personalty with realty and the personalty is insufficient to pay the specific legacies, they become a charge against the realty to the extent of the deficiency in amount; that there became in this case a “ blending and combining of the real and personal estate in one devise,” hence, in effect, it contends, there was no vesting of the estate in the realty upon death, to the heirs, consequently the expenses paid here as charges against the realty and the income therefrom were properly accounted for by it as executor.

The respondent cities George L. Craig, 7 B.T.A. 504, involving a similar state of facts. In that case we held that under the laws of Pennsylvania- the executors under a will have no right to the rents and profits arising from realty of a deceiient unless such right be conferred by the will itself and that the rents were taxable to the devisees under the will.

The petitioner concedes that in the ordinary case realty descends to the heirs at law and not to the executors of the estate. We infer that this concession applies also to the State of New York — but it distinguishes the George L. Craig case upon the facts, from the instant case, because (1) that case arises under the laws of a different state, Pennsylvania — but it does not show what difference there is in the laws of the two states, if there be any, or where such difference would produce a different result here — and (2) in that case the personalty was ample to satisfy all of the demands to be made thereupon, the executors’ only interest in the realty there being in the exercise of a ¡sower of reinvesting conferred by the will.

The principle upon which the Craig case rested was that under the laws of Pennsylvania realty descends, without lapse of time,' to the lawful heirs or devisees and, therefore, all of the rents, issues, and profits accruing thereto are likewise the property, of such heirs or devisees. We find in book 13, paragraph 14, of McKinney’s Consolidated Laws of New York Annotated that “ Every will that shall be made by a testator, in express terms, of all his real estate, or in any other terms denoting his intent to devise all his real property, shall be construed to pass all the real estate, which he was entitled to devise, at the time of his death ”; and in section 2672, paragraph 9 of Chase’s Pocket Code Civil Procedure, New York, it is said, “Things annexed to the freehold or to a building, shall not go to the executor, but shall descend with the freehold to the heirs or devisees * * *. The right of an heir to any property, not enumerated in this section, which by the common law would descend to him, is not impaired by the general terms of this section.” Those provisions were cited and quoted by the respondent’s counsel at the hearing. The petitioner’s counsel cites no modifications of those provisions by later enactments, and though we have made careful search we have found none. See also Greene v. Greene, 26 N.E. 739.

Thus, although no stress has been laid upon this phase of his contention, we are satisfied that the petitioner’s first distinction between the instant case and the Craig case is without merit. As a matter of fact the petitioner’s argument hinges upon his second distinction, to which we shall now address ourselves.

In the Oraig case, after citing section 219 of the Revenue Act .of 1918, which is, for all practical purposes, identical with, that of section 161 of the Revenue Act of 1928, the Board said:

* * * It is at once apparent that the income, referred to in the statute as the income of an estate, is income which belongs to the estate. and which it is the right and duty of the personal representative to collect. If in this case the income from the real estate did not belong to the executors as such, then it was no more the income of the estate of Joseph W. Craig than if the executors had reached out and brought into the estate their own personal income or the income of any third person. * * *
* * * Sis * ❖ s¡:
It is to be observed that the testator did not devise his real estate to his executors but devised it directly to the petitioners. The only provision in his will which gives his executors any power or right whatever with respect to his real estate, is the fifth clause thereof. That clause conferred on the executors a naked power of sale for the purposes of the will and for reinvestment. In this connection it is well to recall that the real estate of the testator was never in danger of sale for the payment of debts. After the payment of all debts and liabilities, the executors distributed among the residuary legatees, $1,831,646.73. Another pertinent fact is that all the testator’s debts were paid and his estate relieved of all its contingent liabilities prior to September 23, 1914. Thus, there was no necessity for any sale by the executors for the payment of debts and there were no debts after September, 1914. Nor-is it necessary to consider what would have been the result if the executors had sold the real estate for the purpose of reinvestment. It does not appear that they exercised this power. *

In this case as in the Craig case the will gave the executor no title to the realty. The executor here was clothed with power to sell the' realty as in that case, but in a much more restricted sense.

Conceding, arguendo, that the personalty, at the then market values, was insufficient to satisfy the specific pecuniary legacies, and, furthermore, that the payment thereof was a proper charge against the realty to the extent of any deficiency found to exist, the fact remains, so far as we are informed, that the rights of the lawful heirs to the realty were never seriously threatened, which we deduce, partly from the known fact that the same parties who were to receive the specific legacies (all but $50,000 thereof) were not only the heirs at law but were the residuary legatees and devisees under the will and as such entitled to take the realty, and partly from the fact that the problem of satisfying the proper distribution of the estate was solved by distribution of the estate in kind, all of which transpired long prior to the necessity for preparing and filing an income tax return by the estate for that year.' Of course at least one and possibly two pieces of realty were sold prior to the exercise of the election by the legatees in October 1980, but there is no showing that such sales were, for the purpose of satisfying the specific legacies.

