source: Caselaw Access Project

author: SteRnhagen :

license: Public Domain

text:
    Union Guardian Trust Company, Successor to Union Trust Company, Executor of the Will of J. Dallas Dort, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44735.
    Promulgated October 21, 1932.

      William P, Smith, Esq., and John G. Evans, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

SteRnhagen :

The respondent determined a deficiency in the estate tax of the decedent’s estate amounting to $72,055.52. Several questions were at first in issue, but by stipulations all issues have been withdrawn or adjusted satisfactorily except one.

The decedent more than two years before his death, which occurred on May 17, 1925., had executed seven trusts, copies of which are in evidence as Exhibits A to G. In determining the deficiency, the respondent included in the gross estate the value of the corpus of these trusts, regarding them as within subdivisions (c) and (d) of section 302 of the Revenue Act of 1924. This inclusion is assailed by the petitioner.

Each trust instrument contained the following provision:

This trust shall remain and be carried out as herein directed, and should it be deemed advisable to make any change or changes therein during my lifetime, such change or changes, if any, must be in writing and attached to this instrument and must have the signature of myself and said Grantee [trustee] ; and in that event such change or changes shall become a part of this instrument. I reserve the right, however, during my lifetime, with the consent of the beneficiary, to revoke and cancel this trust, and require a reconveyance to me of the property included herein.

In trusts A, B, O and D, the net income was to be paid to the decedent during his life and thereafter to the beneficiary. If the beneficiary were to die before decedent, the corpus was thereupon to be delivered to decedent. If decedent were to die before the beneficiary had reached a certain age, a designated value of corpus was to be delivered to the beneficiary at that age and a designated value at a later age, the income of the remaining corpus after decedent’s death going to the beneficiary. At the death of the beneficiary, the corpus remaining was to be delivered to the beneficiary’s children or heirs.

In trust E the beneficiary was, after the death of the decedent, to' receive only the income during her life, and had the power to dispose of the corpus by will. If she left no will, it was to go to her intestate successors. In trust F the decedent, by an amendment, received no income; it was to be paid to the beneficiary during his life, and the corpus was to. be retained by the trustee until the beneficiary’s death, whereupon it was to be delivered to the decedent, if living, or to the beneficiary’s children or heirs. Trust G was like trust F, except that decedent was not to receive the corpus if he outlived the beneficiary.

It is agreed that none of the transfers was made in contemplation of death, that the Commissioner’s valuations are correct, if material, and that none of the property was administered as .part of decedent’s estate. All of the named beneficiaries survived the decedent.

The petitioner treats the trusts as complete transfers of both the legal and equitable interests at the time of their execution, with a mere possibility of reverter to the decedent; and upon that conception argues that, as in Stephen Peabody, 24 B. T. A. 787, there was no transfer to take effect in possession or enjoyment at or after death. We are, however, of opinion that the respondent has correctly held that, in respect of trusts A to F, there was occasioned by the decedent’s death a transfer of an interest in the trust res — a shifting of the economic benefits of the property which is the subject of the tax, Reinecke v. Northern Trust Co., 278 U. S. 339. While this case is unlike Klein v. United States, 283 U. S. 231, in which the fee and remainder had not been transferred, but was withheld until the grantor’s death, the same statutory provision is none the less applicable here, because there was likewise a retention by the grantor of an interest in the property by virtue of which its possession and enjoyment were withheld from any other until his death. It was only then that the transfer of possession or enjoyment of the corpus could take effect; and this and not the transfer of the fee or title determines the inclusion in the gross estate. It is true that by the creation of the trusts, and thus prior to decedent’s death, the several beneficiaries acquired an interest; but such interest was no different from or greater than the interest retained by the decedent. Each was a potential survivor of the other, and neither could possess or enjoy except by such survivorship. Whatever such interest may be called, the decedent’s death was the occasion upon which it became effective in possession as to the beneficiary. It was not as if all passed immediately to the beneficiary, subject to repassing upon his death before the grantor, as in the Peabody case. By the same token, all was retained by the grantor, subject to the beneficiary’s right of survivorship. The mutual condition is no more subsequent on the one hand than precedent on the other. The statute, however, overrides the ancient terminology, and imposes the tax upon the taking effect of possession or enjoyment; and there is no doubt that none of the beneficiaries of trusts A to F, inclusive, could possess or enjoy the corpus until the grantor’s death. The values of such properties were therefore correctly held by the respondent to be within the gross estate by virtue of subdivision (c) of section 302. Sargeant v. White, 50 Fed. (2d) 410; Union Trust Co. of Detroit v. United States, 54 Fed. (2d) 152. There is, in our opinion, nothing in the statute in its application to these trusts.which is in contravention of the Constitution, Phillips v. Dime Trust & Safe Deposit Co., 284 U. S. 160.

By the terms of trust G, the decedent retained no interest whatever in the corpus, and there is nothing which can be found within the terms of subdivision (c) of section 802. The respondent urges that subdivision (d) is also applicable because the grantor had the power with the trustee to make changes in the trust. He demands a literal’construction of the statute. By the very terms of the trust, the power to change, which exists jointly with the trustee, excludes the power to revoke, which in a separate provision requires the consent of the beneficiary. The latter provision, taken alone, would keep the property out of the gross estate, Reinecke v. Northern Trust Co., supra; Ershine v. White, 47 Fed. (2d) 1014; Logon v. Denman (Dist. Ct., No. Ohio, W. Div., June 21, 1932); William B. Kurtz Estate, 22 B. T. A. 1377. We think that the power to change, read in its context, does not include the power to revest in the grantor any interest in the trust property, or to shift the essential economic benefit from the beneficiary without his consent. Thus reading the statute to accomplish its essential purpose, and reading the instrument in accordance with its plain intendment, the corpus of trust G must be omitted from the gross estate, Reinecke v. Northern Trust Co., 278 U. S. 339.

Judgment will he entered u/uder Rule 50.


author: Lansdon :

text:
    Sioux Falls Metal Culvert Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41070.
    Promulgated October 21, 1932.

      Peter 8. Rash, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Lansdon :

The principal question in this proceeding is whether the transactions described in our findings of fact constitute sales of the warrants by petitioner, or borrowings of money upon the warrants as collateral security. If we hold that petitioner borrowed money, then we must determine whether such indebtedness was “ incurred or continued to purchase or carry obligations or securities * * * the interest upon which is wholly exempt from taxation” within the meaning of section 234 (a) (2) of the Revenue Act of 1926.

The evidence produced does not show what agreement, if any, existed between petitioner and the individuals to whom payments in the nature of interest were made. The testimony is that whenever possible the petitioner sold the warrants. The respondent has determined that the amounts paid to the individuals were mere advances and could not be deducted, since petitioner was later reimbursed therefor. We must sustain the respondent’s position. Henry F. Cochrane, 23 B. T. A. 202; Charles E. Albright, 16 B. T. A. 1228; Grelck Condensed Buttermilk Co., 7 B. T. A. 79.

The transactions between petitioner and the Minnehaha National Bank were covered by a memorandum providing that the bank should “ carry ” the warrants for petitioner and charge interest at the rate of 7 per cent per annum. The warrants also paid 7 per cent per annum, which makes the details of the transactions rather confusing. The language of the memorandum is that the warrants were “ deposited ” with the bank and the petitioner was to be “ charged ” 7 per cent interest on the “ face ” of the warrants. If they had been sold on the same basis petitioner would undoubtedly have received the face, plus accrued interest.

The respondent places considerable emphasis on the fact that the warrants transferred were taken into the assets of the bank and were not carried as assets on petitioner’s books. We do not think the bookkeeping methods necessarily determine the nature of the transactions. If a note had been given to the bank for the face of the warrants it would have appeared in the bank’s assets instead of the warrants and petitioner would have carried the warrants as assets, with an offsetting liability for the note. The net effect of what was done is the same.

In our opinion the written agreement of the parties provides for a loan to petitioner rather than a sale of the securities transferred. First National Bank of Wichita, 19 B. T. A. 744; aff'd., 57 Fed. (2d) 7. The amounts paid by petitioner to the bank represent interest paid on indebtedness.

The remaining question, as to whether amounts paid to the bank in the taxable years represent interest paid on indebtedness incurred or continued to carry tax-exempt securities, has heretofore been decided in R. B. George Machinery Co., 26 B. T. A. 594, where we held that warrants, similar to those involved in the instant proceeding, received in payment for machinery and used as security for a loan, were received and carried as an incident to petitioner’s business, and that the interest paid was deductible. Upon authority of our decision in that case we hold that the petitioner is entitled to deduct as interest expense the amounts paid to the Minne-haha National Bank.

Decision will be entered under Bule 50.


author: Goodeioh:

text:
    L. B. Foster, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43086.
    Promulgated October 21, 1932.

