author: Sternhagen:

text:
    H. H. Champlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22486.
    Promulgated June 6, 1933.

      Harry O. Glosser, Esq., for the petitioner.

      P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.
   OPINION.

Sternhagen:

1. The first issue has been settled by the parties. The Commissioner had allowed the petitioner a deduction of $10,000 for salary, which petitioner claimed was inadequate and should be increased to $25,000. This the Commissioner now concedes, and thus removes the issue from consideration.

2. The petitioner contends that during all of the period in question the income from the oil and refining business inured to a partnership which existed by agreement between him and his wife. The respondent denies the partnership. In our opinion, the evidence fails to establish that such a partnership existed.

It has been held that in tax cases a claim of partnership between husband and wife must be carefully scrutinized, and is not to be lightly allowed. James L. Robertson, 20 B.T.A. 112; W. M. Buchanan, 20 B.T.A. 210; J. Howard Coombs, 20 B.T.A. 1021; cf. Bur-net v. Leininger, 285 U.S. 136; Leonard M. Gunderson, 23 B.T.A. 45; D. Morton Rose, Administrator, 22 B.T.A. 1334; (65 Fed. (2d) 616); Elizabeth M. Coombs, 25 B.T.A. 1320; J. W. Brack-man, 24 B.T.A. 259. While, in Oklahoma it may be, as the petitioner contends, that a husband and wife may properly form a partnership, and that such state law would be controlling (but see Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110; Bur-net v. Leininger, supra), the question here is whether the evidence is sufficient to establish such a partnership in fact. We are unable to find that it does. The wife merely contributed some of her own funds to the petitioner to be used in the acquisition and operation of the lease, being at the same time aware that the venture might prove unsuccessful and that her contribution might thus be lost. Nothing more was understood as to a partnership relation, either between themselves or by anyone else who did business with the petitioner. The wife had no authority to participate either in the management or the responsibilities of the business, and she never attempted to exercise any. The business was conducted entirely by the petitioner and in his own name. No distribution of profits was ever made to the wife. Under these circumstances the petitioner properly omitted to file partnership returns for 1917 and 1918, and the fact that such returns were improperly filed for 1919 and 1920 and the resulting tax was distributively paid by both, adds nothing to demonstrate the existence of a partnership.

3. The petitioner contends that for 1920 the Commissioner erroneously charged him with gain resulting from the exchange by him of the assets of his business, including the Beggs lease, for shares of the newly organized Champlin Befining Co. He contends that the transaction was within section 202 (b), Bevenue Act of 1918, and that the shares received had no fair market value and thus the transaction involved no gain. The evidence offered to support this point is misconceived. It is directed not so much to the actual fair market value of the shares received as it is to the effect of the title litigation upon the scope of the market for the Beggs lease. Since the opening balance sheet shows that the corporation’s shares were backed not alone by the Beggs lease, but also by the substantial value of various other apparently unrelated assets, there would still be value in the shares even if it could be said that the Beggs lease was itself without fair market value. H. II. Blumenthal, 21 B.T.A. 901. The balance sheet indicates that such assets included cash $196,000, accounts receivable $150,000, refinery $319,000, tank cars $447,000, and other items, all aggregating over $1,500,000. Nothing in the record indicates that this valuation was inflated. There is therefore no basis for a finding that the shares had no substantial fair market value.

The parties have stipulated that, except for the effect of the litigation upon the petitioner’s rights under the Beggs lease, the lease was worth $1,530,000. This figure is substantially less than the aggregate discovery values of the eight .wells which were brought in on the property prior to the incorporation, upon which substantial depletion deductions had been claimed and allowed. Throughout the litigation the petitioner and the corporation were successively in possession of and actually engaged in operating the property, and during this period the petitioner’s right to operate and retain the proceeds was never sufficiently in doubt to impel the court by the appointment of a receiver or otherwise to restrict his use of either the property or the proceeds. One witness thought that the petitioner’s chance of ultimate success in the litigation was one out of three. The witness translated this and other facts into a value for the lease while under the cloud amounting to “ $400,000 or $500,000.” Another witness thought that the major oil companies would not be interested in buying either the petitioner’s shares or the leasehold, and this he translated into an opinion that the leasehold and shares were unmarketable and without fair market value. His opinion of the value of the sound right under the lease was $750,000, which is one half of the value stipulated. As a matter of fact, no attempt was made by the petitioner or the corporation at any time to sell either the lease or the shares, and evidence of actual effect upon the market is not available. The opinions of the witnesses are conjectural estimates, cf. Buena Vista Land & Development Co. v. Lucas, 41 Fed. (2d) 131, and, as we have said, relate primarily not to the corporate shares but to the controverted lease.

The corporation which the petitioner organized accounted for the leasehold at a total depleted value of $1,147,500. The respondent, having agreed with the petitioner that the sound, unclouded title to the lease was worth $1,530,000, recognized that the pendency of the title litigation served to diminish such market value and he determined the value thus diminished to be 25 percent less, or $1,147,500, which is the same figure appearing as the opening-entry upon the corporation’s books. We are unable, after a full consideration of the evidence, to say that this determination overstates the fair market value of the lease or that the fair market value of the corporation’s shares was less than the Commissioner’s figure, which reflected the inclusion among the corporation’s assets of the Beggs lease at $1,147,500.

4. The respondent raises an alternative issue as to the depletion allowance if his valuation be overruled. Since the valuation is sustained, there is no occasion to consider this alternative issue, there being no claim for an increase in the deficiency.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Smith, dissenting: I do not agree with the majority holding that the taxpayer realized a gain upon the incorporation of his oil business. Section 202 (b) of the Revenue Act of 1918 provides that upon an exchange of property the property received * * * shall * * * be treated as the equivalent of cash to the amount of its fair market value, if any" There is no warrant in the statute for resorting to the intrinsic value of the assets of the new corporation in determining the “ fair market value, if any,” of its stock. The statute uses terms connoting a concourse of willing buyers and willing sellers. The evidence of record discloses that there were neither sales nor offers to buy or sell; that there was a cloud upon the title of the petitioner to the Beggs lease; and that there was no market for the stock in 1920. In these circumstances I do not see how it can be said that the shares of stock had a fair market value. In my opinion there was no realized gain taxable as income to Champlin. See O'Meara v. Commissioner (C.C.A., 10th Cir.), 34 Fed. (2d) 390; Schoenheit v. Lucas (C.C.A., 4th Cir.), 44 Fed. (2d) 476; Mount v. Commissioner (C.C.A., 2d Cir.), 48 Fed. (2d) 550, wherein similar transactions have been held to result in no taxable gain.

       Sec. 202. (b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.
      When in the case of any such reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Joseph S. Wells Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54447.
    Promulgated June 6, 1933.

      Percy W. Phillips, Esq., for the petitioner.

      F. B. Schlosser, Esq., and Bernard D. Hathcock, Esq., for the respondent.
   opinion.

Black:

Petitioner complains of a determination of a deficiency of $177.54 in income tax for 1928 and in addition thereto claims an overpayment of tax in the amount of $2,475.27.

The petitioner is a corporation organized under the laws of the State of Utah. It was organized by the heirs of Joseph S. Wells for the purpose of holding together and administering certain securities owned by Joseph S. Wells after his death. The principal office and place of business of petitioner is Salt Lake City, Utah.

During 1916 to 1924 petitioner acquired stock in three corporations at a total cost of $10,500. During 1928 it exchanged such stock and $53.10 in cash for 288 shares of stock in a fourth company, and $1,479.53 in cash. In its return for the year 1928 petitioner reported a profit on the exchange of $23,142.90, computed in Schedule B of the return as follows:

There also appears under Schedule B of the return the following explanation: “(Received in exchange Bennett Glass and Paint Co. stock at trading price of 117.00 per share).”

The respondent accepted petitioner’s valuation of the 288 shares of Bennett Glass & Paint Co. stock as $117 per share, but determined that petitioner also should have included the cash received of $1,-479.53 as a part of the sale price, which determination resulted in the deficiency herein of $177.54. No evidence was introduced by petitioner to the effect that it did not receive $1,479.53 in cash in the transaction. Hence we must regard respondent’s determination as to that fact as being correct. Section 111 (a) of the Revenue Act of 1928 provides that “ the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113 * * Section

111 (b) of the same act provides that the “ amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.”

Petitioner and respondent seem to agree that the proper basis to be used is the amount of $10,553.10; that respondent was correct in adding the amount of $1,479.53 to the sale price; that under section

112 of the Revenue Act of 1928 “ the entire amount of the gain or loss, determined under section 111, shall be recognized ”; and that none of the exceptions to such recognition mentioned in section 112 are applicable.

Petitioner, however, contends that both petitioner and respondent were in error in finding that the 288 shares in question had a “ lair market value ” of $33,696 (or $117 per share) when received by petitioner in 1928; that such stock did not have any fair market value, or, if it did, such value was not in excess of $30 per share and that there was no profit to petitioner in the transaction; and that petitioner is, therefore, entitled to a refund of all the taxes paid rather than liable for the deficiency determined by the respondent.

The respondent’s determination is prima facie correct and the burden of disproving it is upon petitioner. Austin Co. v. Commissioner, 35 Fed. (2d) 910; Wickwire v. Reinecke, 275 U.S. 101. In the effort to prove that respondent’s determination was wrong, petitioner offered the testimony of Wallace F. Bennett, Edward L. Burton and a Mr. Adams.