The executor knew when it filed its return for the taxable year that the matter of satisfying the pecuniary legacies was settled; therefore, it should not be permitted to take advantage of a situation which may have but did not in fact arise to. alter the status of taxable income and deductible expenses for that year.

It is our opinion that the .realty here in question vested in the devisees upon the death of the decedent; that the income accruing therefrom became their income; that all of the expenses incurred in connection therewith were in their behalf, for tax purposes; and that the respondent correctly excluded such income from the return of the estate and also correctly disallowed the deduction of expenses incurred in connection therewith.

Judgment will he entered for the respondent.


author: Adams :

text:
    James E. Lewis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56073.
    Promulgated April 4, 1934.

      Thomas F. Veaoh, Esq., and James E. MaeOloskey, Esq., for the petitioner.
    . Nathan Gammon, Esq., for the respondent.
   OPINION.

Adams :

This proceeding involves a deficiency in income taxes for 1928 in the amount of $19,245.95. One question is presented by the appeal, namely, whether petitioner’s share of the profits-of a syndicate was income to him in 1928, under the doctrine.of constructive receipt, or whether such share was income to him in 1929, when actually received.

In August 1927, petitioner executed the following agreement:

It is proposed to form a syndicate for the purchase of Common Capital Stock of the Inland Steel Company, at quoted market prices, the aggregate cost price of shares originally purchased not to exceed $5,000,000. This Syndicate will be managed by W. R. Burwell, and as Manager he shall have authority on behalf of all members of the syndicate to negotiate for, receive and pay for stocks, to hold, vote and control the same during the life of the syndicate; to buy and sell such stock at prices to be determined from time to time by him, and for that purpose to employ and compensate brokers and agents; to acquire on behalf of the syndicate any additional stock which may be offered in the market, and to re-sell the same, or any part thereof, provided that the purchase of such additional stock shall in no case increase the original liability of subscribers to this agreement; to borrow money for the purposes of the syndicate, and for that purpose to pledge this agreement, and/or the subscription rights and stock to be acquired by the syndicate.
The responsibilities of each subscriber shall be several. He will not be deemed the partner of any other subscriber or subject to joint liability of any kind.
The syndicate shall terminate April 30, 1928, unless sooner terminated by the Syndicate Manager. The Syndicate Manager may extend the period for not exceeding six additional months, upon giving notice to the subscribers. Upon the termination of the syndicate, gains pr losses shall be distributed pro rata among the subscribers, and each member, of the syndicate shall thereupon pay in full any amount which may remain unpaid upon the subscription, whereupon he shall be entitled to his proportional number of the shares then held by the Syndicate Manager.
[Signed] W. R. Bur well.
The undersigned hereby subscribes to the foregoing agreement to the amount of $250,000 Dollars, and agrees to pay upon entering the syndicate $75,000 Dollars, representing thirty per cent of his commitment. The undersigned appoints the Syndicate Manager as agent in the purchase of said shares at any time and from time to time during the term of the syndicate, and agrees to pay, if called upon by the Syndicate Manager therefor, his proportionate amount of the purchase price of such stock. The undersigned hereby releases the Syndicate Manager from any and all claims arising out of tills agreement for any losses not caused by his willful misconduct.
[Signed] J. E. Lewis.

The term of the syndicate was extended for an additional six months from April 30, 1928, and thereafter- the term was further extended for a second six-month period.

Under date of November 3, 1928, W. B,. Burwell, the syndicate manager, who was also president of Continental Shares, Inc., offered the latter company, “ the 96,906 shares now held in the Syndicate at a price of $70 per share which is the approximate price as of today, the terms of payment being $3,000,000 in cash and the balance in a 6% preferred stock of Continental Shares, Inc., with a suitable warrant attached to buy Common Stock with the understanding, however, that should any participant in the Syndicate wish to receive all cash for his interest, Continental Shares, Inc. will pay 100% in.cash for this participant’s proportionate interest. It would be further understood that the dividend payable to Inland Steel stockholders of record November 15th will be received to the credit of the Syndicate participants.”

Under date of November 10,1928, the vice president of Continental Shares, Inc., advised Burwell, as syndicate manager, that the directors had accepted the above offer, and stated that the company “ will take immediate steps to issue for the purpose of the transaction a 6% preferred stock callable at $107.50, bearing a share for share warrant to purchase common stock at a price of $130 per share up to December 15, 1929, and at $150 per share up to and including December 15, 1930. It is expected that arrangements will be made whereby this preferred stock will be issued as of December 15, 1928. The purchase of the Inland Steel Common Stock will date from November 15, 1928, with interest at 6%.”