      8. Leo Ruslander, Esq., George B. Bennemam., Esq., and Frank Wilbur Main, G. P. A. for the petitioner.

      0. 0. Holmes, Esq., for the respondent.
   OPINION.

Goodeioh:

Petitioner assails deficiencies asserted in the amounts of $434.35 for the year 1924 and $920.05 for 1925 which result from (1) respondent’s action in denying as deductions from income in those years losses claimed upon sales of securities made by petitioner to the Fidelity Title & Trust Company, trustee of the Pauline Livingston Foster Trust; and (2) his action in including in petitioner’s income for the year 1925 certain amounts which accrued from the above named trust to Pauline-Livingston Foster, who was petitioner’s wife.

The precise issue raised by the first allegation of error was previously fully considered by this Board in a case brought before us by this same petitioner involving his income-tax liability for the year 1923, and was decided adversely to respondent. See Lee B. Foster, 22 B. T. A. 717. As the facts here are identical with our findings in the first case, except, of course, as to the various sales, the amounts of losses sustained thereon and the period involved, it ie unnecessary to repeat them. In the case now at bar the losses sustained, modified from the amounts set out in the pleadings in accordance with our view expressed in the first reported case were: in 1924, $4,920; in 1925, $4,292.50. Since respondent has not appealed from our prior decision governing this issue and the principles thereof have not been rejected by higher authority, we adhere thereto and sustain petitioner’s contention. The amounts above set out should be deducted from petitoner’s income for those respective years.

With respect to the second issue, it appears that on petitioner’s return for the year 1925, Question No. 3, reading: “Is this a joint return of husband and wife? ” was answered, “Yes.” However, the return reported only the individual income of this petitioner and contained no items whatsoever relating to the income of his wife. For the taxable year 1924 petitioner had filed a separate individual return on which this question had been answered, “ No.” It was petitioner’s intention to file a separate return for 1925. In that year Mrs. Foster had no income except such as came to her as the beneficiary of the Pauline Livingston Foster Trust. For 1925 the trustee of that trust, following its previous practice, executed and filed a return on Form 1040, entitled “ Estate of Pauline Livingston Foster.” The tax disclosed thereby was duly paid and has not been refunded, nor has any claim for refund thereof been made. On this return was claimed an exemption of $1,500, while on the return filed by petitioner an exemption of $3,500, the full amount then allowed by statute, was claimed, together with a credit of $800 on account of two dependents. No other return relating to this trust was filed by the trustee for 1925. Petitioner’s return was prepared for him by an accountant employed for that purpose, with whom petitioner cooperated in computing and determining the figures and amounts of the various items therein reported. Respondent has treated as a joint return of husband and wife the return for 1925 filed by petitioner and has added to the income disclosed thereby a total of $12,232.83, less deductions of $2,510.69, or a net amount of $9,722.14, of the items reported on the return filed by the trustee.

We think respondent erred in so doing. There is more to a return than the preliminary questions and answers and, while they are an important part of the return no doubt, they are only for the purpose of furnishing accurate information upon which to base a determination of taxpayer’s liability, which is likewise the purpose of all the other statements and figures required by the form. We see no reason why the answers to such questions, if given in error, should not be corrected upon a proper showing of the facts. Here, the proof is that petitioner elected to file a separate return and that he included in the return he did file only items respecting his separate individual income. The only contradiction thereto is that an affirmative answer, instead of a negative answer was given to one question. Under oath, petitioner testifies that he filed a separate return; that the answer to the third question should have been, and was intended to be, “No”; that the answer given was the result of an inadvertent mistake, and that he “ never even looked at that part of the return, to be frank with you, when I signed it.” We do not commend petitioner’s negligence, but we' agree with his contention that the answer as written was contrary to the fact and' that the items of income accruing to Mrs. Foster which were added by respondent to petitioner’s income should be eliminated. That applies likewise to the deductions claimed by Mrs. Foster which respondent offset against petitioner’s income. We are not impressed with respondent’s argument that, because no return as fiduciary upon proper form was filed by the trustee, because an exemption was erroneously claimed by the trustee and because the return filed by the trustee may have been improperly captioned, that Mrs. Foster’s separate individual income may be disregarded and the income accruing to her and reported by the trustee he added to that of petitioner. Respondent has ample power to force the correction of such errors by appropriate action against the parties at fault. He may not do it by the means here attempted.

Reviewed by the Board.

Judgment will he entered under Rule 50.

Sternhagen, Smith, and Black dissent.


author: Murdock: Black,

text:
    Delaware, Lackawanna and Western Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33813.
    Promulgated October 24, 1932.

      J. Marvin Haynes, Esq., and Walter A. Staub, O. P. A., for the petitioner.

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

Murdock:

The Commissioner determined a deficiency in income and profits taxes for the calendar year 1921 in the amount of $753.80. Several issues raised by the petition have been settled by a stipulation of the parties, leaving for our" determination but one issue which is that the Commissioner has erred in rejecting the petitioner’s application to have its profits tax computed under section 328 of the Revenue Act of 1921.

The petitioner is a New Jersey corporation, with its principal office in New York City.

For almost sixty years prior to 1909 the Delaware, Lackawanna and Western Railroad Company had engaged extensively in mining, purchasing, transporting and selling anthracite coal. In May, 1909, the Supreme Court of the United States decided that these activities were in violation of the Hepburn Act. United States v. Delaware, Lackawanna & Western R. R. Co., 213 U. S. 366. The railroad company, after considering various methods calculated to comply with the law and yet to save its valuable coal business for its stockholders, finally decided to organize the petitioner. The petitioner was organized in June, 1909, with an authorized capital stock of $6,800,000, divided into 136,000 shares of the par value of $50 each. The petitioner was to purchase the coal of the railroad company, just prior to shipment, and to ship and sell it as the railroad company had done formerly. Stockholders of the railroad company were advised of the situation and were permitted to subscribe for the petitioner’s stock on the basis of one share to each share of railroad stock held. In order to enable the stockholders to purchase their allotted shares, the railroad company declared a 50 per cent dividend and suggested that each stockholder authorize the treasurer of the railroad company to use one-half of the dividend to pay for the number of shares in the petitioner to which such stockholder was entitled to subscribe. Practically all of the stockholders of the railroad company followed the plan suggested so that the stockholders of the two corporations were identical for the most part. The petitioner began business immediately, with personnel taken over from the railroad company with the business. A contract was entered into by the railroad company and the petitioner on August 2, 1909, whereby the petitioner purchased coal on hand, leased certain equipment, and agreed to take over existing sales contracts and to conduct the business so as best to conserve the good will and markets of the railroad company. The agreement was to continue until either party gave notice of six months. The rental was less than the railroad would have accepted from outsiders. The customers were notified of the change and urged to continue as customers of the new coal company.

The petitioner’s gross tonnage, gross sales, and net profits for a representative period after the exchange compared favorably with those of the railroad company from its coal-selling business before the change. Sales of the petitioner’s stock in the last six months of 1909 ranged in price from $90 to $130 per share.

The validity of this contract was attacked by the Federal Government, and the Supreme Court on June 21, 1915, handed down its decision in United States v. Delaware, Lackawanna & Western R. R. Co., 238 U. S. 516, holding the contract illegal and enjoining further transportation of coal under it because the contract retained for the railroad company too great interest in and control over the coal sold and thus violated both the commodity clause of the Hepburn Act and the Anti-Trust Act. In the meantime, on June 5, 1914, the two corporations had entered into a new contract eliminating some of the objectionable features of the old, but. preserving the essentials of the petitioners’ business derived from the railroad company. On July 30, 1915, they entered into another contract to further conform to the decision of the Supreme Court. These various changes gave the railroad company less control over the business of the petitioner and gave the latter the right to exercise greater freedom in its dealings with the railroad company and others. The actual business of the petitioner and the profits derived therefrom went on uninterruptedly throughout this period. Old customers were retained through the year here involved. In 1921 all but about 25 per cent of the petitioner’s stock was held by stockholders of the railroad company. In 1921 or thereafter the railroad company sold its coal-mining business and the purchaser took over the contract with the petitioner.

The following are condensed balance statements of the petitioner as of January 1 and December 31, 1921:

The petitioner, in its return for the calendar year 1921, reported, among other items, the following:

Gross sales less returns and allowances_$82, 374,199. 31
Gross income-1_ 7,099,821. 30
Net income- 4,435,187. 78
Invested capital- 14,252, 111. 26
The Commissioner reduced net income to_ 4,158, 702. 40
increased invested capital to_ 14, 256, 771.92
and determined profits taxes to be_ 863, 997. 74

The parties now agree that invested capital should be further increased by $74,675.28.

The petitioner has applied for and the Commissioner has denied it the privilege of having its profits taxes computed as provided in section 328 of the Eevenue Act of 1921.