Bennett testified that he was secretary and treasurer of the Bennett Glass & Paint Co.; that he had been with the company since 1920; that he had no financial interest in petitioner; that his father organized the petitioner herein and has been the president of both petitioner and the Bennett Glass & Paint Co. since each was organized; that petitioner owned some stock in the Bennett Glass & Paint Co. and also some stock in three other companies, the Bennett Gasoline & Oil Co., Ogden Gasoline & Oil Co., and Ogden Glass & Paint Co.; that the two first named corporations had their offices in Salt Lake City and that the two last named corporations had their offices at Ogden, Utah; that the remaining stockholders of all four companies were principally the Bennett interests and W. R. Wallace; that the Bennett Gasoline & Oil Co. had been organized to take over the gasoline and oil business developed in its inception by the Bennett Glass & Paint Co.; that the operation of the last two mentioned companies was had out of the same office with the Bennett Glass & Paint Co. doing the actual merchandise business of both companies; that the Bennett Glass & Paint Co. was, as its name signifies, engaged in the glass and paint business, principally at wholesale, and jobbing lubricating oils; that the latter company had a capital stock outstanding of 6,000 shares of the par value of $100 per share; that from 1923 to 1928, inclusive, its earnings averaged about $42,000 per year and during these years it paid a regular annual dividend of 6 percent or $36,000 a year; that from 1900 to 1928 there had been no sales of stock in any of the companies; that the stock in all the companies was closely held; that in 1928 it was agreed that petitioner and the Bennett family would take all the stock of the Bennett Glass & Paint Co. and the Wallace family would take all the stock of the other three companies; and that due to this agreement the Bennett Glass & Paint Co. lost gross profit (the business it had had with the Bennett Gasoline & Oil Co.) of between $40,000 to $50,000 per year with only a compensating saving in salaries of between $14,000 to $15,000 per year.

Burton testified that he had been in the investment banking and brokerage business in Salt Lake City for about 30 years; that he was fairly familiar with the market for unlisted stocks in 1928. The following hypothetical question was asked him by counsel for petitioner:

The evidence in this case, Mr. Burton, shows that the Joseph S. Wells Association received 288 shares of the stock of the Bennett Glass & Paint Company in 1928; that the Bennett Glass and Paint Company had 6,000 shares of the par value of $100 each or a total capitalization of $600,000; that the earnings of that corporation for the period from 1923 to 1928, inclusive, had been approximately $7 per share or $42,000 a year; that the corporation had paid dividends of six per cent per year or $36,000 per year upon its capital stock from the year 1923 to 1928, inclusive;' that at the time that the Joseph S. Wells Association received this stock of the Bennett Glass and Paint Company, the corporation was about to lose or surrender business which had produced a gross profit of between forty and fifty thousand dollars per year; that the savings anticipated by reason of the loss of this business were fourteen or fifteen thousand dollars with perhaps some other minor savings which might be effected; that the testimony also showed that there had never been any sales of the stock of the Bennett Glass and Paint Company from the year 1900 to the year 1928, inclusive, and that the stock of the corporation had been held during all that time in a few hands — the hands of a very few people, mainly the Bennett and Wallace families, and that as a result of the transactions which took place in 1928, the Bennett family was acquiring the stock of the Bennett Glass and Paint Company. From these facts are you able to state whether or not 288 shares of the capital stock of the Bennett Glass and Paint Company could have been sold, and if so, for approximately what price such a sale could have been made?

To this question, the witness answered he would not consider the stock worth over $25 or $30 per share marketwise; and that on account of the stock being closely held he did not believe the 288 shares could be sold at $30 per share to anyone other than Bennett or his family or some of the clerks within the organization. Adams did not appear at the hearing, but the parties stipulated that his testimony, if produced, would be to the same effect as that given by Burton. The respondent introduced in evidence petitioner’s income tax return for the taxable year involved, in which petitioner reported that it had “ Received in exchange Bennett Glass and Paint Co. stock at trading price of $117 per share.”

Has petitioner overcome the prima facie determination of the respondent? We think not. Fair market value has been defined as “ the cash price at which a seller willing but not compelled to sell and a buyer willing but not compelled to buy, both having reasonable knowledge of all the material circumstances, will trade.” Andrew B. C. Dohrmann, 19 B.T.A. 507, and cases therein cited.

In the instant cáse, two separate and distinct interests, namely, petitioner and the Wallace interests, both dealing at arm’s length, effected a transfer of stocks in which the Bennett Glass & Paint Co. stock was received by petitioner “ at a trading price ” of $117 per share. For the six years previous thereto this stock having a par value of $100 per share had been earning 7 percent and had paid a regular annual dividend of 6 percent. Notwithstanding these facts and the further fact that the corporation in question was a business of long standing and well established, petitioner asks us to find on the basis of Burton’s and Adams’ testimony that the stock did not have a fair market value of more than $80 per share. The Board is not bound to accept at face value the testimony of expert witnesses, if such testimony is contrary to the best judgment of its members. Tracy v. Commissioner, 53 Fed. (2d) 575; Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893; Grand Rapids Store Equipment Corp. v. Commissioner, 59 Fed. (2d) 914; Keystone Steel & Wire Co. v. Commissioner, 62 Fed. (2d) 458; and American Chemical Paint Co., 25 B.T.A. 1208. It is true that the testimony shows that by reason of the rearrangement of business interests between the Wal-laces and the Bennetts, the Bennett Glass & Paint Co. lost from $40,000 to $50,000 gross business which it had previously had with the Bennett Gasoline & Oil Co., with an ability to effect a corresponding saving in salaries of between $14,000 to $15,000 annually. But this fact was clearly known to all of the parties when they arrived at a “ trading value ” of $117 per share. It must therefore be assumed that in arriving at the fair market value of the stock in question due allowance had already been made for the loss of business, which seemed to be the principal factor considered by Burton in arriving at his opinion of value. Burton, in answering the hypothetical question put to him, knew nothing concerning the assets owned by the Bennett Glass & Paint Co., nor the gross annual business done. Ever since the enactment of the Revenue Act of 1924, Congress has provided that “ In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.” See sections 204 (b) of the Revenue Acts of 1924 and 1926, section 113 (b) of the Revenue Act of 1928, and section 113 (a) (13) of the Revenue Act of 1932. Although Congress has not made the same requirement in valuing stock in a corporation as of a time other than March 1, 1913, yet it is a factor that might well have been considered in the instant case. As we have already pointed out, Wallace F. Bennett, secretary and treasurer of the Bennett Glass & Paint Co., testified at the hearing, but he gave no testimony concerning the assets of the company which were behind the stock, and which would under ordinary circumstances to some extent at least determine its fair market value. Cf. Commissioner v. Swenson, 56 Fed. (2d) 544. We have also pointed out, that the company was capitalized at $600,000 and the witness gave no evidence that the capital was impaired at the time we are asked to find that stock having a par value of $100 per share, and paying an annual dividend of $6 per share, had only a fair market value of $30 per share. Nor did he give any testimony that this loss in gross profits due to the loss in gasoline and lubricating oil business was not made up in some other way, nor did he give any testimony that this loss in business caused the corporation thereafter to operate on a nonprofit basis and to cease its payment of dividends or even to reduce them. What the situation was in that respect, we do not know. What we do know is that for six years, including the year 1928, the taxable year which is before us, the corporation had paid a dividend of 6 percent on a par valuation of $100 per share. To say that a stock in a well established business, which for the six preceding years had paid an annual dividend of 6 percent on its par value, and which was actually exchanged at a “ trading value ” of $117 per share, according to the statement made in petitioner’s own income tax return, and with no evidence that the capital of the corporation had become impaired, had a “ fair market value ” on the date of the exchange of only $30 per share, seems to us unreasonable and contrary to the actual conditions and circumstances of the case, and we feel compelled to hold that the evidence introduced by petitioner is insufficient to overcome the prima facie correctness of the determination made by the respondent.

It follows that the determination made by the respondent must stand.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Trammell :

text:
    Henry C. Heinz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55480.
    Promulgated June 6, 1933.

      D. J. Gantt, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Trammell :

Issue 1. — The petitioner loaned the sum of $5,000 to the Piedmont Hotel Operating Co. on December 22, 1927, for the purpose of paying taxes of said company. Each of petitioner’s associates advanced a like sum for the same purpose, under the circumstances set out in our findings of fact above. Petitioner alleges that in 1928 he ascertained that this debt was worthless, charged it off and subsequently claimed a deduction therefor in his return for 1928. The respondent disallowed said deduction on the ground that the debt became worthless in the prior year, 1927.

It is not shown what assets, if any, the operating corporation had, but the record discloses that each year it sustained a substantial deficit, which it could not pay and which it was necessary for the petitioner and his two associates in the venture to make good. At the end of 1926 the petitioner’s one-third share of the accumulated deficit was $31,333.33, which amount he paid and claimed as a deduction in his return for that year. This deduction was allowed by the respondent. These facts, we think, can support no other conclusion than that in 1927 when the subsequent advance of $5,000 to the corporation was made, the corporation was insolvent and unable to pay its debts and was without any reasonable prospect of being able to do so in the future. It is equally clear that the facts were known to the petitioner at that time. Under these circumstances, we cannot hold that the deduction, if allowable, could be postponed until the next year.

