text:
    Eleanor Lansburgh, Administratrix with the Will Annexed of the Estate of Lester Lansburgh, Petitioner, v. Commissioner of Internal Revenue, Respondent. Irving Trust Company, as Trustee under Trust Indenture Dated December 28th, 1929, as Modified by Agreement Dated April 1st, 1933, with Lester Lansburgh, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81480, 84371.
    Promulgated April 23, 1937.

      David Michelsohn, Esq., Edward B. Pecherman, Jr., Esq., and B. B. H. Lyon, Esq., for the petitioners.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Disney:

The above proceedings, consolidated by stipulation for trial and decision, are for the redetermination of the liability of Eleanor Lansburgh as administratrix of the estate of Lester Lans-burgh, deceased, for a deficiency of $23,188.26 in estate tax asserted by the respondent against the estate of Lester Lansburgh, and The liability of the Irving Trust Co. as transferee for said deficiency and undischarged returned estate tax of $6,614.02.

Lester Lansburgh died August 10, 1933, a resident of New York City, survived by his wife, Eleanor Lansburgh, and two minor daughters, living with their mother. His will was admitted to probate October 2,1933; the executor named did not qualify; Eleanor Lansburgh qualified as administratrix with the will annexed, and letters testamentary were issued to her. The assets of the estate consisted of $716.18 cash in bank, $1,172.79 proceeds of insurance payable to the estate, and 2,064 shares of the capital stock of Lansburgh & Bro., Inc., a close, family-owned and controlled corporation operating a store in the District of Columbia. In addition $22,684.08 life insurance proceeds were paid to the widow and $332,745.66 proceeds of life insurance policies were paid to the Irving Trust Co. as trustee under a trust indenture made by Lester Lansburgh December 28, 1929, and by him modified April 1, 1933. Total debts and funeral and administration expenses against the estate were proved in the amount of $22,359.02, of which only $8,381.02 was paid and allowed by the administratrix. The proof varies from the figures set forth in the estate tax return. The estate, aside from the $1,888.97, being the total of cash in bank and life insurance money paid to the estate, was insufficient for payment of the debts of the estate.

The administratrix attempted to procure a loan on the security of the 2,064 shares of the capital stock of Lansburgh & Bro., Inc., in order to raise funds to pay the expenses and charges of the estate. She wrote a letter to a list of about 111 banks and insurance companies requesting a loan, but could obtain none. She attempted without success to get such a loan from all stockholders of Lansburgh & Bro., Inc. These facts were communicated to the collector of internal revenue for the third district of New York, and to the Commissioner of Internal Revenue. Attempt was also made to sell the shares to the other stockholders, also to various banks and insurance companies, but none of them would buy the shares or treat them as security. Section 215 of the Surrogate’s Court Act of the State of New York provides in effect that an executor may petition the surrogate’s court for advice and direction as to the propriety, price, manner, and time of sale of property; that notice of the application shall be given to all persons interested or directed by the surrogate to have notice; that the surrogate may hear the application and witnesses, and give such advice and direction as seem to him for the best interests of the parties. The administratrix filed such a petition before the Surrogate’s Court of New York County on May 23, 1934, for leave to sell the capital stock of Lansburgh & Bro., Inc., or so much thereof as might be necessary to pay the expenses and other obligations of the estate. Notice of hearing upon the application was directed to all parties interested, and served upon the collector of internal revenue for the second district of New York, and upon the Commissioner of Internal Revenue, At the hearing, the United States was represented by “Mr. Roberts” of the office of the Honorable Martin Conboy, United States Attorney. Notice was also published in a newspaper published in Washington, D. C. Upon such hearing the surrogate made an order granting the petition of the administratrix to sell the shares of stock, the order being dated October 11, 1934. The order inquired that the notice of the time and place of sale be published five days in the Washington Evening Star and the New York World Telegram, and that notice be given by mail to the collector of internal revenue for the second district of New York, and the United States Government, and such notice was given.

The shares of stock were sold on October 24, 1934, pursuant to the terms of the order. The sale was at public auction in the city of New York. Eleanor Lansburgh was the only one who appeared' to bid at the sale. Representatives of the State Tax Commission of New York were present, but did not participate in the sale. Eleanor Lansburgh individually purchased the shares of stock for $3,500. The auctioneer’s report recites the purchase by Eleanor Lansburgh for $3,500 and that “the deposit and cash was waived by agreement.” The auctioneer made report of the sale to the surrogate. The surrogate had appointed a special guardian and referee to represent the interests of the decedent’s minor children. The guardian and referee made a report approving the sale. After the consummation of the sale, a New York estate tax return, and a Federal estate tax return were filed with the respective taxing authorities in which the stock was reported at a valution of $3,500. That value was accepted by the State Tax Commission of New York.

The cash assets of the estate, including the proceeds received from the sale of the shares, were insufficient to pay the debts and administration expenses, and were insufficient to pay any tax whatever. At the time Lester Lansburgh entered into the trust indenture dated December 28, 1929, he was vice president and general manager of S. M. Greer & Co., receiving a salary of $75,000 a year, and had other income of from $20,000 to $25,000 per-year. He had no liabilities. He was solvent on December 28, 1929. The record is silent as to whether there were any other sales of the stock near the time of Lester Lansburgh’s death.