The petitioner came into being under peculiar circumstances. The railroad company had built up, over a long period of years, a very large and profitable coal business, mining, buying, transporting and selling coal from the anthracite fields of eastern Pennsylvania. Its customers were located at various points reached by its rails. It could no longer continue this business under the law. In an effort to comply with the law and, at the same time, to preserve the value of the business to its stockholders, the petitioner was formed and the business turned over to it. Overnight the petitioner was launched in a prosperous business earning far more than a normal return on its tangible assets. The stock of the petitioner immediately sold at double its par value, at which the original stockholders had obtained it. The petitioner paid nothing and gave no stock for the valuable intangible assets of this business. These intangible assets obtained by the petitioner are not reflected in its invested capital. The railroad, instead of transferring the intangibles to its stockholders and allowing them to pay them in for stock or shares, attempted to transfer them directly to the petitioner. The railroad could afford to do this because its stockholders lost nothing through the change and the railroad retained all of the advantages which it thought the law allowed. Although the early contracts were invalid, the petitioner was permitted to enjoy all the benefits of the old business to the same extent it would have enjoyed them had the contracts been valid. The advantages which the petitioner thus acquired and which it retained through its close relation with the railroad were among its most important income-producing factors during the period from its beginning through the year here in question. .

There was an abnormality in the petitioner’s capital of such magnitude as to entitle it to have its profits taxes computed under section 328 of the Revenue Act of 1921. Cf. J. M. & M. S. Browning Co., 6 B. T. A. 914; Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Rothschild Colortype Co., 14 B. T. A. 718; Stephens-Adamson Mfg. Co., 16 B. T. A. 41; Gantz Tank Co., 16 B. T. A. 212; Roslyn Fuel Co., 16 B. T. A. 285; Marc Eidlitz & Son, Inc., 18 B. T. A 187; Concrete Engineering Co., 19 B. T. A. 212.

Reviewed, by the Board.

Fwther proceedings will be had under Rule 62 (c).

Black,

dissenting: I do not agree that this proceeding presents a proper case for special assessment, especially on the ground on which the majority opinion places it. The concluding part of the majority opinion reads, “There was an abnormality in petitioner’s capital of such magnitude as to entitle it to have its profits taxes computed under section 328 of the Revenue Act of 1921.” (Citing cases.) As I see it, there was not only no abnormality in petitioner’s capital of a large magnitude, but, on the contrary, there was no abnormality at all.

Petitioner was organized in 1909 with a cajoital stock of $6,800,000, divided into 136,000 shares of the par value of $50 each. All of these shares were subscribed for by stockholders of the Delaware, Lackawanna and Western Railroad Company and the full amount was paid in cash. The Commissioner allowed this invested capital in his computation and I fail to see where petitioner has any ground for complaint.

The majority opinion cites, in support of the conclusion reached, such cases as J. M. & M. S. Browning Co., 6 B. T. A. 914; Clarence Whitman & Sons Co., 11 B. T. A. 1192; Concrete Engineering Co., 19 B. T. A. 212. I do not think these cases are in point. These are cases where the corporation had acquired valuable assets and was prevented from including them in invested capital by reason of the prohibitions contained either in section 326(a)(3) or section 331 of the applicable revenue acts.

To illustrate, in Clarence Whitman & Sons Co., supra, Clarence Whitman, who had been carrying on a valuable business for many years, covenanted and agreed with the newly organized corporation, Clarence Whitman & Sons, Inc., that it should have the exclusive right to use his name in connection with its business throughout the world and that he would not use or willingly permit the use of his name in connection with a competing business. He also transferred to the newly organized corporation all the good will attaching to his name. On June 3, 1918, in consideration of the said transfer of good will and in consideration of the said agreements, the corporation, Clarence Whitman & Sons, Inc., issued $1,000,000 par value of its common stock to Clarence Whitman. In that case we held that the trade name and good will which Clarence Whitman transferred to the corporation had a cash value at that time of at least $412,500. That amount was “ paid in ” to the corporation. But we further held that, on account of the provisions of section 331 of the Revenue Act of 1918, petitioner was not entitled to include these intangibles in invested capital, because they had cost the trans-ferror, Clarence Whitman, nothing.

We further held that this exclusion from invested capital by reason of a prohibition contained in the statute, coupled with the fact that these intangible assets were the principal factor contributing to the production of the income, created an abnormality, which entitled the taxpayer to special assessment.

This sort of a case, as I view it, is no precedent for the majority opinion of the Board in the instant case. In the instant case there has been no “ paying in,” so far as I have been able to find from the facts stated in the opinion, of intangible assets for capital stock as there was in Clarence Whitman & Sons, Inc., supra, or even for a nominal consideration as there was in J. M. and M. S. Browning Co., supra, and Concrete Engineering Co., supra. There was no paying in ” at all, so far as I have ascertained from the facts, by the Delaware, Lackawanna & Western Railroad Company of any assets, either tangible or intangible, to the newly organized corporation, Delaware, Lackawanna and Western Coal Company. The latter corporation was organized in the regular way and its entire capital stock was subscribed and paid for in cash to the amount of $6,800,000. Thereupon the newly organized corporation made an advantageous contract with the railroad company, but I can not see where that fact creates the slightest abnormality in petitioner’s invested capital.

The situation, it seems to me, is very similar to that which we had before us in the recent case of Western Indiana Gravel Co., 25 B. T. A. 654. In that case the Northern Railroad, a part of a system operated by the Cleveland, Cincinnati, Chicago & St. Louis Railroad, owned some valuable gravel pits which it was operating. The railroad was advised by its counsel that it did not have the necessary powers to sell its surplus gravel in the market. Thereupon certain individuals connected with the railroad and some of their associates organized the Western Indiana Gravel Company, with a capital stock of $100,000. Certain advantageous contracts were executed between the railroad and the newly organized corporation, Western Indiana Gravel Company. One hundred thousand dollars of the corporation’s capital stock was issued to these individual incorporators in consideration of a purported transfer of these valuable contracts by them. The corporation sought to include this $100,000 in its invested capital for the taxable year which was before us. We said, “ No.” The contracts were not “ paid in ” to the corporation by these stockholders or anybody else. They were not the owners of the contracts. The corporation made the advantageous contracts itself with the railroad without cost; hence, the contracts cost it nothing and therefore did not represent any invested capital, and the corporation was not entitled to include the value of the contracts in its invested capital. In denying special assessment, we said:

It remains to decide whether the exclusion from invested capital of the value of the four contracts in itself creates an abnormality. It is perfectly clear, at the outset, that the mere statutory exclusion of an asset from invested capital does not of itself justify special assessment. Morris & Co., 1 B. T. A. 704; W. E. Beckmann Bakers’ & Confectioners’ Supply Co., supra; Sanford Cotton Mills, 14 B. T. A. 1210; Enameled Metals Co., 14 B. T. A. 1392; J. D. Williams, Inc., 22 B. T. A. 21.
Engrafted on this rule, however, is the exception adopted in J. M. and M. S. Browning Co., 6 B. T. A. 914, w'here the asset excluded for statutory reasons is a substantial part of its capital and productive of a very substantial part of the taxpayer’s income. Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Detroit Opera House, 13 B. T. A. 587; Rothschild, Colortype Co., 14 B. T. A. 718.
But the petitioner can not avail itself of this exception, for in the above cases the asset excluded for statutory reasons was paid in for stock, and while the asset was not part of the invested capital, as defined by the statute, it was nevertheless an unrecognized capital asset largely productive of the petitioner’s income, so that its exclusion would result in abnormality. Such is not the case here. The contracts were not paid in for stock, so that the petitioner has not met the first condition of its claim. Electric Appliance Co., 19 B. T. A. 707; Washington Electric Supply Co., 9 B. T. A. 1399.

The facts in Electric Appliance Co., supra, were substantially as follows: The Electric Appliance Company of Chicago, an Illinois corporation, had established a large and profitable business on the Pacific Coast as well as elsewhere. Due to California laws and other considerations, it was determined in 1905 to incorporate the San Francisco branch as a separate corporation, and this was done under the name of the Electric Appliance Company. This latter company succeeded to all the business and good will of the Illinois company in the California territory, without paying anything for it and the Illinois corporation withdrew from that field. The stock of the California corporation was not taken by the Illinois corporation, but most of it was taken by the stockholders of the Illinois corporation.

Fifteen years later, to wit, 1919 and 1920, the Electric Appliance Company ,of California, petitioner, asked for special assessment on the ground that this transaction back in 1905, whereby it succeeded to the business of a going concern without having to pay anything for it, except to make payment for physical assets, created an abnormality in both its capital and income in 1919 and 1920, which would entitle petitioner to special assessment. This plea was denied on the authority of Moses-Rosenthal Co., 17 B. T. A. 622, and Coca-Cola Bottling Works of Pittsburgh, 19 B. T. A. 267. Cf. Washington Electric Supply Co., 9 B. T. A. 1399.

For the reasons stated, I do not believe that the situation in the instant case is one which calls for special assessment under sections 327 and 328 of the Revenue Act of 1921, and that special assessment should be denied.