A taxpayer in possession of all the material facts is not permitted to make a formal determination of worthlessness, charge off the debt and claim a deduction on that account subsequent to the year in which the debt actually became worthless. The rule, and the reasons which require it, were stated by the Circuit Court of Appeals for the Fifth Circuit in Avery v. Commissioner, 22 Fed. (2d) 6; affirming 5 B.T.A. 872, as follows:

The reasonable interpretation of the law is that, in order to secure a deduction of worthless debts, they must be charged - off in the year they are ascertained to be worthless. A man is presumed to know what a reasonable person ought to know from facts brought to his attention. A taxpayer should not be permitted to close his eyes to the obvious, and to carry accounts on his books as good when in fact they are worthless, and then deduct them in a year subsequent to the one in which he must be presumed to have ascertained their worthlessness. To do so would enable him to withhold deductions in his less prosperous years, when they would have little effect in reducing his taxes, and then to apply the accumulation at another time to the detriment of the fisc. This would defeat the intent and purpose of the law.

The petitioner argues that he would not have been justified in ascertaining the debt in question to be worthless in 1927 when the loan was made, for the reason that it was then hoped by all that the hotel business would improve in 1928 so that the corporation would be enabled to pay its debts. However, it is not shown that any facts were known in December 1927, which would reasonably have indicated such hoped-for results. At that time the three stockholders of the corporation had already advanced $109,000 to cover its prior operating deficits over a four-year period, in none of which years did the corporation have net earnings. The corporation’s past history did not encourage hope for the future in that respect, and it did in fact during 1928 sustain a further operating deficit in the amount of approximately $55,556.07. As we said in Joseph, H. Rudiger, 22 B.T.A. 204:

The bare hope that something might turn up in the future that would permit petitioner to recover constitutes no sound reason for postponing the time for taking a deduction for a loss that has been clearly sustained.

See also Audubon Park Realty Co., 6 B.T.A. 875; Simon Kohn, 8 B.T.A. 547; Ralph H. Cross, 20 B.T.A. 929; affd., 54 Fed. (2d) 781; Louis D. Beaumont, 25 B.T.A. 474; Miles G. Saunders, 26 B.T.A. 519.

The respondent’s action on the first issue is approved.

Issue %. — The petitioner, who is on the cash receipts and disbursements basis, assigns as error the action of the respondent in including in gross income for the taxable year 1928 the amount of $4,391.60 received by the petitioner personally from a syndicate of which he was a member on February 26,1929, on account of “ interest and dividend adjustments.”

Early in 1928 the petitioner became a member of a syndicate or partnership organized to deal in Coca-Cola stock. The syndicate discontinued operations in November 1928, but did not get its affairs wound up and distribution made to its members until subsequent to January 1, 1929.

Respecting the character of the syndicate or partnership, petitioner testified at the hearing as follows:

Q. * * * Now, as a matter of fact, the syndicate was nothing more or less than a joint venture, wasn’t it, or a partnership?
A. It might be termed that.
Q. You were to share the losses or share the profits, as the case might be?
A. Yes, sir.
Q. In accordance with your respective holdings?
A. Yes, sir.

Petitioner argues in his brief that the syndicate of which he was a member was not a partnership, but a joint adventure. In our opinion, the distinction is immaterial, in so far as it bears on the issue under the facts presented here. The rule is established by statute, and the petitioner does not contend to the contrary, that if the syndicate was in reality a partnership under another name, the partners were taxable on their respective distributive shares of the partnership net income, whether or not distributed to them in the taxable year. Sec. 182 (a), Revenue Act of 1928.

If the syndicate ivas a joint adventure and not a partnership, then under the facts disclosed here, the petitioner’s distributive share of the profits, which he became entitled to receive in 1928, constituted taxable income to him for said year.

The syndicate in November 1928 ceased to carry on’ the business for which it was organized, and thereafter proceeded to wind up its affairs and distribute its earnings among its members. Prior to the close of 1928, all events had transpired which fixed the amount of the net income distributable to the petitioner. The fact that the syndicate manager was busy’with other matters, or did not find it convenient for any reason to audit the syndicate accounts and determine the exact amount to which petitioner was entitled and turn over said amount to the petitioner personally, is immaterial.

Even though the petitioner is on the cash basis, he is not entitled to defer to 1929 the reporting of his distributive share of the net earnings of the syndicate for 1928 merely because the manager of the syndicate refrained from ascertaining the amount and making distribution thereof in 1928.

In our opinion, there is no more reason to hold otherwise than to say that the petitioner might defer reporting as income the net profit derived from a transaction conducted by himself personally where he had refrained from ascertaining the exact amount of the profit so, derived until a subsequent year.

In reaching the conclusions in the present proceeding above indicated, we are not unmindful of the recent decisions of the Circuit Court of Appeals for the Second Circuit in Wild v. Commissioner, 62 Fed. (2d) 777, and Glenmore Securities Corp. v. Commissioner, 62 Fed. (2d) 780, where it was held that the realized profit of a syndicate, similar in many respects to the one involved here, constituted taxable income to the members only in the year when actually distributed to them. However, those cases, we think, are distinguishable from the instant proceeding in that the income there in controversy had been accumulated or retained by the manager of the syndicate for future investment or eventual distribution.

The facts are sufficiently indicated by the following statements contained in the court’s opinion in the Wild case:

The question raised by this appeal is whether the earned, but undistributed, income of a member of an investment “syndicate” using contributions of its members to buy, hold and sell securities and land, is taxable. The taxpayer’s position is that he need return only what is actually distributed by the “ syndicate managerthe Commissioner that the syndicate was a partnership, and that its realized profits were taxable income of the members, though retained by the manager for future investment, or eventual distribution. * * *
Sixteen individuals united in a contract, as parties of the first part, with a corporation, as party of the second. The corporation was to be the “ manager ”, though it was also a subscriber. The purpose was to buy and hold shares and bonds of a company which owned real estate. The members promised to pay their subscriptions, which were of unequal amounts, as the manager might call; if they defaulted the manager might advance the call, which was to be then treated as a loan. These funds the manager was to use to buy, and “ manage ”, the shares and bonds of the realty company, and for whatever else it thought “ advisable,” putting the securities in its own name, if it chose, pledging them, voting upon them, and acting as shareholder. The syndicate was to last until the manager ended the venture at its pleasure, when it should distribute all the capital and profits, though it might make “partial distribution ” earlier. Upon distribution the manager was first to take its expenses, next repay the contributions to each member with 6 per cent., and divide the balance as profit, one part to itself and three to the members in proportion to their contributions.

The undistributed profits in controversy in the above cited cases were not available to the syndicate members in the taxable years, for the reason that under the agreement distributions prior to termination of the operations of the syndicate was a matter exclusively within the discretion of the manager, and in the exercise of that discretion the profits in controversy were being held for future investment, or, if not so invested, then for eventual distribution.

“ In the instant case, the business operations of the syndicate were terminated on November 16, 1928, and thereafter the income in question was at the unqualified demand of the petitioner. True, the exact amount thereof, for some undisclosed reason, was not determined and distributed by the syndicate manager until after January 1,1929, but this was apparently only a matter of bookkeeping. The syndicate’s operations had been terminated on the date above stated, and all events had then transpired which fixed the distributive share of income to which the petitioner was entitled. Thereafter, the syndicate manager bad no discretion to accumulate or retain the realized profits for future investment or eventual distribution. The amount to which the petitioner was then entitled was no longer at the risk of the enterprise, but he had a legal right to its immediate possession and unrestricted use.

Eespondent’s action on the second issue is approved.

Issue 3. — In 1928 the petitioner delivered to the syndicate above referred to 1,000 shares of Coca-Cola stock, endorsed in blank or otherwise transferred to the syndicate or a nominee, and in writing authorized the syndicate to buy and sell on his account to the best advantage, solely in its discretion. The stock so turned over to the syndicate included 100 shares purchased by the petitioner in 1920 and 100 shares issued to him as a stock dividend. The remaining 800 shares were acquired by the petitioner subsequent to said purchase in 1920 and subsequent to his receipt of the stock dividend. There was no earmarking or identification by which any of the shares delivered by the petitioner to the syndicate could be differentiated from any other similar shares. There was no restriction in writing placed upon the use of the shares by the syndicate, although petitioner testified he requested the manager of the syndicate orally not to sell or dispose of the 200 shares first acquired by him.

The syndicate sold 800 shares of the stock in November 1928, and remitted the proceeds to the petitioner, the amount of which is not in controversy. The syndicate then purchased on the market 45 shares of Coca-Cola stock and returned to the petitioner a certificate for 200 shares, thus accounting for the 1,000 shares originally turned over to the syndicate by the petitioner. Respondent computed the profit derived by the petitioner from this transaction in accordance with article 58 of Regulations 74, which provides as follows:

When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain. * * *

The quoted regulation is commonly referred to as the “first in, first out ” rule, and in appropriate cases has been approved both by the Board and the courts. The petitioner contends, however, that this rule should not be applied here, and that respondent erred in so computing the profit on the sale of his stock, for the reason that there is a sufficient identification to show that the 800 shares sold were the shares last acquired by him, and that the 200 shares returned in accordance with petitioner’s oral request were those purchased in part in 1920 and in part received as a stock dividend.

We are unable to agree with the petitioner’s contention. There is no evidence to show that the syndicate did not in fact sell or otherwise dispose of the 1,000 shares of stock delivered by the petitioner, as it undoubtedly bad a legal right to do. So far as the record discloses the syndicate may have sold petitioner’s stock, and with the proceeds later have acquired the 800 shares which it sold in November 1928, the proceeds from which were remitted to the petitioner. Certainly it clearly appears that the syndicate sold 800 shares of the stock delivered to it by the petitioner and at least an additional 45 shares, since it was necessary for the syndicate to purchase that number of shares in order to return 200 shares to the petitioner. Furthermore, it is indicated that a new or different certificate for 200 shares was returned to the petitioner by the syndicate in lieu of the original certificate or certificates covering a like number of shares turned over by petitioner to the syndicate.