In connection with the petition to the Surrogate’s Court for permission to sell the stock, it was represented to the surrogate that Eleanor Lansburgh was ready and willing to pay $3,500 for the stock, the petition so stating; also that the sale was necessary to close the estate. The petition further stated that dividends had not been paid by Lansburgh & Bro., Inc., during the last two years. The petition also submitted an undertaking to create a trust of all of said shares of stock without any obligation whatever to the petitioner, Eleanor Lansburgh, and to have the stock administered by the trustee to be named either by the surrogate or by the petitioner in accordance with the terms of the last will of Lester Lansburgh. The petition also recited that the last will and testament of Lester Lans-burgh directed, and said last will did direct, that after the payment of debts, funeral expenses, taxes, and $10,000 to each of the children, the rest of the estate (except automobiles, pictures, silverware, household goods, furniture and furnishings, jewelry, and personal effects, which were bequeathed to the wife) was placed in the hands of a trustee with directions to pay one-half of the income of the estate to the wife and the balance to the children, to be distributed equally between the daughters. The surrogate’s order provided that no bids should be received for a sum less than $3,500. The report filed by the special guardian states that it is impossible to wind up the estate-unless the stock is disposed of; that decedent’s estate was divided by his will into two parts, the first for the benefit of the wife and the other half for the benefit of the two children; and that, since the stock is the only asset of the estate, “the best that the children can ever hope is to participate in the shares of stock, irrespective of their value.” The special guardian’s report also states:

The widow asks for permission to sell this stock for $3,500.00. She states in writing to the Special Guardian herein, that in the event she shall purchase these shares of stocJc, at such price as she may hid, she will turn over to the infants the said stocJc as an absolute gift under such further trust terms and conditions as the surrogate may require. * * *

Later in the report the special guardian states: “If the mother had not agreed to make a gift of the stock to the children, the Special Guardian would object to the sale.” The special guardian attaches to his report a letter directed to him under date of September 21, 1934, by Eleanor Lansburgh, in which she states that in the event the surrogate shall direct a sale of the stock, and she should purchase the stock, that she will turn over to her daughters, Louise Lansburgh and Jane Lansburgh, infants, said stock as an absolute gift, under such further trust terms and conditions as the surrogate may require, and that this is to be deemed a representation on her part.

The special guardian’s report further states that the stock shows a. book value as of January 27, 1934, of about $130 per share; that it is not worth that much, but it is clearly worth more than $1.20 a share, at which price it is sought to sell the stock; that it has no present market value; that it is doubtful whether the stock is worth the book value as fixed by the balance sheet of Lansburgh & Bro., Inc.; that he as special guardian thinks the true value of the stock is considerably less than the book value, but how much, he is unable to say, but that the fact remains that this stock must be disposed of in order that the estate be closed; that no dividends are being paid. The balance sheet of Lansburgh & Bro., Inc., attached to the special guardian’s report states the amount of surplus on January 28, 1933, “Less Div. 2/5/33:-$75,000.00.”

When the sale was finally approved, Eleanor Lansburgh had already made the provision for the children in connection with the sale, the Guaranty Trust Co. of New York being the trustee named in the trust which Eleanor Lansburgh established. The stock was not delivered to the Guaranty Trust Co. of New York, but was held by the United States Fidelity & Guaranty Co. jointly with Eleanor Lansburgh, that company having made her bond in the amount of $160,000. The bonding company for the year preceding the trial had not made a charge for premium, because of statement by the admin-istratrix and her counsel that the estate is insolvent, and for that reason, and for reasons of expense, no proceedings have been filed to reduce the bond. At the time of sale Lansburgh & Bro., Inc., was a going concern, had been for many years, operating a department store in the city of Washington, and the store is still running.

For the year ending June 30,1933, Lansburgh & Bro., Inc., by Sol Lansburgh, president, on August 18, 1933, executed a return of capital stock tax, showing shares of stock to be 30,000 common of par value of $100, total $3,000,000, with a surplus of $185,532.25, and valued the 30,000 shares of stock as of June 30, 1933, at $3,125,433.73, being $104.18 per share. This capital stock tax return was sworn to by the president and treasurer of Lansburgh & Bro., Inc., and filed with the Treasury Department of the United States, and a tax of $1 per $1,000 on the value of the capital stock was paid in the sum of $3,125. Profits, dividends paid, and net sales of Lansburgh & Bro., Inc., for the years ended on the following dates were as follows:

The petitioners urge (1) that, the stock having been sold at public auction pursuant to order of the Surrogate’s Court of the County of New York, the probate court having jurisdiction, the amount realized upon such sale was the “fair market value” of the shares; (2) that where the debts and funeral and administration expenses of decedent and his estate exceed the amount realized by the administratrix in liquidating the assets, and insurance proceeds paid to beneficiaries other than the estate were included in the gross estate, the entire amount of the debts and funeral and administration expenses are deductible from the gross estate in determining the amount of the net estate; (3) that it was not the intent of Congress to permit the entire amount of the estate tax to be collected from one of the beneficiaries of insurance where the gross estate consisted in part of assets and in part of insurance proceeds in excess of $40,000, and where the debts and funeral and administration expenses exceeded the amount of the assets which came into the hands of the administratrix; (4) that it is contrary to the Fifth Amendment of the Constitution of the United States to collect the entire estate tax from one of the beneficiaries of insurance under the conditions above described under petitioners’ third contention.

The taxability of the proceeds of insurance in the hands of the Irving Trust Co. is conceded; also, that, if the deficiency is sustained, a share thereof, proportioned in the same ratio that the insurance proceeds bear to the estate itself, should be borne by the transferee, Irving Trust Co., but petitioners contend that in any case the entire tax should not be borne by the Irving Trust Co.

The prime question is, of course, as to whether $3,500, the amount paid by Eleanor Lansburgh at the surrogate’s sale for the stock of Lansburgh & Bro., Inc., is the value thereof under the statute, section 302 (a) of the Revenue Act of 1926. The act, of course, merely refers to “the value of the gross estate” and “including the value at the time of his death.” Article 13 (1) of Regulations 80 specifies that “the value” is “the fair market value”, and both the courts and this Board have apparently interpreted the term as meaning “fair market value.” Ithaca Trust Co. v. United States, 279 U. S. 151; Laird v. Commissioner, 85 Fed. (2d) 598; affirming 29 B. T. A. 196; Frank J. Kier et al., Executors, 28 B. T. A. 633. See also Cecil H. Gamble, Executor, 33 B. T. A. 94, 99. Both parties seem to have briefed the case upon the assumption of identity in meaning of the two terms. We therefore assume, for the purpose of this case, that “value” is in this matter equivalent to “fair market value.” What then was the fair market value of the shares here at the time of the death of Lester Lansburgh ? Is it defined and determined by the probate sale, made through the Surrogate’s Court in New York, as argued by petitioners ? The sale is, of course, competent evidence, but is it the sole criterion by which to judge? Lester Lansburgh died on August 10, 1933. This is the date as of which the fair market value of the stock in question is to be determined. The probate sale was made on October 24, 1934, more than a year later. Is the price of such sale the determining factor here?