Smith agrees with this dissent.


author: Smith:

text:
    S. A. MacQueen Company, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50572.
    Promulgated October 24, 1932.

      A. S. Lisenby, Esq., and E. Stanley Richardson, Esq., for the petitioner.

      Roy N. McMillan, Esq., for the respondent.
   OPINION.

Smith:

The only issue is whether, by the means employed and fully recounted in our findings of fact, the petitioner successfully disposed of the real estate in question without realizing a taxable profit, the amount of which was distributed proportionately to its common stockholders. In other words, did the petitioner corporation sell the property to MacQueen in good faith in an arm’s length transaction, and did MacQueen in turn sell the property to Hatfield; or did the taxpayer, in substance, make the sale to Hatfield and realize the $65,000 profit ?

Stephen A. MacQueen, at all times material hereto, was president, director and chief stockholder of the petitioner corporation. The record indicates that the sale to Hatfield had been negotiated by MacQueen and that he procured the transfer of the property to himself in order to make the sale to Hatfield. The corporation was solvent and the stockholders consented to the sale to MacQueen, but the property was not actually transferred to MacQueen until after he had executed the declaration of trust in favor of the common stockholders in “ conformity with and in confirmation of an understanding subsisting ” between MacQueen and the other two stockholders “ at and prior to the resolutions adopted February 1, 1927,” by which the board of directors was authorized to sell the property to MacQueen. Obviously, therefore, when MacQueen received title to the property, he did so not in his individual right, but as trustee (cf. Jackson v. Ludeling, 21 Wall. 616, 634), and as a director of the petitioner corporation he occupied a place of trust and must execute the trust with fidelity for the common benefit of the stockholders of the corporation rather than for his own benefit (Koehler v. Black River Falls Iron do., 67 U. S. 715, 720), and in such cases he may be compelled to account to the corporation for any profit realized upon the sale of the property. Bird Coal & Iron Co. v. Humes, 157 Pa. St. 278; 27 Atl. 750, 752. In the case just cited the Supreme Court of Pennsylvania said:

* * * a director is a trustee for the entire body of stockholders, and both good morals and good law imperatively demand he shall manage all the business affairs of the company with a view to promote, not his own interests, but the common interests; and he cannot, directly or indirectly, derive any personal profit or advantage by reason of his position, distinct from his co-shareholders. 1 Potter, Corp. § 330; Mor. Priv. Corp. 517, 518. And by assuming the office he undertakes to give his best judgment in the interests of the corporation in all matters in which he acts for it, untrammeled by any hostile interest in himself or others. There is an inherent obligation on his part that he will in no manner use his position to advance his own interest as an individual, as distinguished from that of the corporation. Coal Co. v. Parish, 42 Md. 598; Hill v. Frasier, 22 Pa. St. 320. And all secret profits derived by him in any dealings in regard to the corporate enterprise must be accounted for to the corporation, even though the transaction in which they were made also advantaged the corporation of which he was director. Parker v. Niekerson, 112 Mass. 195. * * *

The Bird Coal & Iron Co. v. Humes case, supra, was followed in Commonwealth Title Ins. & Trust Co. v. Seltzer, 227 Pa. 410; 76 Atl. 77, 79, wherein the court said:

* * * An officer is but the agent of his corporation, and in all transactions in which its interests are involved he must act for it with unselfish singleness of purpose. If in any such transaction it appears that he has acted against the interest of his corporation, the m'ere fáct that the means used to accomplish the unlawful end would, if standing alone, be lawful in themselves will not save such officer from responsibility to account for profits thus made by him which otherwise might have gone into the coffers of his corporation. * * * In scrutinizing the acts of such officers, the court will not heed mere forms when the substance which lurks behind them shows profits from a dealing in the corporation property.

The respondent attacks the bona fides of the sale to MacQueen, and obviously that transaction, previously hedged about by a declaration of trust to protect the shareholders, who had “ equal rights in the distribution of corporate assets after the general debts of the corporation have been paid ” (Stone v. New Schiller Building & Loan Assn., 302 Pa. 544; 153 Atl. 758, 760), created a situation “ which in law implies a fraud” upon the corporation. Tenth Nat. Bank of Philadelphia v. Smith Construction Co., 242 Pa. 269; 89 Atl. 76, 82.

In substance, the purported sale to MacQueen did not effect any change in the beneficial ownership of the assets involved. Had the corporation transferred the property directly to Hatfield, the profit would have been distributable to the same persons receiving it from MacQueen, who was, in accordance with an agreement subsisting prior to any of the steps taken to effect the transfer, merely a trustee for the shareholders. This was in effect a recognition of the fiduciary relation which he occupied and was merely a means to carry out his-duty to the corporation and to his coshareholders, while at the same time attempting a conveyance that would relieve the corporation of the tax upon the profit realized from the sale of the real estate. Although the petitioner corporation was entirely solvent and its dissolution and liquidation did not take place until several months later, the transfer to MacQueen was in reality a transfer in trust, and recognized as such by all the interested parties; his subsequent sale of the property should be treated in the same manner as the sales involved in Rubay Co., 9 B. T. A. 133; Taylor Oil & Gas Co., 15 B. T. A. 609; aff'd., 47 Fed. (2d) 108; certiorari denied, 283 U. S. 818; James Duggan, 18 B. T. A. 608; and Hellebush et al., Trustees, 24 B. T. A. 660, to wit, as the sale of the corporation, and the profit taxed accordingly. Cf. Rasmussen v. Eddy’s Steam Bakery, 57 Fed. (2d) 27; certiorari denied, October 10, 1932.

The facts of record distinguish the instant proceeding from the transactions involved in Fruit Belt Telephone Co., 22 B. T. A. 440, and Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777, wherein corporate taxpayers were held to have successfully divested themselves of corporate property and that the individual stockholders thereafter selling the property involved in the first case and fulfilling the contracts involved in the second case, realized income which could not be considered taxable to the corporation. The steps taken in the instant case to safeguard the trust relation were not present in either of those cases and, for all the record discloses, there is nothing to indicate that the laws of Georgia and Iowa would place the same interpretation upon such transactions as does the Pennsylvania law. In the circumstances, we do not think either of those cases controlling here.

Judgment will be entered for the respondent.


author: Black :

text:
    Beneficial Loan Society of Trenton, Petitioner, v. Commissioner of Internal Revenue, Respondent. American Loan Company of Akron, Ohio, Petitioner, v. Commissioner of Internal Revenue, Respondent. American Loan Company of Camden, Petitioner, v. Commissioner of Internal Revenue, Respondent. Beneficial Loan Company of Providence, Petitioner, v. Commissioner of Internal Revenue, Respondent. Personal Finance Company of Lebanon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47749, 48238, 49273, 60961, 61021.
    Promulgated October 25, 1932.

      Jackson R. GolUns, Esq., for the petitioners.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Black :

As to all of the petitioners there is one issue which is common, and that is whether or not each petitioner is entitled to take as a deduction from a return reporting income for a fractional part of a year, the entire specific credit allowed to a corporation with net income less than $25'000 per annum, by the Revenue Acts of 1926 and 1928, or whether such specific credit should be prorated over the number of months for which income has been reported separately, as respondent has done in his determination of'the deficiencies involved in these proceedings.

There is an issue of limitation as t'o petitioner, American Doan Company of Camden. We will discuss these issues in their order.

’An examination of the findings of fact will show that som'e of the income-tax returns in question are governed by both the Revenue Acts of 1926 and 1928, because the fiscal year of the taxpayer began in 1927 and ended in 1928, and some of them are governed solely hy the Revenue Act of 1928, but in so far as ’a decision on ’the first point is concerned, it is not Relieved that there is any substantial difference in 'the "provisions of 'the two acts and "that 'whatever is the correct rule to apply to one is the correct rule to apply'to the other. Under both the 1926 and 1928 Acts, the Commissioner hUs promulgated regulations which require the subsidiary or subordinate corporation, member o'f an affiliated group, whose'sthtus is ¿hanged during the taxable year, to make a separate return for that part of the taxable year during which time it was Outside of the'affiliation. See art. 631, Regulations 69; art. 738, Regulations 71; art. 13, Regulations 75 (which govern'the'year 1929 and subsequent years). This requirement, that the subsidiary or subordinate corporation, whose status 'has been changed during the taxable 'year shall make a separate return for tbat part - of the taxable year during which time it was outside of the affiliated group, has received the approval of the Board and the courts. Industrial Cotton Mills Co., 22 B. T. A. 648, and cases there cited; Sweets Co. of America, Inc., 12 B. T. A. 1285, affirmed on this point, 40 Fed. (2d) 436.