In the light of these facts, there having been no identification of any of the shares in question, we are unable to find that the syndicate sold the 800 shares of stock last acquired by the petitioner, and returned to him the 200 shares first acquired. The petitioner has not discharged the burden of proof upon him to show that respondent’s determination on this point is erroneous.

The petitioner relies upon Howbert v. Penrose, 38 Fed. (2d) 577, to support his contention. The decision cited is distinguishable on the facts from the present proceeding. In that case the trial court found on the evidence of Penrose that he intended to and did in fact sell certain blocks of stock which represented his latest purchases. As pointed out above, there is no evidence in the instant case to show that the entire 1,000 shares of stock delivered by the petitioner to the syndicate were not sold and other shares purchased, nor that other repurchases and resales were not made prior to November 1928. If it was the petitioner’s intention not to sell but to retain the 200 shares first acquired by him, the evidence we think clearly shows that such intention was not carried out by the syndicate.

In Snyder v. Commissioner, 54 Fed. (2d) 57; affirming 20 B.T.A. 778, the court said:

Where shares “ are sold from lots purchased at different dates and at different prices ” in a marginal account it is clear that, in the absence of something else, the identity of the lots sold could not be determined, hence the cited regulation, which is tersely called the “ First in, first out ” rule. The rule is an arbitrary one, as from the very nature of the case it must be; yet, again from the nature of the case, it is reasonable.

See also David Stewart, 17 B.T.A. 604, and cases cited; Western Bank & Trust Co., 19 B.T.A. 401, 412; John A. Snyder, 20 B.T.A. 778; affd., 54 Fed. (2d) 57, supra.

Bespondent’s action on the third issue is approved.

Eeviewed by the Board.

Judgment will be entered for the respondent.

Black and Adams concur in the result.


author: Lansdon:

text:
    J. Kemp Bartlett, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edgar Allen Poe, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of L. B. Keene Claggett, T. West Claggett, J. Kemp Bartlett and Edgar Allen Poe, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63629, 63630, 63632.
    Promulgated June 6, 1933.

      J. Kemp Bartlett, Esq., and Edgar Allen Poe, Esq., for the petitioners.

      T. M. Mather, Esq., and R. H. Transue, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined that the fair market value of the stock of the Consolidated Instrument Co. of America at the date received by the partnership is the amount to be included in computing partnership net income. The petitioners contend that its value at December 31, 1929, when it was distributed, is the amount on which the partners are taxable. In Old Colony Trust Co. et al., Administrators, 22 B.T.A. 1062, we held that the fair market value of stock received as compensation for services rendered constituted taxable income to the recipient when received. Article 53 of Begulations 74 provides that where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income, where there is no stipulated price for the services rendered, and that compensation in stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. It seems perfectly clear that the date on which value must be determined is the date of payment rather than the end of a taxable year. The partnership income was earned on September 7, 1929, and the value on that date must be included as distributable income even though it had shrunk at the date actually distributed. Cf. Harry B. Hurd, 12 B.T.A. 368; Lincoln Bank Trust Co. et al., Executors, 14 B.T.A. 393; affd., 51 Fed. (2d) 78; Benedict Crowell, 21 B.T.A. 849.

The respondent contends that the right to subscribe to stock of the Fire Co. granted by the Guaranty Co. to its stockholders represents a taxable dividend to the extent of the fair market value of the “ right ”. In support of his contention he cites Peabody v. Eisner, 247 U.S. 347; United States v. Phellis, 257 U.S. 156; Rockefeller v. United States, 257 U.S. 176; Cullinan v. Walker, 262 U.S. 134; Marr v. United States, 268 U.S. 536; Estate of Edwin D. Metcalf, 13 B.T.A. 236; affd., 32 Fed. (2d) 192; and Nanaline II. Duke, 18 B.T.A. 374.

The facts of the instant case are different from those of the cases cited by the respondent. Here the Guaranty Co. acted as agent for the Fire Co. in distributing 25,000 shares of the latter’s stock to stockholders of the former. It subscribed for 25,000 shares on its own account and for 25,000 which were to be taken by its stockholders at the subscription price. It never received certificates for the latter 25,000 shares and it never owned them. Payment was made therefor only after the money had been collected from the subscribers. Surplus of the Guaranty Co. was in no way affected by the transaction and it received no benefit from the subscription price, which was immediately paid over to the Fire Co.

In such circumstances we think the petitioner has realized no taxable profit or dividend upon receipt of the rights to purchase stock of the Fire Co. Cf. T. I. Hare Powell, 27 B.T.A. 55.

Reviewed by the Board.

Dedsiop will be entered ujider Rule 50,


author: Murdock: Arundell,

text:
    Security First National Bank of Los Angeles and Caroline H. Holladay, Executor and Executrix of the Last Will and Testament of Henry E. Huntington, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45429.
    Promulgated June 6, 1933.

      Thomas G. Haight, Esq., Roswell Magill, Esq., James O. Wynn, Esq., J. Marvin Haynes, Esq., Robert H. Montgomery, Esq., and E. H. Conley, Esq., for the petitioners.

      M. B. Leming, Esq., and J. R. Gaskin, Esq., for the respondent.

       Chapter LVII of the Statutes of California, approved March 9, 1885, provides substantially as follows:
      Section 1. The act shall be liberally construed to effect its objects and promote its purposes.
      Section 2. Any person, desiring, in his lifetime, to promote the public welfare by founding, endowing, and having maintained, within the state, a university, college, school, seminary of learning, mechanical institute, museum, or gallery of art, or any or all thereof may convey to trustees any of his property within the state for this purpose.
      Section 3. The grantor may designate:
      1. The nature, object, and purpose of the institution,
      2. Its name,
      3. The powers and duties of the trustees, etc.,
      4. The method of appointing successors,
      5. Rules and regulations for management of the property,
      6. The time and place for erecting buildings, and provide for all other necessary things to carry out the purpose of the grant, including what shall be taught and who shall use without charge.
      Section 4. The trustees may sue and defend.
      Section 5. The grantor, by a provision in the grant, may elect to perform all duties and exercise all powers of the trustees during his life.
      Section 6. The grantor may “ reserve the right to alter, amend, or modify the terms and conditions thereof, and the trusts therein created, in respect to any of the matters mentioned or referred to in subdivisions one to six, inclusive, of section two hereof; and may also therein reserve the right, during the life of such person or persons, of absolute dominion over the personal property conveyed, and also over the rents, issues, and profits of the real property conveyed, without liability to account therefor in any manner whatever, and without any liability over against the estate of such person; and if any such person be married, such person may, in said grant, further provide that if his wife survive him, then such, wife, during her life, may have the same absolute dominion over such personal property, and such rents, issues, and profits, without liability to account therefor in any manner whatever, and without liability over against the estate of either of the spouses.”
      Section 7. The grantor may provide that the trustees may become custodian of the person of minors.
      Section 8. The grant may be executed, acknowledged, and recorded like grants of real property.
      Section 9. No action to set aside, annul or affect the conveyance or the title to the trust property can be commenced more than two years after the recording of the grant.
      Section 10. The property conveyed shall not after a lapse of two years from the date of recording be subject to force sale under exemption, etc., against the grantor unless tlie action was commenced within two years of recording. Nor shall it be sold under execution, etc., if there be other property of the grantor available.
      Section 11. The grantor may by will give all of the trust property to the state, to take effect only should the trust fail for any reason, as an assurance that his wishes will be carried out as nearly as may be.
      The above act was amended in 1891 to include in the list of institutions botanical gardens and public parks.
      An act, supplemental to the above act, was approved on March 13, 1903. It provides that the founders may surrender their reserved rights at any time and thereupon all rights, powers, privileges, trusts and duties shall vest in and devolve upon the trustees as they would otherwise have done upon the death of the grantors.

   OPINION.

I.

Murdock:

The Commissioner has included in the decedent’s income for each period the income for the corresponding period of the trust, known as the Henry E. Huntington Library and Art Gallery. The explanation given in the notice of deficiency and the arguments now advanced by the -respondent indicate that he relies upon the following provisions of subsections (g) and (h) of section 219 of the Revenue Act of 1926:

(g) Where the grantor of a trust has, at any time during the taxable year, * * * the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. (h) Where any part of the income of a trust may, in the discretion of the grantor of the trust * * * be distributed to the grantor or be held or accumulated for future distribution to him * * * such part of the income of the trust shall be included in computing the net income of the grantor.

The same provisions were in the Revenue Act of 1924. Congress intended by the enactment of these provisions to prevent a taxpayer from reducing, or altogether avoiding, his income tax liability by the creation of a trust to hold income-producing property and the retention of a power which would enable him at will to withdraw the property or to direct the payment of the income to himself. The words of Congress are clear enough for present purposes and the case may not turn upon any ambiguity in the language of the taxing statute. If the words of either of these provisions cover the case, the Commissioner must be sustained even though the decedent never exercised his power and even though to tax him may appear to be a great hardship. Corliss v. Bowers, 281 U.S. 376; Clapp v. Heiner, 51 Fed. (2d) 224; Alfred F. Pillsbury, 19 B.T.A. 1229, 1233. Conversely, if the letter of the act does not apply, then there should be no enlargement through interpretation. In short, we are to apply the act as we find it and not our own notions of equity. Crooks v. Harrelson, 282 U.S. 55.