Heiner v. Crosby, 24 Fed. (2d) 191, says:

* * * Sales made at a particular time and place may be significant, but the price paid is not necessarily decisive oí fair market price or value. The fact of sales, in itself, and without regard to the circumstances under which the sales were made, does not conclusively establish either statutory fair market price or value. Sales made under peculiar and unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market may neither signify a fair market price or value, nor serve as the basis on which to determine the amount of gain derived from the sale. In such cases resort must be had to evidence to determine “fair value.” * * *

In Phillips v. United States, 12 Fed. (2d) 598, the court says:

* * * The law of the case seems perfectly plain. It is well settled that the fair market price or value of the property as of March 1, 1913, is a question of fact under all the circumstances of the case. No method of determining this value can be stated which will adequately meet all circumstances. The stock sales made from time to time are to be considered together with the nature and extent of the sales, and the circumstances under which they were made; hence forced sales, or sales of small lots, may often be no real indication of the value. The test is the fair market value. This may be defined to be the value of the property in money as between one who wishes to purchase and one who wishes to sell; the price at which a seller willing to sell at a fair price, and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts. * * *

Of course the statute being construed in the above cases is not the same as here involved, but there is no discernible distinction in principle. In Andrew B. C. Dohrmann, 19 B. T. A. 507, 513, we approved the language just above quoted from Phillips v. United States, in construing section 202 (b) of the Bevenue Act of 1918 as to fair market value of property received in exchange, and we said:

We think it is well settled that whether property at a given date has a fair market value or not is a question of fact to be determined from all of the evidence introduced and admitted in each individual case; that no set rule or formula can be employed; and that in weighing and sifting the evidence the fact to be found, if it exists, is 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.

In Dunn & Balter, Inc., 30 B. T. A. 663, 667, we applied the same principle and quoted a portion of the same language in referring to fair market value with respect to which depletion was claimed.

• These and other cases convince us that the surrogate’s sale in the Lester Lansburgh case is only one of the circumstances to be taken into consideration in arriving at fair market value. Under Regulations 80, article 18 (3), the value of the stock of a close corporation is to be “determined on the basis of the company’s net worth, earning power, and dividend-paying capacity, and all other relevant factors bearing upon the value of the stock.” Moreover, it is at least doubtful in the instant proceeding whether the buyer and seller herein can be described in the language of Phillips v. United States, supra, as “both having reasonable knowledge of the facts”; for we can not but notice the fact that both the administratrix and the special guardian represented to the surrogate that the stock to be sold was not paying dividends, whereas in truth it was and had been paying dividends regularly in an amount each year from 1930 to 1935, inclusive, greater than the amount at which the stock was sold at the surrogate’s sale. The stock sold for $1.69 per share. The capital stock of Lansburgh & Bro., Inc., was 30,000 shares. The yearly dividends hereinabove enumerated in gross show that a $6 dividend was paid in each of the years 1930, 1931, and 1932, a dividend of $5.50 per share in 1933, of $2.50 per share in 1934, and of $2 in 1935. The Surrogate’s Court was, therefore, misinformed on this point of dividends paid, which is obviously one of the most important facts in determining value of stock. This situation serves to cast some doubt upon the bona tides of the sale, upon which petitioners heavily rest. The statements were made either ignorantly or intentionally. The sale either lacked bona tides or the seller and buyer did not - have “reasonable knowledge of the facts.” This, together with a consideration of all the facts, including the fact that the guardian and the wife and executrix represented to the surrogate that if she purchased the stock she would turn it over to the daughters of decedent as an absolute gift, the fact that the special guardian would have objected to the sale if the mother had not agreed to make such gift, the fact that the sale was more than a year after death, and the fact that both the executrix and the special guardian represented to the surrogate that the stock must be sold in order to close the estate, indicates to us that this sale, in spite of the fact that it was at auction, and that notice was given, was not a free and voluntary sale of the unrestricted nature that is required to furnish a dependable indication of fair market value at time of death. Certainly we can not give such a sale determining effect here, and we therefore proceed to consider it with the other evidence as to value.

The fact that there are no sales on the market does not prove that there is no market value, under many cases. Both under the regulations above referred to and in logic, we are required to include in our consideration the other circumstances including those as to intrinsic value. But when we do this, we are met by the fact not only that the stock paid regularly the dividends hereinabove referred to, but that the stock had value, in terms of its interest in the assets of the corporation, of more than $100 per share at the time of sale; and that the solemn sworn statement of the president and treasurer of the company gave the stock the value of $104.18 per share as of June 30, 1933. This affidavit was sworn to eight days after the death of Lester Lansburgh, more than a year before the sale. The valuation set by the Commissioner approximates the valuation set by the corporate officers. We must and do conclude and hold that the petitioner has not overcome the presumption of the correctness of the Commissioner’s determination as to the value of this stock being $100 per share, and on this issue we sustain the Commissioner.

(2) Petitioners’ second contention is that the deductions from gross estate should include all lawful debts and funeral and administration expenses, regardless of amount of assets in the hands of administratrix. This question has been definitely settled in favor of petitioners’ contention by Mary Q. Hallock et al., Trustees, 34 B. T. A. 575; Commissioner v. Strauss, 77 Fed. (2d) 401; Union Guardian Trust Co., Administrator, 32 B. T. A. 996; Edna F. Hays et al., Executors, 34 B. T. A. 808; Edith M. O'Donnell, 35 B. T. A. 251. We sustain the petitioners with respect to this issue to the extent of the $22,359.02 expenses of administration and debts of the estate and deceased, as shown by the evidence.