On the same date Burwell notified Continental Shares, Inc., that the. terms provided for were satisfactory, and addressed the following letter to the petitioner:

' It has been 'my feeling that the syndicate should not continue indefinitely. There is a very real difficulty, however, in liquidating such a large holding on the market, or in disbanding with an assurance that all participants will share alike should they wish to sell. In view of this, on November 3rd, I, as Syndicate Manager, offered the holdings of the syndicate as a block to Continental Shares, Inc., at a price of $70 per share plus the accrued dividend, which $>as the market price on that day, payable $3,000,000 in cash (the ápproximate amount of the syndicate’s bank loans) and the balance in a 6% preferred stock of Continental Shares.
The offer has been accepted and Continental Shares will take immediate steps to issue a- preferred stock callable at $107.50 per share and bearing a share for share non-detaehable warrant for the purchase of common stock St a price of $130 per share up to December 15, 1920 and at $150 per share ap to December 15, 1930. Participants in the syndicate may thus. receive ior their 30% payment, plus their profit amounting to approximately 180% on this payment, a 6% preferred stock, on the basis of $101 per share, with a warrant which will enable them to participate in the future appreciation of a diversified list of holdings whose market value following the completion of this transaction will exceed $48,000,000. The common stock to which the warrants apply is now selling at $110 per share. I enclose a recent balance sheet of Continental Shares.
Should any participant wish to receive cash instead of the preferred stock, arrangements have been made through an underwriting of the issue whereby he may do so.

In consummation of the purchase of the syndicate’s holdings, Continental Shares, Inc., entered into' an agreement with Otis & Co. whereby the latter agreed to underwrite the sale of the 40,000 shares of preferred stock. Under the agreement Otis & Co. was to receive a commission of one dollar per share for stock accepted by the syndicate members or sold and delivered to stockholders of the corporation, and it agreed to purchase the remaining shares at $101 per share, plus accrued dividends from December 15, 1928, but less a commission of $2.50 per share.

The parties have stipulated that “ on December 1, 1928, a meeting of Continental Shares stockholders occurred, at which the issue of 40,000 shares of Continental stock in question was authorized, and that such stock was issued on December 15.”

After receiving the letter dated November 10, 1928, Lewis discussed his option of taking cash or preferred stock in Continental Shares, Inc., with one Croft, a business associate who was also a member of the syndicate. Lewis informed Croft that he preferred his proportionate part of the Inland Steel common stock, or in lieu thereof, cash, and that he did not want preferred stock of Continental Shares, Inc. Lewis did not personally inform Burwell of his election to take cash, but he had every reason to believe that Croft would convey his wishes to Burwell.

Under date of December 7,1928, Burwell advised Lewis as follows:

I was hoping to see you in Cleveland this week, but as you have probably delayed your trip, I am writing to say that we -will send you a cheque for your interest in the Inland Steel Syndicate on January 2nd.
[Signed] W. R. Btjbweli,, Syndicate Manager.

Lewis replied on December 10, 1928, as follows:

Replying to your letter of the 7th inst., I regret that it was impossible for me to be in Cleveland last week. I am pleased to note that a check will be sent to me on January 2nd for my interest in the Inland Steel Syndicate.
[Signed] J. E. Lewis.

Petitioner’s next communication from the syndicate manager was a letter dated January 2, 1929, enclosing a check “ for $211,610.53 in full payment of your interest in the Inland Steel Syndicate.” The letter contained the following detailed statement of petitioner’s account with the syndicate:

STATEMENT OE ACCOUNT OF
MR. J. E. LEWIS with the
INLAND STEEL SYNDICATE
as-of
January 2, 1929
• Payment made by Participant' August 8, 1927_ $75, 000. 00
Interest adjustment for late entrance_ 854.17
$74,145. 83
Proportionate share of profits *- 135,785.25
Amount due Participant November 15, 1928_1_$209,931.08
Interest on above amount at 6% from Nov. 15,1928 to Jan. 2,1929_' 1,679.45
Amount now being paid to Participant by cheque_$211, 610. 53
* For income tax purposes the way in which the profits are made up is shown here: • .
share of dividends received_$39,285.20 Proportionate
“ “ interest earned_ 177. .85 •
“ “ “ received_
from late entrants_:_ 966..5Q
“ “ profit from sale of securities_ 108,282. 65
--- $148, 712.20
“ “ interest expense_$11,510.80
“ “ • miscellaneous expense_ 1,416.15 12,926.95
Net Profit-$135,785.25

Under date of January 3, 1929, Lewis acknowledged receipt of Burwell’s letter with enclosed check.