Both parties agree that the original trust deed must receive primary consideration since the others refer to and depend upon it. There are no provisions in that deed expressly authorizing or permitting distribution or accumulation of income to or for the grantor. But the respondent contends that the grantor retained to himself the power to revest in himself title to the trust property and also the power to distribute to himself the income of the trust. He points particularly to the provisions of Paragraph YII of the original trust instrument, wherein the grantor reserved to himself the right to absolute dominion over the personal property conveyed to the trust and the income therefrom, the right to absolute dominion over the income of the real property, and the right to improve, change, manage, and control the trust property as if the trust had not been made. The paragraph also provides that these rights shall be exercised without let or hindrance and free from all interference from any source whatever. Paragraph IX provides that the grantor reserves to himself the absolute dominion over any real or personal property thereafter given tq the trustees. Furthermore, there was no. liability upon him to account to anyone for anything he did with the property. The rights thus reserved were never relinquished by the decedent as long as he lived.

“Absolute” means perfect, complete, unrestricted, freed or loose from any limitation or condition. “ Dominion ” means ownership or right to property, including the right to claim, use, enjoy, and dispose of to the exclusion of every other person. The phrase “ absolute dominion ” must ordinarily connote unrestricted, perfect, and complete ownership in a thing. Webster’s New International Dictionary; Bouvier’s Law Dictionary, Rowles 3d ed., People v. Perry, 84 Cal. 31; 24 Pac. 33; Columbia Water Power Co. v. Columbia Electric Street Ry. Light & Power Co., 172 U.S. 475. Cf. Anderson v. Wilson, 289 U.S. 20. No California case in point has been called to our attention. In People v. Cogswell, 113 Cal. 129; 45 Pac. 270, there is no indication that the grantor reserved any right of absolute dominion. Yet the California statutes provide that there may be such a trust. There is no showing that any of the income of the trust was from real estate. If the decedent retained during his life perfect, complete and unrestricted ownership of a part or all of the corpus of the trust, and particularly of all of the income, obviously he could at any time revest legal title in himself and he could in his discretion distribute the income to himself. The Commissioner contends that he did retain these rights and therefore the income was properly included in his income.

The petitioners contend that the phrase “ absolute dominion ” as used in the statute and in the trust instrument means only a power to further the trust for eleemosynary purposes. They are drawn to this conclusion, not by one determinative word or provision, but by the application of several rules of interpretation. They point to a number of the provisions of the original trust instrument and the act which, they contend, can not be reconciled properly with the respondent’s interpretation of the words “absolute dominion.” In order to avoid incongruities, and in order to give meaning to each provision of the deed and of the act, they say that the words “ absolute dominion ” must mean something less than the power to revoke, deplete or destroy the trust. They also call attention to the California Act of March 21, 1812, California Civil Code, sec. 2280:

A trust cannot be revoked by the trustor after its acceptance, actual or presumed, by the trustee and beneficiaries, except by the consent of all the beneficiaries, unless the declaration of trust reserves a power of revocation to the trustor, and in that case the power must be strictly pursued.

Their argument is sufficiently specious to require careful consideration. This we have given it, but without being convinced that the plain words used by the decedent admit of any modification. Consequently, we may not go outside the deed and the act to raise a doubt as to the meaning of the words used or to find the intention of the grantor. Objections can be suggested to each view, but in our opinion the respondent’s conclusion is the one most easily and naturally reached.

Huntington apparently desired absolute freedom, so long as he might live, in developing his ideas concerning the use of the trust property. C'f. Fosclich Estate, 139 Atl. 318. He reserved the power to deal with all contingencies which might arise. He alonó was to be the judge of the sufficiency of his reason for any of his acts. Yet he desired to have in existence a trust which would manage the trust property from the moment of his death. He further desired that this trust should not be untried but should be an organization which had developed with him and which had benefited through the experience of operating, at least formally, during his life. Thus, he made the trust something more than a potentiality during his life. He allowed it to operate in form at least. The trustees were permitted to gain experience in the conduct of its affairs during his life, and when he died and actual control passed into the hands of the trustees they were not untried. Viewed in this way all of the-provisions of the deed have some reasonable purpose and there is no part of the deed which is inconsistent with any other. .The statute of California permitted him to do what he did. He retained for himself broad powers and he also retained powers more restricted. The retention of one does not negative the retention of the other. He actually exercised the more restricted powers, but the occasion never arose for the exercise of the broadest powers he retained. One who can act as trustee without accounting to anyone, who has retained absolute dominion over the property and over all of the income, and who can control the trust property as if the trust had not been made, has very extensive powers. These, in our opinion, included the power to revest in himself legal title to the personal property at least, and perhaps to the realty, and the power and discretion to appropriate all of the income of the trust property for his own purposes apart from the purposes of the trust. Cf. Porter v. Commissioner, 288 U.S. 436. “ He was free at any moment, with reason or without, to revest title in himself * * Burnet v. Guggenheim, 288 U.S. 280. The income was subject to his unfettered command. Corliss v. Bowers, supra. The Commissioner did not err in taxing the income of the trust to the grantor. Cf. Grace Whitney Hoff, 20 B.T.A. 86; Joseph H. Bromley, Jr., 26 B.T.A. 878; Reinecke v. Smith, 289 U.S. 172; Jackson v. Commissioner, 64 Fed. (2d) 359; O'Donnell v. Commissioner, 64 Fed. (2d) 634; affirming 25 B.T.A. 956.

II.

The next question would not arise had our decision on the first point been in favor of the petitioners. The Commissioner not only taxed the income of the trust to the petitioners for 1925 and 1926, but for those years he failed to allow, as an offset against that income, losses incurred in those years in the operation of a ranch. For each year the ranch had certain income and certain expenses. The Commissioner does not question the amount of either. In each of the two years the expenses exceeded the income. The Commissioner has not included the ranch income in computing the deficiencies and he has not reduced trust income by the ranch expenses. He did not comment on the matter in his notice of deficiencies. In order to limit the evidence to matters as to which the parties were at odds, the Board Member asked counsel for the respondent to state the ground upon which the respondent relied to support his action. Counsel replied that the respondent’s position was that the ranch was operated for Huntington’s pleasure and the expenses were not incurred in a business carried on for profit. Thereupon the petitioners introduced evidence to refute this position. That evidence is not as complete and convincing as it might be. Nevertheless, it sufficiently negatives, for present purposes, the Commissioner’s view that the ranch was conducted as a rich man’s hobby. The ranch was operated for profit. Cf. Edwin S. George, 22 B.T.A. 189. Counsel for the respondent in his brief argues that the proof fails to show that the expenditures were ordinary and necessary. In view of his statement at the trial referred to above, proof of such facts was unnecessary.

III.

The third issue is whether or not the Commissioner erred in holding that a transfer of land was equivalent to the receipt by the decedent of a dividend of $509,600. Originally the amount involved was $866,-320, which the Commissioner had determined was the value of the land. The parties have stipulated that the value was $509,600. Consequently, the difference between the two figures should be excluded from income on the basis of the stipulation. The petitioners have raised this issue as an alternative to be considered only in the event the first issue is decided adversely to their contention. But the respondent argues that he has correctly included the value of the land in the decedent’s income as a dividend, regardless of whether or not the income of the trust is taxable to the decedent.

The land belonged to the Huntington Land and Improvement Co. The decedent owned all of the stock of that corporation and exercised control over it. He wanted to purchase some objects of art for the Henry E. Huntington- Library and Art Gallery from a certain art dealer. Therefore he suggested to the vice president of the corporation that the corporation transfer the land to the trust so that the trust, in turn, could transfer the land to the dealer in exchange for the art objects. This was known to be satisfactory to the dealer. The corporation made the transfer on January 25, 1927, pursuant to a resolution of the directors in which the transfer was described as a gift. On the same day the trust made the exchange with the dealer. The Commissioner held that the transaction was equivalent to the distribution of a dividend to the decedent. This holding must be sustained. The corporation had ample earned surplus from which to distribute a dividend of $509,600. A dividend may be paid in kind. Peabody v. Eisner, 247 U.S. 347. It need not be called a dividend. Phelps v. Commissioner, 54 Fed. (2d) 289; affirming 20 B.T.A. 866; certiorari denied, 285 U.S. 558. Although the directors may have called it a gift and intended to make a gift, it may nevertheless be a dividend. Lincoln National Bank, Executor, 23 B.T.A. 1304; alfd., 63 Fed. (2d) 131. Cf. Alexander Sprunt & Sons v. Commissioner, 64 Fed. (2d) 424, affirming 24 B.T.A. 599. There need be no formal declaration of a dividend. Chattanooga Savings Bank v. Brewer, 17 Fed. (2d) 79; certiorari denied, 274 U.S. 751. Hadley v. Commissioner, 36 Fed. (2d) 543; affirming 6 B.T.A. 1031. The contention of the petitioners is that the transfer was made by the corporation for business purposes to increase the value of adjoining land held by it. This was obviously not the purpose which any of the parties had in mind at the time. If the transfer affected the value of the remaining land, the effect was incidental, unintentional, and not the real purpose of the transfer. The corporation acted solely to accommodate the decedent. At the end of the day the earned surplus of the corporation was reduced by the book value of the land, the trust had the art objects, and the decedent had fully accomplished his sole purpose in having the transfers made. Although it may not be important, it is a fact also that through his absolute dominion over the personal property of the trust, he was in control of the art objects. He enjoyed the use of the corporate property and obtained what he wanted to buy. For income tax purposes the transaction amounted to the distribution of a dividend to the decedent. Cf. L. J. Christopher, 13 B.T.A. 729; affd., 55 Fed. (2d) 527.