(3), (4). Petitioners’ third and fourth contentions can be considered together. Succinctly stated, the petitioners argue that it was not the intent of Congress, and if there was such intent, it is contrary to the Fifth Amendment to the Constitution of the United States, to collect the entire amount of the tax herein from one of the beneficiaries of life insurance (in excess of $40,000) included in the gross estate, there being two beneficiaries of such insurance. There is no issue between the parties as to the taxability of the insurance. Petitioners merely contend that a particular beneficiary, such as the Irving Trust Co. herein, should not be required to pay, of the tax assessed, more than a part proportioned in the ratio which the insurance proceeds bear to the estate. They argue that the language of section 315 (b) (2) of the Bevenue Act of 1926 bears out their contention, stressing the thought that the expressions “the tax in respect thereto” and “such tax” refer only to tax upon insurance mentioned in that subsection, and say that therefore the tax is proportionate to and limited to, such insurance. It is of course limited to the insurance received, but is it proportioned according to the proportion of estate and insurance received by the particular beneficiary?

In Edna F. Hays et al., Executors, supra (815), we considered a contention that a beneficiary of life insurance was not a “transferee” under section 316 (e) of the 1926 Act. We quoted the language of tlie Conference Eeport on the Eevenue Bill of 1926, which, specifically showed that a beneficiary of an insurance contract was intended to be covered by the term “transferee”; and we therefore concluded and held that the beneficiaries of life insurance in that case were “transferees and are liable as such for the amount of the deficiency.” There is no suggestion of liability only proportionate to the estate. The transferees are simply liable for the deficiency. By the inclusion of insurance beneficiary in the term “transferee”, this decision affects and brings the provisions of sections 314 and 315 under the effect of section 316, so far as affecting insurance beneficiaries. From this it follows that the liability of an insurance beneficiary, as such transferee, shall be assessed, collected, and paid in the same manner as the deficiency, and the liability of a transferee, in turn, is shown to be “in respect of the tax” — not in respect of any proportion of the tax. We think therefore that any insurance beneficiary is liable for the entire deficiency. This is consonant with the language of section 314 (b), providing for contribution in favor of “any person other than the executor in his capacity as such” who pays “the tax or any part thereof.” This language plainly includes the beneficiary of insurance. If he had been liable, as petitioners contend, only for his proportionate share he would need no right of contribution against others whom his payment had benefited (other than the estate). We believe that the statute plainly indicates intent to permit the Commissioner to collect the entire deficiency from any transferee, leaving the matter of proportionate liability as one for contribution between the several transferees. It is true that the language in section 315 (b) (2) is not entirely clear, but sound principles of statutory construction require us to consider that language in connection with the remainder of the act. So considering it, we reach the above conclusion.

Moreover, it is well settled that the liability of transferees is several, that the whole deficiency may be collected from one transferee, and that without joining others regard may not be given as to what is the pro rata share of a particular transferee. Phillips v. Commissioner, 283 U. S. 589. To the same effect are McDonald v. Commissioner, 52 Fed. (2d) 920, and Fairless v. Commissioner, 67 Fed. (2d) 475. In Phillips v. Commissioner, supra, the Supreme Court also decided definitely in favor of the constitutionality of the liability of transferees on grounds which we think cover the present contention. Although the above cases involve section 280 (a) (1) of the 1926 Act, the principles involved are the same; and in Baumgartner v. Commissioner, 51 Fed. (2d) 472; certiorari denied, 284 U. S. 674, following Phillips v. Commissioner, supra, the constitutionality of section 316 of the 1926 Act was sustained. The same reasoning which sustains the constitutionality of the liability of transferee for the deficiency, of transferor, plainly sustains his liability for the whole thereof as against a desire for apportionment thereof, as herein contended for. We having held that the insurance beneficiary is a transferee and that he is as such liable for the entire deficiency to the extent, of course, of the transferred assets in his possession, it follows that petitioners’ plea as to Congressional intent and unconstitutionality must be, and the same is, denied, and it is held both that the act provides for several liability of the Irving Trust Co. as transferee, and that the provision is constitutional.

Decision accordingly will be entered under Rule 50 in both dochet numbers.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      (a) To the extent of the interest therein of the decedent at the time of his death.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Loren D. Sale, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53133.
    Promulgated April 23, 1937.

      Claude I. Parher, Esq., for the petitioner.

      Thomas F. Callahan, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $3,187.80 in the petitioner’s income tax for the year 1925. The sole issue is whether or not the Commissioner erred in including in the petitioner’s income $19,670.13 as taxable dividends from the Cudahy Walnut Land Co. The facts have been stipulated and may be summarized for present purposes.

The petitioner throughout the year 1925 owned common stock of the Cudahy Walnut Land Co. He received in 1925, as a stockholder of the company, distributions totaling $46,545.50. He did not report any part of this amount as income. The Commissioner held, in determining the deficiency, that 42.26 percent, or $19,670.13, of the total amount received by the petitioner was a taxable dividend representing earnings of the corporation during the period November 15,1924, to August 5,1925.

The company at the time of its organization in 1912 acquired real estate in exchange for its stock of the par value of $250,000, and notes of the face value of $875,000. This land was its principal asset and it still owned the land on March 1, 1913, at which time the land had a fair market value of $2,050,000. The company had no accumulated earnings or profits on March 1, 1913. Thereafter and prior to January 31, 1919, the company acquired a paid-in surplus of $321,235.65 by way of stock assessments. The company paid no dividends prior to June 1, 1923, but during the calendar years 1923 and 1924 it made certain distributions to its stockholders. The last distribution for 1924 was made on November 15. It distributed $278,550 to its stockholders during 1925, the last distribution for that year having been made on August 5.