Petitioners in the instant case complied with the above stated regulations, and filed separate returns, in which they included that part of their net income earned during that part of their calendar year or fiscal year, as the case may be, while they were outside the affiliation. Their income for the period of affiliation was included in the consolidated return of a parent corporation. On these points there is no dispute between petitioners and the Commissioner, but as to the use of the specific credit deduction, there is a contest. Petitioners, as has already been stated, contend they are entitled to deduct the entire amount permitted by the statute for a whole taxable year of twelve months, whereas respondent contends that this credit should be prorated in proportion to the income for the number of months included in the return.

Eespondent gives, as a justification for his contention, section 239 (b) of the 1926 Act, and a corresponding provision in the 1928 Act, section 47 (e). Section 239 (b) of the 1926 Act reads: “ * * * In the case of a return made for a fractional part of a year, except a return made under subdivision (a) of section 226, the credit provided in subdivision (b) of section 226 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which the return is made bears to twelve months.”

The Commissioner promulgated article 625 of Eegulations 69 under the foregoing provision of the 1926 Act, and article 715 of Eegulations 74 and 75 under section 47 (e) of the 1928 Act. He followed out the provisions of these regulations in the determination of the deficiencies involved in these proceedings.

The method used by the Commissioner in the instant case recently received the approval of the United States Court of Claims in Beneficial Loan, Society of Bethlehem v. United States, 48 Fed. (2d) 686. We agree with the decision of the Court of Claims in that case.

In Green River Distilling Co., 16 B. T. A. 395, which was governed by the Eevenue Act of 1918, we approved the action of the Commissioner in requiring the Green Eiver Distilling Company to file its separate return for the fractional part of the year (8 months) during which time it was not affiliated with the Copperfield Company and to file a consolidated return with said Copperfield Company for the remainder of the year (4 months). The facts in that case show that in connection with his determination of the deficiency against the Distilling Company, the respondent reduced its invested capital to eight-twelfths of the amount of invested capital, for the 8-month period. He also reduced the excess-profits and war-profits credits to eight-twelfths of the amounts allowable for a full year. This action of the Commissioner, the taxpayer vigorously contested and contended the Commissioner had no right to prorate the amount of invested capital or of the excess-profits and war-profits credit over a period of eight months, but must allow them for the full 12-month period, notwithstanding that income of only eight months was included in the separate return. This contention there made was very similar to the one now made by petitioners in the instant case. Petitioner in the Green River Distilling Co. case relied upon some of the same authorities that the petitioners in the instant case urge in their brief, but we sustained the action of the Commissioner in his method of prorating the amount of invested capital and the excess • profits credit and overruled the contentions of petitioner. We think the principles announced in Green River Distilling Co. are controlling here.

Undoubtedly the point raised by all the petitioners in the instant case would be governed by the same rule applied in Beneficial Loan Society of Bethlehem v. United States, supra, and Green River Distilling Co., supra, unless Beneficial Loan Society of Trenton and Beneficial Loan Society of Providence, which each on December 26, 1929, secured permission of the Commissioner to change their accounting period from a fiscal year period ending January 31, 1930, to a calendar year period beginning February 1, 1929, and ending December 31, 1929, be excepted and are entitled to take the specific credit deduction in accordance with section 47 (a), (c), (e) of the Revenue Act of 1928, which reads:

(a) Returns for short period resulting from change of accounting period.— If a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
* m * * * * *
(e) Income placed on annual basis. — If a separate return is made under subsection (a) on account of a change in the accounting period, the net income, computed on the basis of the period for which separate return is made, shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in the period for which the separate return ig.iriacle. Tlie tax. sliall be-such part, of- the;tax, computed on such, annual basis .as the number of months .in-such period is of twelve months.
* % # * * * r ^
(e) Reduction of credits against net income. — In the case of a return made for a fractional part of a year, except a return-made-under-subsection-(a), on account of; a change in the accounting period, the personal exemption and credit for, dependents, and the_ specific.credit for corporations,: shall be reduced respectively to amounts which bear the same ratio to the full credits provided a? the -number of months in the period for which return is m.ade bears to twelve months.

We think the provisions of section 47 (a) (c) (e) of the Revenue Act of. 1928 would govern in the cases of Trenton and Providence if they liad- not been in.and out of affiliation during the taxable year. If.they .had not be.en in and out of affiliation during the taxable year, we think their, proper procedure, under the permission which had been granted by the Commissioner, would have been to file returns covering the calendar, period,. February 1 to December 31, 1929, including all their income for such ■ period and having it placed upon an annual basis, as provided in section 47 (a) (c) (e) of the Revenue Act of 1928.-.

But. Trenton and. Providence,, like the-other petitioners in this proceeding, were in,and out of affiliation- during the taxable years. In the first-four months of their calendar year, (changed to such by permission of the Commissioner) beginning February 1, 1929, they were not affiliated and their income was reported separately. For the,-remainder, of the calendar year their income-was included in the consolidated returns of parent corporations. We, therefore, think the same rule, which must.be applied to the .other petitioners in this proceeding, must, be applied to them and that rule, as we have already stated, we think was correctly decided by us in Green River Distilling Co., supra, and by the Court of Claims in Beneficial Loan Society of Bethlehem v. United States, supra. That rule we follow in the instant case and approve the. method used by the. Commissioner in his determination of the deficiencies.

The remaining question-relates-to the-statute of-limitations-raised by Camden, which executed and delivered -to respondent a wai-ver of the statute of limitations dated March' 7, 1930, extending the period for assessment of the, taxes involved herein to December 31, 1930. The notice of deficiency - was dated April 23,1930,-and the .appeal was taken June 16, 1930. The written consent or waiver is in the usual form and no objection -is made thereto, except it is pointed out that the name of the parent-corporation of the affiliated group appears at the top of the printed form, but not in the caption or body of the consent in writing, and it is argued that because of this the waiver should .be. confined to the affiliated period for which consolidated return was filed, and not apply to the separate return filed by Camden. There is nothing to indicate that the waiver is so limited. The parent company is not a party to the agreement. Gamden is the taxpayer and the only party to the agreement which waived the statute of limitations on 1927 and 1928 taxes until December 31, 1930. It follows that the waiver is valid.

Reviewed by the Board.

Decision will he entered for the respondent in all the respective dochets.


text:
    The Charles E. Hires Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47781.
    Promulgated October 25, 1932.

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

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

Smith:

The facts clearly show that although it was possible to compute petitioner’s income at the close of any month, its books were kept on the basis of a fiscal year ending September 30. Since the Revenue Act of 1918, taxpayers have been required to compute their net income upon the basis of their “ annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.” Section 212 (b) of the Revenue Acts of 1918, 1921, 1924, and 1926. This petitioner should have filed income-tax returns on the basis of its fiscal year ended September 30 in each year. Henry D. Weed, 2 B. T. A. 84; Coghlin Electric Co., 3 B. T. A. 1071; W. B. Thompson, 5 B. T. A. 193; Berkshire Cotton Mfg. Co., 5 B. T. A. 1231; Paso Bodies Mercantile Co., 12 B. T. A. 750; aff'd., 33 Fed. (2d) 653; certiorari denied, 280 U. S. 595; Jonas Cadillac Co., 16 B. T. A. 932; affd., 41 Fed. (2d) 141; San Francisco Hotel Co., 19 B. T. A. 383; Cohen, Endel Clothing Corp., 20 B. T. A. 169; American Hide & Leather Co. v. United States, 284 U. S. 343.

From the record it appears that the respondent did not adjust petitioner’s returns prior to January 1, 1926, to a fiscal year basis, because he considered such adjustments barred by the statute of limitations. Beginning with January 1, 1926, respondent attempted to restate the tax liabilities of the petitioner and in doing so used a short period, namely, January 1 to September 30, 1926, as the first period. The respondent contends that such adjustment is warranted by section 226 of the Revenue Act of 1926.

We are of the opinion that section 226 does not authorize the respondent to determine a deficiency upon the basis of a tax liability for a short period. In the circumstances of this case the petitioner was required by the statute to file a return for its fiscal year ended September 30, 1926. It never changed its methods of accounting from a fiscal year basis to a calendar year basis. The statute of limitations had not operated to bar the respondent from determining a deficiency upon the return required for the fiscal year ended September 30, 1926. If he could determine a deficiency for a short period he could determine it for the entire fiscal year, which was admittedly the accounting period for which a return should have been made. It appears that the tax liability of the petitioner for the fiscal year ended September 30, 1926, was much less than the tax liability for the short period used by the respondent. The respondent had no right to use a short period to the prejudice of the taxpayer.

In American Hide & Leather Co. v. United States, supra, the question before the court was :

* * * whether the court below correctly held that the admitted overpayment was of the tax due and payable for petitioner’s fiscal year ending June 30, 1918, so that the bar of the statute had fallen at the time of the claim for refund, or was of taxes on income for the fiscal period ending June 30, 1920, and, if the latter, whether recovery was barred by the statute of limitations.