IY.

The petitioners contend, under the fourth issue, that the Commissioner erred in failing to allow proper deductions, for each of the three periods here involved, on account of alleged gifts made by the decedent to the Henry E. Huntington Library and Art Gallery. They make this claim under section 214 (a) (10) of the Bevenue Act of 1926, which allows as deductions, subject to certain limitations, “ contributions or gifts made within the taxable year to or for the use of: * * * any * * * trust * * * organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual.” This contention of the petitioners is closely related to the first issue discussed in this proceeding. Section 214 (a) (10) allows deductions for gifts made within the taxable year. Courts hold that there is no gift unless the donor absolutely and irrevocably divests himself of the title, dominion, and control over the subject of the gift. For a summary of authorities see Margaret M. Edson, 11 B.T.A. 621, and the opinion of the Circuit Court of Appeals for the Eighth Circuit, 40 Fed. (2d) 398, reversing the Board. In holding that there was a taxable gift in 1925 within the meaning of section 319 of the Revenue Act of 1924, the Supreme Court in the case of Burnet v. Guggenheim, supra, stated that:

Taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed * * *. While the powers of revocation stood uneanceled in the deeds, the gifts, from the point of view of substance, were inchoate and imperfect. * * * By the execution of deeds and the creation of trusts, the settlor did indeed succeed in divesting himself of title and transferring it to others [cases cited], but the substance of his dominion was the same as if these forms had been omitted. Corliss v. Bowers, supra. He was free at any moment, with reason or without, to revest title in himself, except as to any income then collected or accrued. As to the principal of the trusts and as to income to accrue thereafter, the gifts were formal and unreal. They acquired substance and reality for the first time in July, 1925, when the "deeds became absolute through the cancellation of the power.
* ♦ * * * * *
* * * a gift is not consummate until put beyond recall.

The alleged gifts were of personal property. This property was not put beyond recall within the taxable year but remained subject to the donor’s “absolute dominion.” Cf. Porter v. Commissioner, supra; Jackson v. Commissioner, supra. Furthermore, the decedent could take to himself at any time the benefits of the net earnings of the trust property. Thus, for these two reasons, the transfers in question can form no basis for a deduction under section 214 (a) (10) of the Revenue Act of 1926. First National Bank of Boston, Administrator, 25 B.T.A. 252.

A.

Before taking up the petitioners’ next assignment of error we will consider the respondent’s affirmative claims. The respondent contends that interest in the amount of $16,666.66 should be included in the decedent’s income for 1925. This amount was the accrued interest on a million dollars par value of Pacific Electric Railway Co. bonds at the date in 1925 when the bonds, with the coupons attached, were transferred to an art dealer in exchange for pictures. The coupons attached were not due until a later date. The transfers of personal .property which the decedent made to the trust were not gifts, inasmuch as he retained absolute dominion over the property after it was transferred to the trust. See discussion on first and fourth points, supra. Thus, the question is whether or not he was in receipt of interest, and therefore income, when he not only transferred the bonds and coupons to the trust but immediately used that personal property to make purchases of other personal property on behalf of the trust. Counsel for the respondent made this claim for an increased deficiency at the hearing by amendment to his answer. Consequently, the burden of proof on this issue is upon him. Board’s Rule 30; S. L. Fowler, 6 B.T.A. 250. But facts to raise the question fairly are not in the record. The decedent sold other bonds with coupons attached, during the periods before us, and in the transactions received a certain amount of cash which was specifically paid on account of the accrued interest. He reported the amounts received as interest. But here the respondent has not shown the value of what was received in exchange or that anything was received on account of interest. Cf. S.O. 46, C.B. III, p. 90. Consequently, the question suggested by the respondent is academic only, in so far as this case is concerned. We can not say that error was committed in omitting this item from income for 1925.

B.

The respondent contends, in case he is sustained on the petitioners’ first point, that the deficiency for the period ended May 23, 1927, should be increased because he erroneously failed to disallow a deduction of $419,600 claimed on the return as a loss from the sale of Los Angeles Kailway Corporation bonds. Some similar bonds were sold by the decedent to his daughters, but the respondent no longer contends that the loss on those particular bonds was improperly allowed. The facts relating to the transactions in the remaining bonds are clear. On a certain day the decedent sold the bonds at market to the Huntington Land and Improvement Co. On the same day the Huntington Land and Improvement Co. transferred the same bonds at the same price to the Huntington Library and Art Gallery trust in exchange for land. The respondent does not question the effect or the genuineness of the sale by the decedent to the corporation of which the decedent was the sole stockholder. A deductible loss may be sustained through such a sale. David Stewart, 17 B.T.A. 604; Corrado & Galiardi, Inc., 22 B.T.A. 847. The only point made by the respondent is that the decedent did not sustain any real loss, since the same bonds which he parted with in the morning were a part of the trust personalty by evening and he had absolute dominion over the trust personalty. The respondent would apply the provision of section 214 (a) (5) that no deduction shall be allowed for loss claimed to have been sustained in any sale of securities where within 30 days after the date of the sale the taxpayer has acquired substantially identical property and the property so acquired is held by the taxpayer for any period after such sale. The petitioners’ briefs are silent in regard to the question thus raised.

The decedent did not personally reacquire substantially identical property and, strictly construed, the language of 214 (a) (5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing-statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. Compare the last paragraph of the opinion in Reinecke v. Smith, supra. The evidence does not indicate that income tax avoidance was thought of in connection with the particular transactions here in question. But a taxpayer’s good intentions are not determinative of his right to a loss deduction. The sale to the corporation and the exchange to the trust were each a part of a single plan conceived and carried out by the decedent. His one desire was that the trust have bonds in place of unnecessary land. The corporation and the trust were his pawns. He completely controlled both and made each act to carry out his plan. But, when his purpose was accomplished, we find that for income tax purposes his one move checkmated the other.

The trust was not a taxpayer. The practical effect of the creation of the trust was to assign income. Reinecke v. Smith, supra. All of the income of the trust was still taxable to the decedent. His gifts to the trust were so lacking in substance that the gift tax of the Revenue Act of 1924 would not have reached them. They would not support a claim for a deduction under section 214 (a) (10) of the Revenue Act of 1926. It would be anomalous if the acquisition by the trust here shown would not defeat the taxpayer’s claim to a deduction under section 214 (a) (5) of that act. The Supreme Court has said repeatedly, “ Taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed— the actual benefit for which the tax is paid.” Corliss v. Bowers, supra, at page 378; Tyler v. United States, 281 U.S. 497; Burnet v. Guggenheim, supra; Reinecke v. Smith, supra. Likewise, taxation is primarily' concerned with the actual reduction of the benefit for which the tax is paid. “ Generally speaking, the income tax law is concerned only with realized losses, as with realized gains.” Lucas v. American Code Co., 280 U.S. 445. Although title to the bonds was acquired by the trust, actual command over the property was still in the decedent. How can the fact or the amount of his loss be determined while the bonds have value and while he can revest title in himself? If the value of the bonds had subsequently increased, he might even have made a profit on them. We are unable to say that he realized any loss. The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214 (a) (5) is concerned. “The substance of his dominion was the same as if these forms had been omitted.” Burnet v. Guggenheim, supra. Cf. O'Donnell v. Commissioner, supra. The alleged loss of $419,600 was not sustained in the period ended May 23, 1927.

Y.

The decedent owned about one third of the outstanding bonds of the Los Angeles Railway Corporation and all of the outstanding bonds of the City Railway Co. The interest on some of these bonds which became due during the periods here in controversy was not reported in the decedent’s income tax returns. The Commissioner included this interest in income for the period in which the coupons matured. The petitioners’ fifth contention is that this was in error since the decedent, who was on the cash basis, did not actually receive the interest and the corporations did not have the cash with which to pay it. A taxpayer on the cash basis certainly can not, by refusing to present his coupons and collect his interest when it is due, select the year in which he will report that interest. Cf. Ella C. Loose, Executrix, 15 B.T.A. 169. The Commissioner has provided by regulations that bond interest is constructively received when the interest coupons mature and are payable and the interest should be reported in that year even though the coupons are not cashed until later. Regulations 69, article 52, and prior regulations. Although this rule should be properly restricted, nevertheless the time for reporting income may not depend upon the whim of a taxpayer. Cf. Newman v. Commissioner, 41 Fed. (2d) 743. In the normal case we would expect a taxpayer having interest coupons maturing in a certain year to report the interest in his income for that year. What circumstances are there in this case which would justify the failure to report the interest on these particular bonds?

If a debtor is insolvent or obviously unable to pay his interest, it may be under some circumstances that the creditor need not report the interest as income of the year in which the coupons mature. Cf. American Cigar Co., 21 B.T.A. 464, 492; Marian Otis Chandler, 16 B.T.A. 1248; Great Northern Ry. Co., 8 B.T.A. 225; affd., 40 Fed. (2d) 372; certiorari denied, 282 U.S. 855. These two corporations, however, not only were solvent, but had a considerable surplus. They showed a profit for each year after accruing all of their interest, including the interest in question, as an obligation.