Payment of the purchase price by Continental Shares was handled to a great extent through accounts with Otis & Oo. The Inland Steel Syndicate had an account with Otis & Co. designated as account X-41, while Continental'Shares, Inc., had an account-with that company designated as X-34. The books and records of Otis & Co. show a transfer of $483,924.54 by journal voucher No. 58, dated January 2, 1929, from account X-34 to account X-41. The latter account shows a credit entry dated January 2, 1929, of $483,924.54 and five debit entries under the same date, representing disbursements by check, one of which was the $211,610.53 payment made to Lewis.

The credit position of Continental Shares, Inc., from December 15 to December 31, inclusive, was such that it could have paid any syndicate participant upon being advised by the syndicate manager of the form of payment to be made. At no time did the petitioner inform the syndicate manager or anyone else that he desired payment at once or at any time in the near future. Petitioner made no demand for payments, nor did he make any eifort to collect his proportionate part of the proceeds prior to. receipt of- the check on January 3,1929.

The petitioner kept his books and reported income on a cash receipts and disbursements basis. He reported his syndicate profits as income for 1929, but respondent has determined that the profits were constructively received in 1928 and taxable in that year.

Petitioner contends that, since his books were kept and his income reported on the cash receipts and disbursements basis, he received his share of the syndicate profits in 1929. He insists that, under the contract of sale and agreement with the syndicate manager, evidenced by the. letters of December 7 and 10, supra, he had no legal right to the profits until 1929; that no funds were set aside for him in 1928; that the syndicate manager represented not only the syndicate subscribers, but also was president of the purchasing company; that the latter company derived a monetary advantage from postponing payment in cash; that he merely submitted to and acquiesced in the time of payment; and, finally, that the doctrine of constructive receipt should be sparingly applied and is not applicable to the evidence adduced in this proceeding.

Respondent argues that, since he determined that petitioner received or could have received his proportionate interest of the syndicate profits in 1928, petitioner has the burden of proving otherwise; that petitioner could have received payment in full during 1928; and that as a member of the syndicate his proportionate interest in the profits, realized in 1928 are taxable to him, whether distributed or not.

An analysis of petitioner’s argument reveals certain fallacies and inconsistencies which are fatal to his contentions. In the first place the contract of sale shows that 96,906 shares of Inland Steel common stock were offered and accepted at $70 per share, or a total consideration of $6,783,420, payable $3,000,000 in cash and the balance in preferred stock or cash. The contract states specifically that the purchase dated from November 15,1928, and presumably the $3,000,-000 in cash was paid at or about the time the sale was made. Certainly nothing to the contrary appears in the record, and the contract of sale states that “ arrangements ” for the issuance of preferred stock would probably be completed by December 15,1928, so that the balance due could be paid in stock or cash at the election of the syndicate members. It is a fact of record that some subscribers were paid during 1928, indicating that the sale was a closed and completed transaction in 1928 and that income was realized from the sale.

Nevertheless, says petitioner, the letters of December 7 and 10 show that the syndicate manager and the taxpayer agreed that the latter should be paid his portion of the syndicate profits oh January 2, 1929. Taxpayer urges that this private agreement prevented him from demanding or securing payment of his proportionate share subsequent to the exchange of correspondence. The answer to this argument lies in the fact that petitioner knew after receiving the letter of November 10 from Burwell that he would accept only cash for his interest in the syndicate, and, therefore, the arrangements for issuance of preferred stock as of December 15, 1928, was of no moment to him. We deem it unnecessary, therefore, to speculate on what petitioner’s legal rights were subsequent to their exchange of letters on December 7 and December 10. His rights were fixed at the time the sale was consummated on November 15,' 1928. A further answer lies in the fact that while the alleged agreement between Lewis and Burwell might be upheld as between themselves, it is by no means certain that Lewis by private agreement can postpone the receipt of income from one taxable year to another. See Hamilton Nat. Bank of Chattanooga, Administrator, 29 B.T.A. 68, and cases there cited.

Secondly, petitioner argues that, since no funds were set aside to pay him during 1928, and since he merely submitted to and acquiesced in the time of payment, he realized income in 1929 when the money was forthcoming from the vendee as shown by the books and records of Otis & Co. While the entries in said books of account show the transfer of funds as of January 2,1929, the other evidence of record shows that the credit facilities of the vendee corporation 'were ample to pay the petitioner at any time after the sale was consummated. When the sale of the syndicate holdings was consummated the existence of the syndicate terminated, and by the terms of the syndicate agreement petitioner became entitled to his share of the syndicate assets.

Petitioner further contends that the dual capacity of Burwell in the transaction is an important factor in this case. Burwell was appointed by each syndicate subscriber as his agent to buy Inland Steel common stock, but he was also the president of Continental Shares, Inc., the vendee in the purchase of the syndicate holdings. If his relationship to the syndicate subscribers imposed certain duties upon him which conflicted with his duties as president of Continental Shares, Inc., this question should have been raised at the time of the sale, and the propriety of Burwell’s conduct examined. We are unable to agree, however, that this factor can influence taxpayer’s legal rights to the income realized by the sale.