The parties have stipulated that the expenses of the company for the period from March 1, 1913, to July 31, 1922, exceeded by $798,-053.08 its profits from the sale of real estate during that period, using as a basis for the computation of the profits the fair market value of the real estate on March 1,1913. They have also stipulated that the company had earnings as follows:

Period ■ Amount
8/1/22 to 11/28/23_$180, 414.17
11/28/23 to 11/15/24_ 197,783.65
11/15/24 to 8/6/25_ 117,725.09

The petitioner contends that no part of the distributions of 1925 represented taxable dividends. He argues that the paid-in surplus of $321,235.65 was impaired by the operating losses and had to be restored before there could be any earnings or profits accumulated after February 28, 1913, within the meaning of section 201 (a) of the Revenue Act of 1924; although the fair market value of the property on March 1, 1913, represented an appreciation over the cost of the property of $925,000, that appreciation was unrealized, had not been recognized even on the books of account, and did not represent a true surplus by which losses could be absorbed; and if the unrealized appreciation on March 1, 1913, must be considered, it was at most an enhancement of capital which, if impaired by losses, must be restored before there can be any earnings and profits accumulated after February 28, 1913, within the meaning of section 201 (a) of the Revenue Act of 1924.

There is a rule of law that every impairment of capital or paid-in surplus resulting from operating losses must be restored before any earnings can be available for the distribution of a taxable dividend within the meaning of section 201 (a) of the Revenue Act of 1924. Crystal Ice Co., 14 B. T. A. 682; J. L. Washburn, 16 B. T. A. 1091; Arthur C. Stifel, 29 B. T. A. 1145; Willcuts v. Milton Dairy Co., 275 U. S. 215. But the facts in this case fail to show that either the capital or the paid-in surplus of the Cudahy Walnut Land Co. was ever impaired by operating losses.

The stipulation is clear that, in the computation of the operating loss of $798,053.08, the gain or loss from the sale of real estate was. computed by using the fair market value of the real estate on March 1, 1913, as a basis. The use of that basis was, of course, entirely proper for the purpose of computing the income tax liability of the corporation. However, the tax liability of the corporation is not involved in the present case. The taxpayer here is an individual, and the question is whether or not he received a dividend taxable to him. Dividend is defined as “any distribution made by a corporation to its shareholders * * * out of its earnings or profits accumulated after February 28, 1913.” Sec. 201 (a). The statute is not specific as to how “earnings or profits accumulated after February 28, 1913” shall be computed. The question might arise as to whether cost or March 1, 1913, value should be used in the computation of those earnings or profits. However, the solution of that question is not important in the decision of this case, for the parties have stipulated what the earnings of the corporation were for the period beginning immediately after the last distribution of 1924 and ending with the last distribution of 1925, the Commissioner has taxed only that portion of the total distributions of 1925, and he does not claim an increased deficiency.

The value of the property of the Cudahy Walnut Land Co. had increased, before March 1, 1913, $925,000 over and above its cost to the corporation. Although this increase had not been realized by the corporation, and ^.¡though the corporation had no earned surplus on that date, nevertheless the increase in value had accrued within the meaning of section 201 (b). The stipulation shows the subsequent distributions and earnings of the corporation. The real question in the case is to determine the effect, if any, upon the 1924 distributions of that part of the stipulation which shows that the expenses of the company for the period from March 1, 1913, through July 31, 1922, exceeded by $798,053.08 its income, consisting entirely of profits from the sale of real estate during that period computed on the basis of the fair market value of the real estate on March 1, 1913. The petitioner contends that the operating loss of $798,053.08, thus computed, was an operating loss in every sense and impaired the paid-in surplus and capital of the corporation, therefore, the capital and paid-in surplus must be fully restored from earnings before there are any “earnings or profits accumulated after February 28, 1913” from which a taxable dividend could be distributed.

The statute does not provide that impaired capital or paid-in surplus must be restored before earnings are available for the dis-‘ tribution of a taxable dividend. That rule of law was laid down by the Board and the courts, which had in mind the fundamental principle that a corporation, the capital of which had been impaired by losses, can never have any accumulated earnings until its capital is restored. Corporations, of course, were well known long before March 1, 1913, the effective date of the income tax. Likewise, the ■concepts of capital and impairment of capital were fixed in the law and generally understood. The provisions of the revenue acts have not changed the law in respect of capital or impairment of capital. Those acts, however, allowed for certain purposes the usé of the fair market value on March 1, 1913, of property acquired prior thereto instead of the lower cost of such property. For example, in the computation of gain or loss giving rise to income or deductions, corporations could use March 1,1913, value, regardless of what would have been the situation had they used cost as a basis. But in the determination of whether or not the capital of a particular corporation has been impaired, there is, so far as we know, no good reason or authority for using the fair market value on March 1, 1913. Losses for which corporations are allowed income tax deductions do not necessarily impair capital. The capital or paid-in surplus of a corporation is only impaired when some part of that capital or that paid-in surplus has been lost. That requires a computation based upon cost. Obviously, the fair market value of property on March 1, 1913, has nothing whatever to do with that particular question. Annie P. Kountze, 17 B. T. A. 928. Cf. Ida I. McKinney, 32 B. T. A. 450; affd., 87 Fed. (2d) 811.