The decedent did not present for payment the coupons on certain of his bonds and did not receive payment of that interest in cash. Yet about two thirds of the bonds of the one corporation were in the hands of the public and the interest on those bonds was paid regularly as it became due. The petitioner regularly presented the coupons from some of his Los Angeles Railway Corporation bonds and actually received the interest. As we have already said, he never presented his coupons on the bonds in question. He made this distinction voluntarily. The petitioners would have us believe that the decedent was making every effort to collect this interest but his efforts were successfully resisted by the corporations. This is difficult to understand in view of the fact that the decedent actually exercised his complete control over both corporations. Bond interest is not in default where the coupons are not presented and payment is not demanded. In 1927 he sold a large block of these bonds for a price which expressly included the accrued interest. He also gave away some of the bonds. After the sales and after the gifts the owners of the bonds regularly collected the interest from the corporations. The decedent obtained some of the interest on his bonds by discounting a note which the corporation gave him on account of interest on these bonds. He did not want the corporations to be in default on their bond interest. His failure to collect the rest of the interest on his bonds seems to have been pretty largely a matter of his own choice. Cf. John I. Chipley, 25 B.T.A. 1103.

We are not unmindful of the fact that the corporations did not have on hand sufficient cash or “ current assets ” to pay all of the coupons when they became due. Cf. Marian Otis Chandler, supra. But the decedent was in control of their finances, had not presented his coupons for several years, and, of course, did not need to have the cash on hand if he did not intend to present his coupons. He was making advances to the corporations, and his failure to demand and collect the interest was equivalent to an advance, subject to demand. We must assume that their failure to have the means of payment and his failure to insist upon payment were matters of his own choice, done to suit his own convenience and for his own good purposes. But he cannot thus avoid his own tax liability on this interest. In John A. Brander, 3 B.T.A. 231, in discussing constructive receipt, we said:

It was not that the corporation would not pay, but rather he would not receive. This election to give the corporation the temporary use of the amount is an exercise by him of its enjoyment, and this is one of the primary attributes of income.

Nor have we overlooked the fact that these companies had gone through strenuous times prior to the years here involved. However, 1924 was apparently a good year and there was no reason to believe in the taxable years that the corporations were going to fail or that they would be unable to pay the interest to the decedent when he chose to demand it. Whatever the difficulties were, they did not render the corporations insolvent, prevent the payment of the interest on the bonds of the other holders or avert a profit after all of the interest had been accrued. The doctrine of constructive receipt of income by one on a cash basis should be sparingly applied, yet we are unable to say that the evidence justifies a reversal of the Commissioner’s determination on the ground that the decedent was not in constructive receipt of this interest. John A. Brander, supra.

VI.

The decedent sold a number of shares of the stock of the Old Dominion Land Co. in 1925 at $100 per share. He had acquired some of these shares before and some after March 1, 1913. The controversy relates to the basis for the computation of gain or loss on the sale of those shares which were acquired prior to March 1, 1913. In making his income tax return for the year 1925 the decedent considered that the cost of those shares was in excess of their value on March 1, 1913, and, therefore, he computed and reported by the installment method a profit on the basis of cost. Furthermore, he stated in that return that the fair market value of the shares on March 1, 1913, was $70 per share. He was familiar with the property, the corporation’s activities, and with prices which had been paid for the stock. Later, the corporation had its properties appraised as of March 1, 1913. But thereafter the decedent filed his 1926 return reporting an additional installment of his profit on the basis of cost and stating the March 1, 1913, value to be $70 as before. The Commissioner accepted the basis used and made certain adjustments which are not in controversy. Apparently encouraged by the appraisal, the executors of the decedent now claim that the shares of stock acquired prior to March 1, 1913, had a fair market value on that day greatly in excess of cost. They therefore claim that the decedent had a loss instead of a profit upon the disposition of those shares involved in the 1925 sale which were acquired prior to March 1, 1913. The Commissioner contends that the cost basis used in the returns was proper for all shares then sold.

The petitioners called the two surviving appraisers to show how they made the appraisal and to state that in their opinion the fair market value of the real estate on March 1, 1913, was the appraised value. The company’s property consisted principally of real estate. However, it had a few other assets .and the petitioners also offered evidence to show the value of those assets on March 1, 1913. After the appraisal was made in 1926 the books were adjusted to conform and they then showed a book value for the stock on March 1, 1913, of about $249. The petitioners also called as a witness an expert on the valuation and marketing of unlisted securities. He was told to assume certain facts in a hypothetical question, and on the basis of these stated that, in his opinion, the fair market value of the stock on March 1,1913, was $183 a share. He assumed that the fair market value of the real estate was the amount determined by the appraisers. He was not told of any sales of the stock.

We need not discuss in detail the retrospective appraisal of the land nor the witnesses’ valuation of the stock. The evidence shows that the value of the land was always increasing and never decreasing from March 1, 1913, to the date of the sale by the decedent. If the stock was as valuable on March 1, 1913, as the witness states, it must have been worth far more than par at other times both before and after that date. Yet actual sales show quite the contrary. Cf. Andrews v. Commissioner, 38 Fed. (2d) 55; affirming 13 B.T.A. 651; Penney & Long v. Commissioner, 38 Fed. (2d) 849; E. Louis Jacobs, 20 B.T.A. 529; H. H. Blumenthal, 21 B.T.A. 901; Detroit Trust Co. et al., Executors, 25 B.T.A. 340; American Chemical Paint Co., 25 B.T.A. 1208. The petitioners did not attempt to present a history of sales of the stock. The respondent’s counsel endeavored to bring out at least a part of this history. It does not appear whether or not there were any sales of the stock on or about March 1, 1913. The sales disclosed were rather remote from March 1, 1913. But there were a great many of these sales, and, so far as we know, the stock never sold above par, and only twice at par, one being the sale in controversy, and the other being the sale of a very few shares in 1917. Most of the other sales were made at 70 or below. The book value of the stock was always far in excess of sales prices actually obtained. The property was not selling rapidly in 1913 and even when land sales were booming the stock sold at 70 or below. Earnings based upon cost were not large. Thus, the petitioners rely principally upon the opinion of a witness, while the Commissioner’s determination is supported by sales and other facts. Unless there is a fair preponderance of the evidence favoring the petitioners’ view, it is our duty to affirm the Commissioner. Here the necessary preponderance is lacking.

VII.

The petitioners claim a deduction of $12,000 in 1925 as an ordinary and necessary expense paid by the decedent during the taxable year in carrying on a business. The Commissioner disallowed the deduction. The amount represents the total of payments made by the Huntington Land and Improvement Co. to H. S. Cook in 1923,1924, and 1925. The Huntington Land and Improvement Co. charged this total to the decedent’s account in 1925. But the decedent was on the cash basis and proof of payment was essential even if his case were otherwise complete. Cook was not employed by the decedent and rendered no more service directly to the decedent than did any other employee of the Felt Co. Thus the services were not rendered in connection with the decedent’s business. The decedent was not obligated to pay Cook. He voluntarily assumed the burden of the expense. At least no necessity for any expenditure by the decedent has been shown. The petitioners rely upon Lillian M. Goldsmith,, 7 B.T.A. 151, and Samuel Rottenberg, 20 B.T.A. 589. Those cases are distinguishable. In each the taxpayer had engaged someone to render services to him. Here the employee was engaged to do no more than to manage properly the business of the corporation. The decedent was only a stockholder of the Felt Co. and can not deduct its ordinary and necessary expenses. Cf. Dalton v. Bowers, 287 U.S. 404; Burnet v. Clark, 287 U.S. 410. The corporate entity may not be disregarded. Cf. Burnet v. Commonwealth Improvement Co., 287 U.S. 415. The requirements of section 214 (a) (1) of the Revenue Act of 1926 have not been met.

VIII.

One of the most important questions in this case is whether or not the decedent sustained a statutory net loss in 1924. The figures necessary to a computation of a statutory net loss have been agreed upon. Thus the solution depends upon whether an amount deducted in 1924 as a debt ascertained to be worthless and charged off in that year was properly deducted in that year and whether there was in that transaction a loss which resulted from the operation of a business regularly carried on by the decedent. The decedent did not claim a corporation’s loss or a loss upon the disposition or worthlessness of stock. Cf. Dalton v. Bowers, supra; Burnet v. Commonwealth Improvement Co., supra; Burnet v. Clark, supra. Although the evidence is not all one way, nevertheless it demonstrates pretty clearly that the decedent was regularly and actively engaged in carrying on a business and the loss resulted from the operation of that business. He was not merely a stockholder. He dominated a great many corporations. He was the principal officer of most of them. He had his representatives placed in charge of many of these corporations. Either directly or indirectly he controlled their affairs and determined their policies. This was his principal activity. In order to carry on this business he had to acquire stock in the corporations which he desired to operate. The Chesapeake & Ohio Railway Co. was such a one and he had a regular account with a broker for the purpose of increasing and changing his ownership of its stock. This was an incident of his business. The inability of the broker to deliver the stock was an unfortunate circumstance definitely connected with the decedent’s business. It necessitated the loan and thus led to the loss. The decedent had to make the loan in order to get his stock and proceed with his business. He could not afford to jeopardize his right to the stock. It was essential to his business. But the loan was not additional cost of his Chesapeake & Ohio stock. It was a separate transaction, the result of which was not dependent upon what he might obtain for his stock. He could not claim a loss in 1921 because there were then probable sources of repayment. He had reason to believe that Gibson might be successful. After three barren years and further investigation he had reasonable grounds to conclude that the balance due was a worthless debt. Other theories on which the loss might or might not form the basis for a statutory net loss need not be discussed.

Reviewed by the Board.

Decision, will be entered, wider Rule 50.

Arundell,

dissenting: I am unable to agree with the decision on the sixth point treated in the prevailing opinion. The conclusion is there reached that within the meaning of the revenue act the taxpayer and the trust created by him should be treated as substantially identical, and, inasmuch as the bonds sold by the taxpayer (Huntington) were reacquired by the trust within thirty days, the loss may not be deducted. Sec. 214 (a) (5), Revenue Act of 1926.