The court concluded in the circumstances of that case that it was the intention of the taxpayer in making its returns on a calendar year basis to pay a tax upon the net income of the calendar year and that where the amount that was paid on the calendar year return was in excess of the tax that was due on the return for the fiscal year ended within the calendar year the excess payment was an advance payment of the tax for the succeeding fiscal year. The court concluded that neither the Government nor the petitioner had chosen the correct method of restating the account. Cf. Bradstreet Co. of Maine, 23 B. T. A. 1093.

In the instant proceeding we are not concerned with the method of applying payments that were made upon the calendar year return. In its petition the taxpayer prays “that this Board may hear the proceeding and compel the Commissioner to accept petitioner’s basis of filing for the calendar year 1926 and, if not, to determine the tax on the basis of a fiscal year of twelve months.” The petitioner is entitled to have its tax liability determined upon the basis of its fiscal year ended September 30, 1926. The petitioner admits that its tax liability for the fiscal year is slightly in excess of the amount which was paid for the full calendar year 1926.

Reviewed by the Board.

Judgment will be entered under Bule 50.

       Sec. 226. (a) If a taxpayer, -with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
      (b) Where a separate return is so made, and in all other cases where a separate return is required or permitted, by regulations prescribed by the Commissioner with the approval of the Secretary, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate return is made.
      (c) If a separate return is made under subdivision (a) the net income, computed in accordance with the provisions of subdivision (b), shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing the number of months included in the period for which the separate return is made. The tax shall be such part of the tax computed on such annual basis as the number of months in such period is of twelve months.
      (d) The Commissioner with the approval of the Secretary shall by regulations prescribe the method of applying the provisions of subdivisions (b) and (c) to cases where the taxpayer makes a separate return under subdivision (a) and it appears that for the period for which the return is so made he has derived a capital net gain, or sustained a capital net loss, or received earned income.
      (e) In the case of a return made for a fractional part of a year, except a return made under subdivision (a), the credits provided in subdivisions (e), (d), and (e) of section 216 shall be reduced respectively to amounts which bear the same ratio to the full credits provided in such subdivisions as the number of months in the period for which return is made bears to twelve months.


author: Smith :

text:
    The Odorono Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Glazo Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51195, 51196.
    Promulgated October 26, 1932.

      Clyde Y. Morris, Esq., Henry Herrieh Bond, Esq., and Carl M. Jaeobs, Esq., for the petitioners.

      Isador Graff, Esq., and James H. Yeatman, Esq., for the respondent.
   OPINION.

Smith :

The petitioners contend, first, that the amounts which they paid to their attorney in 1928 for legal services performed in connection with the transfer of their assets to the Northam Warren Corporation are deductible as ordinary and necessary business expenses of that year, under the provisions of section 23 (a) of the Revenue Act of 1928. This section of the statute permits a deduction from gross income in computing net income of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.”

Were the attorney’s fees paid for the purpose of carrying on any trade or business? The petitioners were both engaged in the regular business of manufacturing and selling toilet preparations. In 1928 they entered into negotiations looking to either a sale of the assets and business to, or a merger with, another corporation engaged in a similar business. They employed an attorney to make an investigation and perfect plans for such a step. As the petitioners state in their brief, the attorney “ represented the petitioners in the proposed merger, he investigated the financial set-up of all the companies, and he assisted in the financing arrangements whereby the transfer of the Odorono and Glazo businesses could be effected.” It seems to us that the attorney’s fees were paid by the petitioners not for the purpose of carrying on any regular business, but for the purpose of merging or reorganizing or completely disposing of their businesses.

The plan by which this was accomplished may be considered, for our purposes, as a reorganization or other nontaxable transaction such as is referred to in section 112 of the Revenue Act of 1928. It has been so treated both by the petitioners and by the respondent. However, it is not necessary in these proceedings to determine the exact nature of the transaction. Our question is whether the attorney’s fees paid in connection therewith are deductible either as expenses of carrying on a business or as losses of that year.

We have held in a number of cases that expenses incident to the organization or reorganization, or merger of corporations are capital expenditures which may not be- deducted from gross income as business expenses of the taxable year when paid or incurred. First National Bank of St. Louis, 3 B. T. A. 807; Hershey Mfg. Co., 14 B. T. A. 867; Udolpho Wolfe Co., 15 B. T. A. 485. This is also true of fees paid by a corporation to increase its capital stock; Logan-Gregg Hardware Co., 2 B. T. A. 647; Holeproof Hosiery Co., 11 B. T. A. 547; and commissions and fees paid in connection with the sale by a corporation of its capital stock. Emerson Electric Mfg. Co., 3 B. T. A. 932; Simmons Co., 8 B. T. A. 631; aff'd., 33 Fed. (2d) 75; certiorari denied, 280 U. S. 577; Harrisburg Hospital, Inc., 15 B. T. A. 1014. We have also held that fees paid by an individual to an attorney for investigating investment projects are not deductible in the year when paid, either as expenses of a trade or business, or as losses. Robert Lyons Hague, 24 B. T. A. 288.

In Holeproof Hosiery Go., supra, we said:

Those expenses which are ordinary and necessary in carrying on a business may be deducted from annual income when paid or incurred. Expenditures which are made for the acquisition of capital assets represent the cost of the asset and, if the assets are exhausting, deductions for exhaustion make capital whole in such cases before income is taxed. * * * However, all expenditures need not fall into one or the other of these two classes. * * *
The expenditures for attorneys’ fees in this case may be such an expenditure. It can be argued, and not without merit, that no capital asset is acquired when attorneys’ fees are paid in connection with an increase in capitalization, but it does not follow that the payments are ordinary and necessary expenses of the year when made. It may be that the scheme of the taxing statute fails to provide for their reflection in the computation of the petitioner’s tax, but in any event they are not ordinary expenses in carrying on the business during the year 1921, within the meaning at section 234 (a) (1) of the Revenue Act of 1921. * * *

Ordinarily, the costs incident to the acquisition or sale of property are considered capital expenditures, which, in the case of a purchase, are added to the cost of the property (see Marjorie Post Hutton, 12 B. T. A. 265; aff'd., 39 Fed. (2d) 459; I. N. Burman, 23 B. T. A. 639), and in the case of a sale are deducted from the sale price, thereby, in taxable transactions, either reducing the amount of the gain or increasing the amount of the loss. See W. A. Bahr, 10 B. T. A. 63?. Cf. also Mrs. E. A. Giffin, 19 B. T. A. 1243.

Regardless of whether or not the amounts here in dispute may be classified as capital expenditures, we are of opinion that they were not ordinary and necessary expenses of carrying on a business.

The petitioners contend, in the alternative, that the attorney’s fees, if representing capital expenditures, are nevertheless deductible as losses, under the provisions of section 23 (f) of the 1928 Act, which losses were incurred upon their dissolution within the taxable year.

There is no merit in this contention. There is nothing in the evidence to indicate, and it is not claimed by the petitioners, that-there was any loss upon the transfer of the petitioners’ assets to the Northam Warren Corporation. We assume, in the absence of evidence to the contrary, that the transaction was mutually beneficial to all of the parties concerned and that value was received by the petitioners on account of the expenditures for the attorney’s fees.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Murdoc-K : Goodrich,

text:
    Alexander D. Falck, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 20452, 29252, 29389, 29444-29446, 29461, 29465, 37520, 37703, 37864.
    Promulgated October 26, 1932.

      WilKam B. Green, Jr., Esq., Bussell L. Bradford, Esq., Williwm D. Flannery, Esq., and Normam, E. Webster, O. P. A., for the petitioners.

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

       Proceedings of the following petitioners are consolidated herewith: Corning Trust Company, Successor Trustee of the Estate of Henry P. Sinelaire; Eugene C. Sullivan ; Estate of Amory Houghton, Jr.; Alanson B. Houghton; Arthur A. Houghton; George Buell Hollister; The Farmers’ Loan and Trust Company as Trustee under the Last Will and Testament of Charles F. Houghton, deceased; Murray Sinelaire and William S. Heyniger as Executors of the Last Will and Testament of Henry P. Sinelaire, Jr., deceased; Helen B. Sinelaire, William W. Sinelaire and Paul Sinelaire as Executors of the Last Will and Testament of William Sinelaire, deceased; and Reginald Sinelaire.

   OPINION.