Although the parties have presented all of the facts which they desired to present, the record does not show that capital or paid-in. surplus of the Cudahy Walnut Land Co. was ever impaired. Consequently, there is no occasion here to decide what the situation would be in case capital or paid-in surplus had been impaired. The stipulation shows that the corporation had earnings during the period beginning immediately after the last distribution of 1924 and ending at the time of the last distribution of 1925. That means that the corporation had realized that amount in excess of its expenses for that period and the fair market value on March 1, 1913, of all property sold during that period. Thus, to the extent of those earnings, the distributions of 1925 represented the distribution of earnings or profits accumulated after February 28, 1913, rather than a distribution of capital or a distribution of an increase in value of property accrued before March 1, 1913. The increase in value of the property accrued before March 1, 1913, is realized through the tax-free receipt of the March 1, 1913, value to the extent that it exceeds cost. The earnings of $117,725.99 were over and above and entirely separate from that increase in the value of the property which accrued before March 1, 1913. Thus it does not appear that the Commissioner erred in taxing 42.26 percent of the total distributions of 1925.

The petitioner says that the unrealized appreciation in value of its properties which had accrued before March 1, 1913, was not a true surplus and could not have absorbed its losses because that appreciation “was not realized until the property was sold after the losses were sustained” and “it is clear * * * that the expenses of the corporation were paid from its paid-in surplus and from its capital for those were the only tangible funds with which the expenses could be paid.” This serves to demonstrate the weakness of the petitioner’s whole argument, for losses of $798,053.08 could not have been paid out of surplus of $321,235.65 and capital of $250,000. The so-called losses of $798,053.08 were income tax losses based upon March 1, 1913, value and not losses which resulted in an impairment of capital or paid-in surplus. If the corporation had had losses of that amount, based upon the cost of the property to it and resulting in the loss of the actual capital and surplus paid in, it would have been insolvent to the extent of $226,817.43, and all of its distributions would have been illegal under the California law, which permitted the distribution of dividends out of surplus profits only. The fact of the matter is that, for the purpose of determining whether or not there was an impairment of capital, losses based upon March 1, 1913, value are no more material than the unrealized appreciation in value of the property on March 1,1913.

Reviewed by the Board.

Decision will be entered for the respondent.

ARNOLD concurs only in the result.

       Section 201 (b) may shed some light upon that question. It provides in part: ‘‘Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed * * The meaning of that provision was carefully considered and adequately discussed by the Court of Claims in Hoffman v. United States, 53 Fed. (2d) 282. The court there came to the conclusion that the word “accrued”, as used in the above quoted provision, meant which had arisen or come into existence rather than which had been actually realised. We agree with that interpretation. Furthermore, in order to give that provision proper effect, it is apparently necessary to use the fair market value on March 1, 1913, instead of cost in the computation of “earnings or profits accumulated after February 28, 1913.”

       Example: A corporation sold an asset in 1924 for $150. The asset had cost $100 in 1912 but was worth $200 on March 1, 1913. The corporation would be entitled to deduct a loss of $50 from its income in computing its income tax liability, but it had no loss, which impaired its capital. Likewise had it sold the asset for $300 and had its operating expenses been $200, no impairment of capital would have resulted.

       The case of T. Irving Hadden, Executor, 17 B. T. A. 956, a companion case of the Kountee case, supra, was reversed by the Court of Appeals for the Second Circuit. Hadden v. Commissioner, 49 Ned. (2d) 709. The court there apparently proceeded on the-theory that earned surplus on March 1, 1913, and unrealized appreciation at March 1, 1913, must be treated like the capital of a corporation in that, if they are reduced by subsequent losses, they must be restored from earnings before there are earnings available for the distribution of a taxable dividend. Although we have great respect for that court, we are not convinced by its opinion in the Hadden case. Cf. Helvering v. Canfield, 291 U. S. 163, which settled the question in so far as earned surplus on March 1, 1513, is concerned. There would seem to be less reason for requiring the restoration of unrealized appreciation on March 1, 1913. The Canfield case also shows the error of the Board’s. decision on this subject in Talbot C. Walker, 27 B. T. A. 829, reversed upon stipulation, 72 Fed. (2d) 1011, 1012, and affirmed on another point, 77 Fed. (2d) 810.


author: Miller:

text:
    Rena S. McCahan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79039.
    Promulgated April 23, 1937.

      W. G. Alexa/nder, Jr., Esq., and F. B. Wadlinger, Esq., for tlie petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Miller:

There were at all times sufficient available funds in the corpus of the estate to pay to petitioner all of the amounts which she received from the estate. The amounts distributed to her were designated as distributions of capital or as distributions of tax-exempt income, except $11,327.82 returned by her as taxable income in 1933. Respondent’s contention is that there was taxable income in the hands of the executrix, which was distributed to petitioner; that neither the availability of principal funds nor the various designations of the distributions as principal and as tax-exempt income can prevent tax liability. Respondent’s contention can not be upheld.' During each of the two years involved, the taxable items of income of the estate of William J. McCahan, Jr., were completely exhausted by the payment of estate and inheritance taxes. These were properly paid from the income of the estate. Revenue Acts of 1928 and 1932, secs. 162 and 23 (c) ; Sitterding v. Commissioner, 80 Fed. (2d) 939; reversing 32 B. T. A. 506; Esselstyn v. Commissioner, 65 Fed. (2d) 1015; affirming 26 B. T. A. 181; certiorari denied, 290 U. S. 678; United States v. Woodward, 256 U. S. 632; Keith v. Johnson, 271 U. S. 1. Cf. Central Union Trust Co. v. United States, 63 Ct. Cls. 619; certiorari denied, 275 U. S. 555; Hamilton E. Shaver et al., Executors, 4 B. T. A. 127; United States v. Mitchell, 271 U. S. 9. See also John H. Watson, Jr., et al., Trustees, 35 B. T. A. 706.

The income of the estate having been thus exhausted, there remained no taxable income for distribution to the petitioner. Sitterding v. Commissioner, supra. In the Sitterding case, as in the instant case, the petitioner was both a legatee and a beneficiary of a testamentary trust under the will. There, as here, the estate paid both Federal estate taxes and state inheritance taxes in excess of the net income. In that case, as distinguished from the instant case, payment of such taxes was charged on the books against the principal or corpus of the estate and the amounts distributed to the petitioner as beneficiary were charged against gross income. The Board held that, as the distributions in the Sitterding case were paid out of income and received by the beneficiary as income, they were properly included by the respondent in the gross income of the petitioner. On appeal, the court held that as the estate did not collect enough total income to pay the state and Federal taxes properly chargeable against it, it followed that “there was no income to be distributed for that year and therefore no income to be taxed either to the estate or to the heirs.”