Petitioner also argues that the vendee corporation derived a financial benefit from postponing payment to Lewis and other syndicate subscribers who elected to take cash instead of preferred stock. Whether this be true or not, it seems entirely immaterial to the question here for consideration. It might explain the reason why Burwell, as president of the vendee corporation, would like to postpone cash disbursements as long as possible, but it has little probative value on the question of whether petitioner constructively received income in 1928.

Finally, petitioner argues that the doctrine of constructive receipt should be sparingly applied, and that the doctrine is inapplicable to the facts existing in this appeal. However, it is our opinion, as previously indicated herein, that the facts point to but one conclusion, namely, that petitioner could have obtained his portion of the profits by merely asking for them in 1928. That he passively awaited their receipt cannot alter the fact that the proceeds were available. On the record we believe that petitioner constructively received his portion of the proceeds in 1928.

In so holding we have carefully considered the numerous cases cited by counsel on brief relative to the doctrine of constructive receipt and the taxable status of syndicates. All of these cases turn on their own particular facts, and while in some of them the facts closely resemble the present case, none of the cases examined was completely in point.

The case particularly relied upon by petitioner is Sidney F. Tyler et al., Trustees, 28 B.T.A. 367, wherein the Board refused to apply the doctrine of constructive receipt to the sale of stock where the stock to be sold and the purchase price were deposited with an agreed depositary. Under the terms of the deposit agreement the vendor had no right to the proceeds of the sale until after January 1, 1928. The Board refused to hold that receipt of the purchase price by the depositary constituted receipt by the vendor, and stated that in its opinion the depositary was acting in a fiduciary capacity and. could not be considered an agent of the vendor, as contended by the Commissioner. Furthermore, the Board pointed out, the vendor had no right under his agreement to the proceeds until after January 1,1928.

The facts here are more analogous to those existing in Henry G. Heinz, 28 B.T.A. 276, where the Board held that all events had transpired on or before November 16, 1928, to fix the taxpayer’s distributive share of the syndicate profits, and that the taxpayer, although on a cash basis, constructively received the income in 1928, even though the proceeds were not actually received until February 26, 1929. In reaching this conclusion, the Board pointed out that the court decisions in Wild v. Commissioner, 62 Fed. (2d) 777, and Glenmore Securities Corp. v. Commissioner, 62 Fed. (2d) 780, which have been cited by petitioner herein, were distinguishable in that the income there in controversy had been accumulated or retained by the syndicate manager for future investment or eventual distribution.

The same distinction applies here, because the sale of the syndicate’s assets terminated the syndicate as of November 3.5; 1928, and at that time petitioner became entitled to his proportionate part of the syndicate proceeds. Since the means were available to satisfy petitioner’s claim, he may not deliberately turn his back upon income and thus select the year for which he will report it, Hamilton Nat. Bank, supra.

Reviewed by the Board.

Decision will be entered for the respondent.

Smith concurs in the result.

-Black, Marquette, Arundell, and McMahoN dissent.


author: TRámmell :

text:
    Norwich Pharmacal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64542, 67492.
    Promulgated April 5, 1934.

      H. A. Mihills, O.P.A., for the petitioner.

      B. M. Ooon, Esq., for the respondent.
   OPINION.

TRámmell :

In its returns petitioner deducted from gross income on account of exhaustion of its trade-niarks, and now contends it is entitled to deduct each year, an aliquot part of the total cost of the trade-marks. Respondent disallowed the deductions claimed, and asserts that trade-marks are not subject to exhaustion.

The statute (section 23 (k), Revenue Act of 1928) provides that in ‘computing net income there shall be allowed as deductions, among other things, “A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

It is not questioned here that trade-marks constitute property, nor that the petitioner used its trade-marks in its business. It is elemental to say that, under the quoted statute, deductions are allowable only in respect of property used in the trade or business which is being exhausted by the passage of time or worn out and consumed by use. Obviously, of course, trade-marks, like other intangibles, are not subject to physical wear and tear. The issue, then, which is purely one of law, is resolved into the question, whether trade-marks may be the subject of exhaustion allowances.

Eights in trade-marks are of common law origin, General Baking Co. v. Gorman, 3 Fed. (2d) 891; certiorari denied, 268 U.S. 705. The right to a trade-mark exists at common law, L. H. Harris Drug Co. v. Stucky, 46 Fed. 624, and has long been protected thereby, Piggly Wiggly Corp. v. Saunders, 1 Fed. (2d) 572; aff'd., 30 Fed. (2d) 385. A trade-mark does not derive its existence from any statute, state or Federal, but exists independent of statutes, and is protected even in the absence thereof. Trade-marks are not created by the trade-mark statutes. Such statutes merely fortify the common law right to a trade-mark by conferring the statutory title on the owner. Authorities cited, supra, and La Croix v. May, 15 Fed. 236.