Murdoc-K :

The parties all agree that the exchanges in 1920 and 1923 were in connection with reorganizations of the corporation, and no gain or loss should be deemed to have occurred or should be-recognized. See sections 202 (b) and 202 (c) (2) of the Revenue-Acts of 1918 and 1921, respectively. Section 202 (e) of the latter act does not apply in this case, since the preferred stock was received in, a nontaxable exchange and the subsequent sale was a separate transaction. The stock received in such exchanges must be treated as taking the place of that given for the purpose of computing subsequent gain- or loss from the disposition of it. Section 202 (d)- (1) of. the Revenue Act of 1921. See also section 202 (b) of the-Revenue Act of 1918. This means that the new stock takes the basis of the old. Matthias W. Wildschutz, 22 B. T. A. 1140; aff'd., 60 Fed. (2d) 689. Where only one kind of stock is received in the exchange, the application of this rule is simple enough and the act' needs no elaboration. But here two classes of securities were received and the question is, How is subsequent gain or loss upon the disposition of these new shares to be computed? The act is not specific on this detail and the Commissioner, as he was authorized to do, has taken care of it in his regulations. Article 1567 of Regulations 62 deals directly with section 202 (d) (1) and the problem presented above, as follows:

If property is exchanged for two hinds of property and no gain or loss is recognized * * * the cost of the original, property should be apportioned, if possible, between the two hinds of property received in exchange for the purpose-of determining gain or loss upon subsequent sale. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until out of the proceeds of sale shall have been recovered the entire cost'of the original property. When securities of a single class are exchanged for new securities of different classes so that no gain or loss is realized * * * , for the purpose of determining gain or loss on the subsequent sale of any of the new securities the proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the marhet value of the particular class bears to the marhet value of all securities received on the date of the exchange.

This article of the regulations has been approved in Gwrtiss et al., 21 B. T. A. 629; affd., 57 Fed. (2d) 847.

The petitioners apparently approve of the regulation, but they claim that the Commissioner has incorrectly applied' it to the facts in these cases. They agree that the preferred stock at the date of the exchange in which they received it had a market value of $100 per share. But they contend that the common stock had no market value or that its market value could not be determined; that no apportionment of the old basis was practicable or possible; and that therefore no profit on the subsequent sales will be realized by any of them until that one has recovered his entire old basis. The Commissioner, except in the case of Falck, has computed a value for the common stock and has allocated the original bases accordingly in a manner which he claims is practicable and fair. Here we find the principal difference between the petitioners and the Commissioner.

The petitioners are beside the point in their argument that the common stock had no “ readily realizable market value.” Neither the act nor the regulation here involved requires that the market value should be readily realizable. The term “ readily realizable market value ” has been used in the revenue acts where the recipient of property in an exchange is to be taxed on the gain resulting from the exchange. Before such a transaction is considered to give rise to taxable gain under the statute, the property received in the exchange must have a readily realizable market value, i. e., be practically the equivalent of cash. In the present case value is not being used to take the place of cash as if it were the purchase price, itself giving rise to gain, but is being used only as a practical means of apportioning a basis to be subtracted from the purchase price in case the property is subsequently sold. The petitioners incorrectly assume that a strict interpretation of section 202 (d) (1) and the regulations would be favorable to taxpayers and therefore should be adopted under the rule that ambiguities or doubts in a taxing statute must be resolved against the government responsible for the wording used. They lose sight of the fact that it is impossible to determine what construction would be most favorable to taxpayers generally. Cf. Brewster v. Gaffe, 280 U. S. 327. The apportionment applies also to benefit taxpayers claiming losses. Other taxpayers may want to report their gains ratably as they dispose of their stock instead of lumping- them, as these petitioners would prefer to do. In fact, these very taxpayers in the end may be benefited by this apportionment if they should sell the rest of their stock in a high tax year.

The various deficiency notices were introduced in evidence to show how the Commissioner arrived at the deficiencies. These show that in every case, except that of Falck, be used certain figures representing the value of tangibles and the earnings of the Corning Glass Works in computing the profit from the sales of preferred stock. This action is now assigned as error by petitioners. If petitioners did not agree to the correctness of these figures, theirs was the duty to prove correct figures. This is not so in the case of Falck. The deficiency notice to Falck was a tacit approval of the method used by Falck in reporting his profit from the sale of his preferred stock. The Commissioner, by amended answer, alleges that he made a mistake in computing the Falck deficiency, and his profit on the sale of preferred stock should be computed as the Commissioner computed it in the other cases. Under our Bule 30 the burden of proof on this issue in the Falck case is on the Commissioner. We know that the company was operating profitably and paying dividends and its stock was worth more than the employees paid for it. ' But the record, in so far as it relates to the Falck case, does not contain evidence sufficient to enable the Board to determine affirmatively the market value of the common stock at the date of the last exchange or to apportion the original basis in order to arrive at Falck’s profit.

If the Falck case had been heard separately, the failure of proof would be more apparent, but it is no less real because the cases were consolidated for hearing. Testimony and other evidence introduced at this hearing has general application, but the Commissioner is not aided in his case against Falck by evidence of how he computed the deficiencies against the other petitioners. The Commissioner introduced no evidence, but relied chiefly upon the presumptive correctness of his determinations. In the Falck case this was fatal to his affirmative contention.

The Commissioner does not ask us to rely blindly upon his determinations in the remaining cases. He has disclosed his method of valuation, a consideration of the value of the assets back of the stock. Cf. Wright et al., 19 B. T. A. 541; George F. Milton, 17 B. T. A. 380; George A. Richer, 10 B. T. A. 11. In order to determine the value of the intangible assets, he used a formula frequently relied upon for such purpose where there are no sales, i. e., he reduced the average earnings for five years preceding December, 1923, by 8 per cent of the average tangibles for the period and capitalized the remaining earnings at 15 per cent to arrive at the value of intangibles. This is the formula set forth in A. B. M. 34, C. B. 2, p. 31, used in the absence of better evidence or as a check in Dwight & Lloyd Sintering Co., 1 B. T. A. 179; Otis Steel Co., 6 B. T. A. 358; Schilling Grain Co., 8 B. T. A. 1048. See also Estate of Jacob Fish, 1 B. T. A. 882; Robertson v. Routzahn, 1 Fed. Supp. 355. This value of intangibles he added to the value of tangibles as of December, 1923, to get tbe total value of the business. From this total value he deducted the 'known total value of the preferred stock and found that one share of common stock was worth $73.43 at the date of the last exchange. In this way he found that the total value of the preferred was 25.40 per cent of the total value of both classes of stock, so he allocated 25.40 per cent of the old bases to the preferred and computed profits accordingly. He also supports his determination by a rule of thumb, ten times earnings, which he says is a common and conservative method used by prospective investors to determine the value-of securities. He points significantly to the fact that the petitioners, objecting to his method of determining the value of the common in 1923, at the same time agree to the value as of March 1, 1913, which he arrived at in exactly the same way. These arguments and the facts, appearing from the petitioners’ evidence, that the business of the corporation was long and well established on a prosperous dividend-paying basis, the common stock was worth more than -the employees paid for it, and the preferred sold at'par when offered, about sum up the respondent’s case.

The fact that the presumptive correctness of the Commissioner’s determinations places the burden of proof upon petitioners in proceedings before this Board, so often relied upon by the Commissioner, as here, frequently makes the decision of cases difficult and unsatisfactory, where the introduction of evidence would have simplified matters. This burden-of-proof principle should not be pressed unduly to defeat taxpayers. Mount v. Commissioner, 48 Fed. (2d) 550. Yet it has its place and requires that the evidence, when fairly considered, preponderate in favor of the petitioners. Wichwire v. Reinecke, 275 U. S. 101; Crook v. United States, 30 Fed. (2d) 917; Walls v. Commissioner, 60 Fed. (2d) 347; Avery v. Commissioner, 22 Fed. (2d) 6; Wright et al., supra; aff'd., 50 Fed. (2d) 727; certiorari denied, 284 U. S. 652. In Burnet v. Houston, 283 U. S. 223, the court said petitioners are required “ to produce the best available evidence of value which the circumstances and nature of the transaction permitted.”

What have the petitioners produced as the best available evidence which the circumstances and nature of the transaction permitted? The respondent concedes that the common stock has been closely held and has never been sold or offered for sale to the public; also, that the sales to employees do not indicate a fair or reasonable market value. Such facts are material, but alone are not determinative as to whether the stock had a market value. Insurance & Title Guarantee Co., 12 B. T. A. 452; aff'd., 36 Fed. (2d) 842; certiorari denied, 281 U. S. 748; Chicago Ry. Equipment Co. v. Blair, 20 Fed. (2d) 10, 14; Wright et al., supra. For additional proof of their position the petitioners must rely chiefly upon the testimony of one witness, an assistant vice president of a trust company, of the city of New York, associated with its trust department. The company was executor and trustee under the will,of Charles F. Houghton. When Houghton died in 1897 he owned a substantial block of stock in the Corning Glass Works, which he had willed should be sold by his executor or trustee as soon as practicable, provided however, that other stockholders should have a preference if they would pay as much as outsiders. None of this stock had been sold up to the time of the hearing, except the preferred sold in December, 1923. No other offers had been received for it and no other price fixed, for any of it by the trust company at any time. The trust company from time to time urged the other stockholders to agree, among themselves upon a price at which they would be willing to purchase. They never agreed. The trust company made no other attempt to sell the stock. The witness said he thought the other stockholders were the most likely purchasers and he knew of no other market. He was not presented as an expert witness upon valuation of securities.