The facts in the Sitterding case were much more favorable to the respondent’s position than are the facts in the instant case, as the intention of both fiduciary and beneficiary there was that the distributions should be regarded as from income and they were so designated on the books. In the instant case they were expressly and uniformly designated as from the corpus, or as tax-exempt income.

The effect of the opinion of the Board in the Sitterding case is that the fiduciary may elect to pay estate and inheritance taxes from the principal or corpus and to distribute the income; whereupon, he having so elected, the income so distributed comes into the hands of the beneficiary subject to tax. The effect of the decision of the Circuit Court of Appeals for the Fourth Circuit is that the fiduciary has no such power of election, that the payment of such taxes in excess of income automatically exhausts the income and leaves none to be distributed. Both decisions are consistent with the proposition that if the fiduciary elects — as he has power to do — to exhaust the income in paying such taxes, there is no income to distribute to the beneficiary, and none to tax. That is the situation here.

Belying upon the case of Esselstyn v. Commissioner, supra, respondent contends that the estate and inheritance taxes should have been paid out of funds other than income; that, although the distributions were designated as distributions of principal and there were ample available principal funds for distribution, nevertheless this was a mere matter of bookkeeping. The opinion in the case of Everett J. Esselstyn, Executor, 26 B. T. A. 181, expressly states that during the process of administration, estate tax, paid or accrued during a given year, is a proper deduction from the gross income of the estate in determining the income of the estate subject to tax. Then the opinion goes on to say:

* * * in the instant case the payment of the estate tax reduced the residue or remainder from which income would be derived, but what we are concerned with is income which has been earned by the remainder or residue of the estate. ,4s 1o this income, the will specifically provides that such income, after deducting all necessary and proper charges and expenses, shall he paid over to the beneficiaries named, one of whom was the petitioner’s decedent. The Federal estate tax paid was not a charge or expense incident to the earning of the income which would be distributed, but was a tax imposed on the transfer of the estate and as such was a charge against the estate rather than a charge against the income which the will provided should be distributed to the beneficiaries. [Italics supplied.]

The will of William J. McCahan, Jr., contained no sucli special provision. The second item of the will is an absolute bequest of one-half the personal estate and is sufficient in itself to authorize a distribution of available principal or corpus far in excess of the amounts actually distributed. Secs. 21, 49 (b), 1917, Pa. Laws, 447, 488, 515 (Fiduciaries Act, June 7, 1917); Pa. Stats., Laws 1920, secs. 8509, 8596. The third item creates a trust, names the petitioner and another as trustees, and provides for the payment of the net income arising therefrom to the petitioner as the beneficiary thereof. The will does not provide for payment of net income of the estate by the executrix to petitioner, but in the third item provides for payment by trustees of the net income of the trust. The facts of the instant case tell us nothing about the income from that trust or even that the trust had any income. There is not even anything to indicate that the executrix had yet distributed to the trust the property specified in the third item, during the course of administration. Obviously, the Esselstyn case has no application to this situation.

The case of Jackson v. Price, 74 Fed. (2d) 707, relied upon by respondent, is one in which the testator bequeathed to his executors certain property in trust and directed the executors to pay the income thereof to the taxpayer. It was apparently assumed by the court and by all parties that the amount distributed was distributed as income. The opinion states:

In a refund claim filed March 8, 1928, it was contended that the income received by the taxpayer from the estate was not taxable to him, or, in the alternative, it was contended that appellee was entitled to deductions for the $60,000 of New York transfer tax which became due and was paid in 1923. It was the last alternative which was urged in this suit * * *. The opinion rendered below ([D. O.] 6 Fed. Supp. 182, 183) seems to rest upon the basis that the income received from the estate was not taxable.

It is apparent therefore that the question presented in the instant case was not even considered in Jackson v. Price, supra. Neither was the question considered in Little v. White, 47 Fed. (2d) 512, the other case relied on by respondent.

Since there is nothing in the will which indicates that the estate’s income, undiminished by charges or expenses properly deductible from it, was to be paid to petitioner, it follows that the estate, after payment of estate and inheritance taxes (which, in the absence of such a testamentary provision, were properly chargeable to the estate’s income), had no income to distribute in the years in question; and the distributions must, therefore, have been from the corpus of the legacy. The bookkeeping entries are immaterial.

Petitioner raises another contention, that since the estate took no deduction for any distributions made to the petitioner, as allowed under section 162 of the Revenue Act of 1932, such distributions would not, in any event, whether corpus or income of the estate, be taxable to petitioner as distributee. In view of our conclusion, consideration of this question is unnecessary.

Our conclusion requires, it should be added, that the sum of $11,327.82 returned by petitioner as taxable income in 1933 should also be treated as corpus and that the tax erroneously paid thereon be refunded, since petitioner’s claim for refund was made within the statutory period. Sec. 322 (d), Revenue Act of 1936.

A further deduction from petitioner’s income in 1933 in respect of $3,700 which was stipulated as the amount of a loss in that year should be considered in the redetermination.

Reviewed by the Board.

Decision will he entered under Bule 50.

       SEC. 162. NET INCOME.
      Tlie net income of the estate or trust shall he computed in the same manner and on the same basis as in the case of an individual except that * * *.
      SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      ****** *
      (c) * * * For the purpose of this subsection, estate, inheritance, legacy and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the Jurisdiction imposing such taxes, and shall he allowed as a deduction only to the estate.


author: Van Fossan:

text:
    R. J. Reynolds Tobacco Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71901.
    Promulgated April 27, 1937.