But the statute itself makes the distinction between trusts and individuals and it took special legislation, viz., subsections (g) and (h) of section 219, to tax the income of a revocable trust to the creator thereof. Valid trusts have long been recognized in this country. The law of trusts is well established. The creator of a trust parts with legal title to the trust property. He does not have legal title to any property acquired by the trust. Legal title to all trust property is in the trustees. They do not hold it as individuals as they would their own property, but only in a new fiduciary capacity which they have been given by the law and the trust deed. Henry E. Huntington was neither a trustee nor a beneficiary of the trust. A trust, though revocable, is nevertheless a trust until it is revoked. Langley v. Commissioner, 61 Fed. (2d) 796. See also Hibbard, Spencer, Bartlett & Co., 5 B.T.A. 464, where a number of authorities are cited. Likewise, the Henry E. Huntington Library and Art Gallery trust was a trust as long as the grantor did not destroy it by the exercise of his retained powers over it.

Distinctions between a trust and the grantor must be recognized except as the revenue act constitutionally provides otherwise. Cf. Warden v. Lederer, 24 Fed. (2d) 233; L.O. 1102, C.B. 1-2, p. 50. All of the income of this particular trust for the periods before us must be included in computing the income of the grantor because of specific provisions in the Revenue Act of 1926. These provisions do not require that for all purposes of the act the trust merge into the individual and lose the separate identity which it otherwise has. The distinction between the individual and the trust is recognized not only in the language of section 219, but in the very necessity for such statutory provisions as are contained in (g) and (h). In fact the language of (g) and (h) may deny to this taxpayer the benefit of a loss of this very trust where that loss exceeds all trust income. Trusts are taxpayers, potentially at least. Section 219 requires that trust income be separately computed. Many trusts pay tax. Others must file returns on which no tax is due. Losses of trusts frequently benefit no other taxpayer. Section 219. Section 214 (a) (5) allows a loss deduction except where the tampayer acquires and holds substantially identical property. The taxpayer here did not acquire or hold such property after the sale. The restriction contained in section 214 (a) (5) does not deal specifically with acquisition and holding by some other entity. A broader inhibition should not be read into the act.

Marquette and Leech agree with this dissent.


author: Lansdon :

text:
    Georgetown Water, Gas & Electric Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53965.
    Promulgated June 6, 1933.

      Laurence Graves, Esq., for the petitioner.

      P. M. Clark, Esq., for the respondent.
   OPINION.

Lansdon :

Upon facts that are not in dispute the petitioner contends that as a matter of law the disposition of its assets was a reorganization under the provisions of section 112 of the Kevenue Act of 1928 and was a transaction in which no gain should be recognized. The respondent has determined that the transaction was a sale and that profit realized should be computed under section 113 (b) of the same act. Petitioner raises no question as to the amount of the profit if the transaction was a sale, and through its counsel at the hearing stated that the retained accounts receivable amounted to about $1,200, and that the cash in bank consisted of an overdraft for $1,200.

Some evidence was introduced by deposition and oral testimony for the purpose of showing the intention of the parties. In a controversy of this nature what was actually done is much more important than post facto testimony to show intention not evidenced by the terms of the governing agreements. Minnie C. Brackett, 19 B.T.A. 1154; J. Hampton Hoult, 24 B.T.A. 79. In our opinion the answer to the question here must be determined by study of the two agreements through which the transaction was effected.

It is obvious that at the date thereof none of the parties in interest regarded the transaction as a reorganization. The first agreement is a plain contract to sell for a cash consideration of $750,000 in which the petitioner and Utilities are several times designated as seller and purchaser, respectively. It is in no sense an option as argued by petitioner. It is not in any way conditioned upon the execution or accomplishment of the second agreement and could have been completed in all respects in the absence thereof. The second agreement merely sets up a method through which a part of the cash payment provided in the sales contract could be postponed to suit the convenience of the purchasers. In effect it provided that out of the $750,000 due the petitioner under the sale contract, $400,000 should be advanced to Corporation for stock and bonds which petitioner was obligated to resell at dates and in amounts carefully specified. Even in default of Utilities to perform its obligation to buy, peti-fcioner could take no title to the stock except through proceedings commonly employed to reduce collateral to possession. In our opinion the disposal of the petitioner’s assets to Utilities was a sale for $750,000; the second agreement was no more than a supplementary contract in which petitioner agreed to receive a part of the purchase money in deferred installments. Having reached this conclusion from careful consideration of the facts of record, it is not necessary to discuss petitioner’s allegation and argument that the transaction was a reorganization. The tax on the gain resulting from the sale should be computed under the provisions of section 113 of the Revenue Act of 1928.

Eeviewed by the Board.

Decision will be entered for the respondent.

       SEC. 112. RECOGNITION OF GAIN OR LOSS :
      (a) General rule. — upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall he recognized, except as hereinafter provided in this section.

        *******

      (b) (4) Same — Gain of corporation. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

        *******

      (d) Same — gain of corporation. — If an exchange would be within the provisions of subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then — -
      (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but


text:
    Smathers Power Typewriter Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43968.
    Promulgated June 8, 1933.

      Albert F. Hillix, Esq., and J. M. D. Crockett, C.P.A., for the petitioner.

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

Lansdon:

The primary contention of the petitioner is that from its inception down to and through the taxable year it was a trust, the income of which was distributable to the beneficiaries at stated dates. The provisions of the trust instruments involved are summarized in our findings of fact. In the original instrument it is plain that the trustees were authorized to carry on business such as usually results in profit or at least with the hope of profit. The testimony at the hearing, however, shows quite clearly that no such business transactions occurred after April 2, 1923. On that date the petitioner assigned the use of its patents to the Northeast Electric Co. From that time the sole function of the trustees was to collect the income resulting from the contract with the assignee and distribute the same to the beneficiaries of the trust in proportion to their interests therein.

The record discloses that no new trust agreement was entered into at April 2, 1923, when such business operations as it may have theretofore carried on were abandoned. If the agreement of April 28, 1925, had been made on April 2, 1923, there is no question that thereafter the petitioner could not have been taxed as a corporation. Apparently this is conceded by the respondent, since he has held that after March 1,1925, petitioner is taxable only as a distributable trust. There are several tests applicable to the situation here. There must be some resemblance to a corporation. Some courts have held that the beneficiaries must have some control after the selection and activities of the trustees. Others that the trust must be engaged in a business for profit. This last seems to have been generally adopted by the courts and this Board. Where the trustees merely hold the corpus for the benefit of others and operations are limited to the collection and distribution of income therefrom, the decisions are practically consistent that the trust cannot be taxed as a corporation. The test is not what may be done but what actually was done by the trustees.

In Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 56, where trustees held real estate for certain beneficiaries, all of whom were members of the same family and whose operations consisted oí collecting gross income, paying taxes, making repairs and distributing net income to such beneficiaries, the Circuit Court of Appeals for the Third Circuit, in reversing the decision of this Board, said:

* * * It is true that the trustees had powers of a broad character, but they did not exercise them and were not carrying on business after the form and manner of a corporation. When the trustees received the property it had all been leased for a period of five years from March 1, 1920. During this period of five years the trustees were not called upon to seek tenants or to do anything with reference to the property of any consequence, except to collect the rents and turn them over to the beneficiaries. By the terms of the lease, the lessees were to keep the premises in repair, pay the insurance and be responsible for all damages connected with the building. It is perfectly appar-. ent that they were not doing business in any sense during the years 1923 and 1924, and we are of the opinion that during the years 1925 and 1926, they were not conducting business after the mode and manner of a corporation, but were doing nothing more than trustees ordinarily would be called upon to perform in the management of trust property. See Gardiner v. U.S., 49 Fed. (2d) 992, decided by this court February 19, 1931; Malley v. Howard, (C.C.A.) 281 Fed. 363; Hecht v. Malley, 265 U.S. 144, 44 S.Ct. 462; Little Four Oil & Gas Co. v. Llewellyn, 35 Fed. (2d) 149; Lucas, Comm. v. Extension Oil Co., (C.C.A.) 47 Fed. (2d) 65; Id, 16 B.T.A. 1028.

In Gardiner v. United States, 49 Fed. (2d) 995, the court, in affirming the decision of this Board, said:

While none of these cases are, on their own facts, exactly in point, the trend of expressed judicial opinion is that the crucial test must be found in what the trustees actually do, not in the mere existence of long unused powers. These two trustees have no business office; they hold no formal meetings; they merely consult with each other; they have hired no officers; employed no agents to procure subscriptions to the capital of their trust; they have sold one parcel of real estate and bought another, otherwise, their real estate holdings are as originally; they have so arranged their leases as not to require them to run heating plants, or even provide janitor or elevator service. In sum, their actual performance is indistinguishable from that of ordinary testamentary trustees.

On tfie facts established in this proceeding, we think the above cited authorities are controlling. In our opinion the petitioner was not taxable as a corporation in any part of the year in question. Having reached this conclusion, it is not necessary to discuss petitioner’s allegation that respondent erroneously included $25,000 in its income for the alleged taxable period. The real taxable period in which such amount was received was the calendar year 1925. The corporation return was filed in error and the return required by law was the fiduciary return for the year in question, which was timely filed and disclosed all the income of the petitioner for the taxable year, including the $25,000 which the respondent has allocated to the first two months thereof. The determination of the respondent is reversed.

Decision will be entered under Rule 50.