He said be never learned what the stock was reasonably worth. This value was unknown to him, but was it unknowable to one willing to make a reasonable effort to discover it ?

We do not know the relationship of the various stockholders of the n ame Houghton. But about 86 per cent of the stock of the Corning Glass Works was owned by them. Under such circumstances, the failure of the trustee to sell may have been due to other reasons than lack of a real market. None of the stockholders or officials of the company were called as witnesses to give information which they might have about the value of the stock. None of the petitioners testified. No experts on valuation appeared to- aid the petitioners or the Board. Perhaps the absence of some such possible witnesses was justified, but, before we should say that the stock had no market value and hold that the Commissioner’s apportionment was,- not practicable, some more convincing- evidence should- be produced. We can not assume that an effort to produce better evidence would have, been fruitless. None of the other stockholders were offering" to-, dispose of their stock. Were they willing and able to buy more.? What, would they have given, for more? How would they have determined, the proper amount to offer and how would the trustee: have determined the proper price to accept except by the aid of some, such method as the Commissioner has used? If this method was faulty or inferior, why was this not shown to us in some way ? We think we are not giving undue importance to the burden of proof nor are we unmindful of the difficulty of proving a negative in holding that these petitioners have failed to produce sufficient evidence to- weigh the scales in their favor.

The petitioners argue that in some cases the determination of a market value is absolutely necessary, but there is no great necessity here, since their profit will be reported ultimately when they have recovered any amount in excess of the original basis and, if the final result is a loss, they will not be charged with a false interlocutory gain. This seems to be an attack upon the reasonableness and propriety of the use of market value in the regulation, whereas we .understood the petitioners had no objection to it. We think the regulation was justified and proper. It serves both the taxpayer and the Government in many cases, apparent to anyone. It does not require apportionment of the basis in every case, but only where possible and practicable. These cases, with the exception of the Falck case, fall within the latter class, for it is not difficult to believe that this common stock might have sold at about the price which the Commissioner. used.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Goodrich,

dissenting: Except as to Docket No. 20452, I dissent from the majority opinion. I agree that whether the common stock had a “ readily realizable market value ” has nothing to do with the case. I agree also that section 202 (d) (1) is controlling here, that the new stocks received take the basis of the old stock for which exchanged, and that article 1567 of Regulations 62, having been approved as reasonable, should be applied in determining gain or loss upon subsequent sale of the stocks, or a part thereof, so acquired. The article requires that a “ fair apportionment ” of cost basis be allocated to each class of securities in “ that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange.” The respondent has made an apportionment which is upheld by the prevailing opinion on the ground that petitioners have failed to overcome the presumptive correctness with which his determinations are armored — have failed to prove that the common stock had a market value different from that assigned to it by respondent. At this point I disagree. The evidence in this record is sufficient to convince me that the common stock had no market value, or if it had, that the value was not known, and that showing, in my opinion, is sufficient to overcome the presumptive correctness of respondent’s determination of market value upon which he bases his apportionment. The stock undoubtedly was valuable and conceivably might have been sold at some price, but as to what that price would be, and whether it would be market value, we can only guess. Its book value and perhaps its intrinsic value might be determined quite accurately, but such values are not necessarily the market value, as that term has been so often judicially defined. Since the regulation requires the apportionment to be based upon a comparison of the market values of the two classes of securities, it need not be argued that, in the absence of one of those factors, it is not possible nor practicable to make a “ fair apportionment ” between them by the method prescribed.

I realize that upon occasion, because of statutory requirements, a value, such as a fair market value as of March 1, 1913, or as of the date of death of a decedent must be determined, and that such determination, be it accurate or inaccurate, if reasonably bottomed upon fact, must be used as a basis for the computation of statutory tax liabilities. No such necessity confronts us here. We are seeking only to determine whether this common stock had a market value, so that it is possible or practicable to make an apportionment of a cost basis between it and a preferred stock of known market value. My conclusion is that its market value at the time received upon exchange was unknown and I see no necessity to attempt to fix that value) by guess or to attribute to a stock of unknown market value, by means of arbitrary mathematical formulae, a portion of the cost basis, as respondent has done.

Therefore, in my opinion, the market value of the preferred stock received in the exchange should be applied against the basis of the original property and no profit on the sale of any of the property received will be realized until, out of the proceeds of such sales, shall have been recovered the entire cost o'f the original property.


text:
    The R. G. Bent Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57312, 59796.
    Promulgated October 26, 1932.

      Dermis P. O'Connor, Esq., and A. F. Hall, G. P. A., for the petitioner.

      James K. Polk, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Smith:

The respondent’s contentions in these proceedings are that the petitioner kept its books upon the straight accrual basis; that under such method of bookkeeping the earned profits on the uncompleted contracts at the end of each year constituted items of accrued income of that year; that the petitioner did not have any “ long-term contracts ” as defined in article 334 of Regulations 74, and that the petitioner is not entitled under the regulations to report its income on the so-called long-term contract basis, but must report on the straight accrual basis, in accordance with the method of bookkeeping regularly employed by it.

The pertinent provisions of the Revenue Act of 1928 and of the Commissioner’s regulations are as follows:

Sec. 41. General Rule.
The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *
Sec. 42. Period in Which Items of Gross Income Included.
The amount of all items of gross income shall be included in the gross Income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.
[Art. 334, Regulations 74.] Long-term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term “ long-term contracts ” means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:
(u) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificates of architects or engineers showing the percentage of completion during the taxable year of the entire work to be performed under the contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If, upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.
Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) of this article, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

The evidence shows, and we have found as a fact, that at the end of each of the years 1928 and 1929 the petitioner had several uncompleted contracts which covered a period of more than one year and which were therefore “long-term contracts” within the meaning of the regulations. The petitioner was therefore entitled under the regulations to report the income from all of its contracts either upon the basis of percentage of completion in each year (art. 334 (a)), or to report all of the income from each contract in the year when the contract was completed (art. 334 (5)). The petitioner chose the latter method and reported in its returns for each of the years 1928 and 1929 the actual profits on contracts substantially completed within the taxable year.

Article 334 of Regulations 74, quoted in full above, gives the taxpayer the option of preparing its returns upon the so-called completed-contract basis. It imposes no condition except that the method of reporting shall clearly reflect the true net income. It makes no mention of bookkeeping methods except to provide that, “Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. * * *”

We see no reason why, as a general proposition, the use of the accrual method of keejDing the books should be said to preclude the use of the long-term contract method of reporting income as provided in article 334. In Bent v. Commissioner, 56 Fed. (2d) 99; affirming H. Stanley Bent, 19 B. T. A. 181, the court said:

* * * In the choice of the accrual or cash basis method of accounting, the matter is left to the discretion of the taxpayer regardless of the actual effect upon the amount of the tax, and there seems no good reason why in the special cases of long term contracts the taxpayer should not have the right to suspend in the job account both expenses and receipts until it is ascertained whether on the whole job there has been a profit or loss. That was done by the taxpayer in this case. * * *

It seems to us that under the law and the regulations the method regularly employed in making the returns is a more important consideration than the method of keeping the books, and that where a taxpayer has for any 3>"ear filed a return, consistent with its method in prior years, which clearly reflects its net income as readily ascertainable from its books and records, it should neither be required nor permitted to change the return to show a different taxable income computed by some other method which is said more nearly to conform to the book income.

The facts in the instant proceedings are similar to those in H. Stanley Bent, supra, where we refused to permit the taxpayer to change his returns, in which he had reported his income upon the accrual basis, to a completed-contract basis. To the same effect is James G. Ellis, 16 B. T. A. 1225. We found in the H. Stanley Bent case, though not in the Ellis case, that the returns were prepared strictly in accordance with the method of bookkeeping employed by the taxpayer, which is perhaps not the situation in the instant case, since the income shown on the return was not the same as that shown in the closing journal entries, but it appears nevertheless that the returns were prepared in accordance with the final and correct general ledger entries. It is apparent that the net income as reported in the returns was readily ascertainable from the figures contained in the petitioner’s books and in our opinion there was a substantial conformity in the method of keeping the books and making the returns.

It further appears that there was a considerable variance in many of the contracts between the estimated profit, which was computed monthly and carried to the closing profit and loss statement, and the actual profit as determined upon final completion of the contracts. We held in Tillman, Admr., 10 B. T. A. 4, that where accounts are so kept that taxable income can be accurately computed on the accrual basis and can not be estimated on the installment basis, the accrual and not the installment basis should be used. The situation here is parallel. The petitioner’s accounts were so kept that its income could be accurately computed upon the completed-contract basis and only estimated inaccurately upon the accrual basis.

Upon the facts before us we would feel compelled to deny the petitioner’s contention, if made, for the right to change its return from the completed-contract to the accrual basis. Likewise, we are of the opinion that the respondent is in error in his requirement that the petitioner’s returns should be so changed.

Judgment will be entered under Rule 50.