The value of a registered trade-mark does not cease upon expiration of the registration period. Eegistration under the Federal law protects only in interstate .commerce, and the rights of the owner of such a trade-mark will be protected by the courts even after expiration of the registration. General Baking Co. v. Gorman, supra. Hence, prior to the complete abandonment of a trade-mark the period of its useful life can not be forecast or determined. There is no determinable period over which cost may be spread. Certainly it is not the period of registration, for the trade-mark is still valuable and enjoys protection of the law after expiration of that period. On this ground alone it would be necessary to disallow petitioner’s claims.

However, another and equally difficult obstacle to petitioner’s contention is the fact that the value of a trade-mark, registered or otherwise, is not exhausted by use nor the passage of time. So long as it is used in connection with a going business, it may safely be said that, barring obsolescence which results in disuse or abandonment, the value normally increases. And it may be noted on this point that no claim is made here op account of abandonment or obsolescence.

The principie stated is well illustrated by the facts of the instant case. The Amolin Co. acquired the trade-mark's in question from the Lodi Co. and its books disclosed a total cost of the trade-marks in the amount of $138,000. Thereafter, the Amolin Co. sold the trade-marks to the petitioner for more than $677,000, notwithstanding the intervening use and lapse of time.

There are no facts disclosed by the record before us to justify the conclusion that the .value of the petitioner’s trade-marks is being lessened either by use or the passage of time. The inherent quality of trade-marks is such that they are not subject to exhaustion.

A trade-mark is essentially an inseparable part of, or the outward symbol of, good will. In Beech-Nut Packing Co. v. P. Lorillard Co., 278 U.S. 628, it was pointed out that;

A trade-mark is not only a symbol of an existing good will, although it commonly is thought of only as that. Primarily it is a distinguishable token devised or picked out with the intent to appropriate it to a particular class of goods and with the hope that it will come to symbolize good will.

. So far as concerns exhaustion, or the allowance of deductions therefor, trade-marks must be considered in the same classification as good will; in fact, good will embraces trade-marks.

In Renziehausen v. Lucas, 280 U.S. 387, following its prior decision in Clark v. Haberle Crystal Springs Brewing Co., 280 U.S. 384, the Supreme Court held that the taxpayer was not entitled to deduct for exhaustion or obsolescence-of good will, and specifically treated good will “ as embracing trade-marks, trade brands and trade names.”

In the Renziehausen case the Circuit Court of Appeals in its opinion (31 Fed. (2d) 675; aff'd., supra) said:

Trade-marks, trade. brands and trade names are closely related to good .will and no attempt has been made to segregate or differentiate them. The Circuit Court of Appeals for the Eighth Circuit * * * ip the case of Red Wing Malting Co. v. Willcuts, 15 F. (2d) 626 * * * held that a deduction for obsolescence of the good will of a brewing company was not allowable * * * because the'allowance for obsolescencé is limited to such property as is susceptible to exhaustion, wear and .tear by use in the business, and good will is not such property.

Good will is not susceptible of being disposed of independently, that is, separate and apart from the business to which it attaches. Metropolitan Bank v. St. Louis Dispatch Co., 149 U.S. 436, 446. “ Good will is the favor which the management of a business wins from the public.” It has no existence separate and apart from an established, business, and it can not be the subject of a loss except on the termination of the business and the sale of the assets. National Chemical Mfg. Co. v. United States, 67 Ct. Cls. 607.

The petitioner is not here claiming a loss of the value of good will represented by its trade-marks on account of obsolescence or abandonment of the trade-marks upon the termination of the business to which they appertain.

In Manhattan Brewing Co., 6 B.T.A. 952, 960, we said on this subject:

The intangible property which the petitioner asserts is subject to obsolescence consists of good will, trade names, and trade-marks. Such assets have value, but that value is so interwoven with the operation of the business, so much an inseparable part of the going concern to which they appertain, that the ascertainment of such value is difficult and their sale, except as component parts of a going business concern, is all but impossible. They are not subject to physical wear and tear incident to their use in the business operations of their owner,- nor ordinarily is the period of their useful life limited .either by contract or statute. No one would argue that such intangibles are subject to annual losses due either to wear and tear or exhaustion even if their cost or capital value could be ascertained.

Respondent’s action in disallowing deductions for exhaustion, of trade-marks is approved.

Judgment will be entered for the respondent.


author: Matthews:

text:
    James A. Connelly, Petitioner, et al., v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44081-44083, 44089, 44090, 45745, 45746, 45833, 45834, 46267, 48120, 48121, 48143, 51967, 54713, 54714, 60566, 60745, 60746, 66948.
    Promulgated April 10, 1934.

      Benjamin Orvmd, Esq., J. S. Seidman, Esq., and M. L. JSeidman, C.P.A., for the.petitioners. . . ...

      P. S. Crewe, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith : Mary B. Connelly; L. B. Connelly; George W. Olmsted.; Iva C. Olmsted; and. Walter Lloyd.

   OPINION.

Matthews:

These proceedings, which have been consolidated, are for the redetermination of deficiencies in income tax as follows:

All the issues raised by the pleadings, except two, were settled by a written stipulation signed by the parties and filed at the hearing, and effect will be given thereto in the redetermination of the deficiencies under Eule 50.

The main issue submitted for our determination, which is common to each of the proceedings, is whether the respondent erred in treating as taxable dividends the amounts received by the petitioners from the J. G. Curtis Leather Co. in connection with the retirement of its class A preferred stock.

The remaining issue, which we shall first consider, relates only to the tax liability of James A. Connelly for the year 1929, Docket No. 60566, and has to do with rights issued in connection with stock of the American Telephone & Telegraph Co.

Petitioner James A. Connelly owned 273 shares of stock of the American Telephone & Telegraph Co. on May 10, 1929, and received thereon 273 rights to subscribe to that company’s 10-year convertible 41/2 percent gold debenture bonds dated July 1, 1929, which rights he exercised. The respondent has held that the value of the rights in the sum of $1,552.69 constituted a dividend to the petitioner and has increased the petitioner’s income for 1929 in that amount.

This same question was presented in T. I. Hare Powel, 27 B.T.A. 55, which case was dismissed by the Circuit Court of Appeals for the First Circuit, and on authority of that decision this issue is determined in favor of the petitioner. See also Thomas W. White, 29 B.T.A. 1272.

With respect to the issuance and retirement of the class A preferred stock of the J. G. Curtis Leather Co., the material facts were stipulated by the parties and will be summarized herein.

In 1901 the J. G. Curtis Leather Co. was organized under the laws of the State of New Jersey, to engage in the business of tanning bag, strap, and case leather. This company, which will hereinafter be called the New Jersey corporation, was liquidated on December 30, 1922, under the circumstances hereinafter set out. Immediately prior to its liquidation its outstanding capital stock consisted of 10,000 shares of 7 percent cumulative preferred stock of a par value of $100 each, and 15,000 shares of common stock of a par value of $100 each.

On December 27, 1922, there was organized under the laws of the State of Delaware a corporation called the J. G. Curtis Leather Co., which will hereinafter be called the Delaware corporation, with an authorized capital stock of $5,000,000, consisting of 440,000 shares of 6 percent cumulative and serially maturable class A preferred stock of a par value of $5 ea.ch; 3,000 shares of 7 percent cumulative.class B preferred stock of a par value of $100 each; and 25,000 shares of common stock of a par value of $100 each.

The Delaware corporation was organized in pursuance of a plan whereby it should acquire the stock of the New Jersey corporation for its own stock and cash. All the stockholders of the New Jersey corporation agreed to the plan submitted, under which the Delaware corporation agreed to give in exchange for each share of stock of the New Jersey corporation, common and preferred, one share of common stock of the Delaware corporation and either $100 in cash or $70 in cash and three tenths of'one share of the 7 percent class B preferred stock. Accordingly, on December 29, 1922, the Delaware corporation issued and delivered to the stockholders of the New Jersey corporation separate certificates of common and class B preferred stock and separate checks in the amounts to which the stockholders of the New Jersey corporation were entitled on account of the exchange of stock, under this plan.

All the stock of the New Jersey corporation was owned by 12 stockholders, Petitioners held the following shares of stock in the New Jersey corporation and were offered in exchange therefor cash and stock of the Delaware corporation, as follows:

On December 29, 1922, in order to secure the money with which to meet its cash requirements, the Delaware corporation negotiated and secured from its depositary, the Bankers Trust Co. of New York, a 6 percent interest-bearing loan in the principal amount of $2,200,000. This loan was repaid to the Bankers Trust Co., with interest, on December 30, 1922.

On December 29, 1922, the Delaware corporation issued for cash, at par, its entire authorized issue of class A preferred stock in the total sum of $2,200,000. All of this stock was subscribed for by the stockholders of the New Jersey corporation, the shares to be apportioned pro rata from the different series A to K inclusive, and the subscriptions were paid for from the moneys which they were entitled to receive from the exchange of their stock in the New Jersey corporation. Petitioners- were among the purchasers of this stock, as follows:

On December 30, 1922, the Delaware corporation acquired all the assets and assumed all the debts and obligations of the New Jersey corporation in return for the surrender- to the New Jersey corporation of all of its outstanding shares of stock.

The comparative annual balance sheets of the Delaware corporation from January 1, 1923, to January 1, 1926, inclusive, disclose that the plant and equipment, the-investment in affiliated companies, and the good will acquired from the New-Jersey corporation at its liquidation, were placed on the books of the Delaware corporation at $653,158, $728,629.71, and $4,696,296.20, respectively; and an analysis of earned surplus for the same period shows that Delaware corporation had an earned surplus for the years 1924, 1925, and 1926 of $196,569.78, $458,596.32, and $808,035.01, respectively.

The class A preferred stock of the Delaware corporation had priority over the other classes of stock, with respect to the payment of dividends, and on liquidation or dissolution of the company the class A preferred stock was to be redeemed in full, with all accumulated and accrued dividends, out of the net assets of the corporation before any distribution of assets to holders of other classes of stock. There were 11 series of class A preferred stock, as follows:

The class A preferred stock was, pursuant to its terms, retired and canceled at the maturity of the respective series. Some of this stock was purchased at par by the Delaware corporation-for the treasury prior to maturity and canceled at maturity. In each case the holders of the stock surrendered their certificates to the Delaware corporation, against payment to them of par and accrued dividends, and the certificates were canceled by the Delaware corporation.

The regular cumulative dividends have been paid each quarter on the outstanding class A and class B preferred stock of the Delaware corporation since its organization. No change has taken place in the amount of outstanding common and class B preferred stock since the organization of the Delaware corporation, nor have any new classes of stock been issued. There have been no additional issues or reissues of class A preferred stock. • In 1932 the Delaware company’s charter was amended, eliminating the class A preferred stock from its capitalization.

Between 1923 and 1930 there were 23 changes in. holdings of common stock of the Delaware corporation involving 4,395 shares. There were also 94 changes in holdings of the class A preferred stock involving more than 40,000 shares, other than purchases by the Delaware corporation for the treasury. Petitioners were included among the purchasers and sellers in these transactions.

Petitioners, in preparing their returns for the years here in issue, treated the disposition of their holdings' of class A preferred stock as a capital transaction, with resulting gain, if any, measured by the difference between the proceeds thereof and the cost of the stock disposed of. In no cáse was there a deduction for a loss. There is no dispute as to the correctness of the figures used by the petitioners in computing their profits.

The respondent, in arriving at the proposed deficiencies, determined that the amounts received on the disposition by the petitioners of the class A preferred stock were taxable in their entirety as dividends, subject to surtax.

Section 115 (g) of the Revenue Act of 1928 and corresponding sections of prior revenue acts were enacted by Congress in an attempt to prevent the avoidance, of tax upon distributions of corporate earnings, ordinarily to be distributed as. dividends and so taxable, by means of redemption and cancellation of stock. As was said by this Board in Harry A. Koch, 26 B.T.A. 1025, 1027:

The purpose of this provision of the statute is to make futile the employment of a roundabout plan of distributing corporate earnings which, if made as dividends are ordinarily paid, would be taxable. * * *

See also, with respect to the application of the principles underlying this provision of the statute, Alfred A. Laun, 26 B.T.A. 764; Pearl B. Brown, Executrix, 26 B.T.A. 901; Robert R. Meyer, 27 B.T.A. 44; Annie Watts Hill, 27 B.T.A. 73; Henry B. Babson, 27 B.T.A. 859; Louis Rorimer, 27 B.T.A. 871.

Inasmuch as the stock involved herein was not issued as a stock dividend, the cancellations made prior to January 1, 1926, do not come within the operation of section 201 (g) of the Revenue Act of 1926, which is identical in its provisions to section 115 (g) of the Revenue Act of 1928, quoted in the margin. Henry B. Babson, supra. Section 201 (f) of the Revenue Act of 1924 applies only in cases where stock dividends have been issued and is likewise not applicable here.

We find nothing in the present proceedings to distinguish them materially from Pearl B. Brown, supra, and the eases in which this decision has been followed. We are of the opinion that the cancellations made subsequent to January 1, 1926, were not made at such time and in such manner as to make them “ in whole or in part essentially equivalent to the distribution of a taxable dividend.” We are convinced that there was no premeditated plan or artifice on the part of the petitioners in connection with the entire transaction and that the element of tax avoidance or evasion is not present. It is proper for a corporation at the time it makes provision for the issuance of preferred stock also to make provision at the same time for its redemption, retirement, or purchase by the company. In the instant proceedings there was no subsequent reissuance of all or any part of the class A preferred stock. The common stock of the Delaware corporation and the class A preferred stock changed hands rather actively during the taxable years and the stock which was retired was not held in the same proportions as the remaining stock.

Since, therefore, the stipulated facts show a retirement and cancellation of all the class A preferred stock in accordance with the terms under which it was issued, and there is nothing in time and manner to give it the character of a cash dividend, we hold it not taxable as a dividend, and reverse the respondent’s determination on this issue.

Judgment will be entered'under Rulé BO.

       (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 the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.