      J. G. Korner, Jr., Esq., D. H. Blair, Esq., and M. A. Braswell, Esq., for the petitioner.

      A. H. Fast, Esq., and E. G. Adams, Esq., for the respondent.
   OPINION.

Van Fossan:

The sole issue in this case is whether petitioner by purchasing shares of its own stock, for cash, and later canceling the certificates and selling and issuing new certificates representing such shares for cash, realized a taxable gain. The amount of gain, the acquisitions and dispositions by petitioner of its own stock, the cost and sale prices thereof, and all other material facts are undisputed. There is only the question of law, whether the profit on the several transactions, $436,581.21, is taxable income. By stipulation of the parties this sum is reduced to $286,581.21 because of a $150,000 dividend.

At the time petitioner’s tax return was made the regulations of the Treasury Department, article 66, Eegulations 74, provided that “a corporation realizes no gain or loss from the purchase or sale of its own stock.” Petitioner’s return conformed to the regulations then in force, as it reported therein nontaxable income of $436,581.21 under the notation “Profit E. J. E. Stock.” This was in accord with the manner in which petitioner had reported similar transactions for the years 1924 to 1928, inclusive, as hereinabove set forth.

Under date of May 2, 1934, article 66, Eegulations 74, together with article 543, Eegulations 65 and 69, and article 66, Eegulations 77, being the regulations under the Eevenue Acts of 1924,1926, 1928, and 1932, was amended by Treasury Decision 4430. Following this amendment of his regulations respondent determined that the petitioner herein realized a net taxable profit from “trafficking” in its own stock in 1929. His determination gives effect to the losses sustained on some transactions and to the profits realized on others. By his amended answer respondent asks that petitioner’s tax liability for 1929 be increased accordingly.

In his brief respondent admits that T. D. 4430 changes a long standing departmental construction, and he concedes it to be a well established rule of law that long continued executive construction contained in regulations must be deemed to have received legislative approval by the reenactment by Congress of the same statutory provision without substantial change. However, he asserts that this rule is. to be applied only when it “does no violence to the letter or spirit" of the provisions construed”, Brewster v. Gage, 280 U. S. 327, 336, and where the regulation operates to create a rule out of harmony with the statute, the regulation is a mere nullity, Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, affirming 29 B. T. A. 395; Lynch v. Tilden Produce Co., 265 U. S. 315; Miller v. United States, 294 U. S. 435, and cases cited at page 440; Schafer v. Helvering, 83 Fed. (2d) 317. He submits that the amended regulation is a reasonable interpretation of the Congressional intent expressed in the statute.

The statutory provisions which the original regulation, article 66, Regulations 74, and the amendment thereto, T. D. 4430 supra, interpret are contained in section 22 of the Revenue Act of 1928, wherein the Congress defines “gross income.” As pointed out by counsel for petitioner in their brief, the interpretation and administration of this section of the statute in like or similar situations to that here obtaining have been uniform under all revenue acts, with the possible exceptions hereinafter noted, until the promulgation of respondent’s T. D. 4430 on May 2, 1934.

This uniformity of construction and administration of the statute is one of the two principal arguments upon which petitioner rests its case. With great care petitioner’s brief dovetails the regulations, rulings and decisions of the Commissioner, the decisions of this Board, and the decisions of the courts, with the passage of the several revenue acts, in order to show the repeated reenactment of the definition of “gross income” after such regulations, rulings, and decisions were promulgated or made. Petitioner submits that over this period of approximately 21 years the repeated reenactment of the definition without change, modification or amendment constitutes legislative approval and adoption of the departmental interpretation. Our attention is particularly directed, inter alia, to the decisions of the Supreme Court in Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; Helvering v. Bliss, 293 U. S. 144; Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289; McFeeley v. Helvering, 296 U. S. 102; and Koshland v. Helvering, 298 U. S. 441.

These decisions, and the others considered, establish the rule that great weight should be given “to an administrative interpretation long and consistently followed, particularly when the Congress, presumably with that construction in mind, has reenacted the statute without change * * * [citing cases].” In -addition, these decisions establish the rule that where a statute “uses ambiguous terms, or is of doubtful construction, a clarifying regulation or one indicating the method of its application to specific cases not only is permissible but is to be given great weight by the courts.” And finally these decisions establish that “the same principle governs where the statute merely expresses a general rule and invests the Secretary of the Treasury with authority to promulgate regulations appropriate to its enforcement”, Koshland v. Helvering, supra. It is this latter rule which petitioner desires to invoke in this proceeding.

However, there is another rule of equal importance which the Supreme Court has stated and restated many times. This rule is to the effect that, if the departmental construction is obviously or clearly wrong the Court will so hold, regardless of the long continued practice in administering the act. United States v. Graham, 110 U. S. 219; Wisconsin Central Railroad Co. v. United States, 164 U. S. 190; Manhattan General Equipment Co. v. Commissioner, supra; Koshland v. Helvering, supra. The Supreme Court has variously stated the rule, always to the same effect, that long continued departmental construction “ * * * is not to be overturned unless clearly wrong, or unless a different construction is plainly required”, United States v. Jackson, 280 U. S. 183, 193; * * will not be disturbed except for weighty reasons”, Brewster v. Gage, 280 U. S. 327, 336; “* * * ought not to be disturbed now unless it be plainly wrong”, Universal Battery Co. v. United States, 281 U. S. 580, 583; “* * * will not be overruled except for weighty reasons”, Fawcus Machine Co. v. United States, 282 U. S. 375, 378; “* * * will not be judicially disturbed except for reasons of weight, * * * ”, McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 492.

These decisions, and others of similar tenor, expressly point out that circumstances may arise where the Court will refuse to follow the departmental construction, even though long continued and followed by subsequent reenactments by the Congress of the statutory section in question. In two recent decisions, Manhattan General Equipment Co. v. Commissioner, supra, and Koshland v. Helvering, supra, the Supreme Court repudiated the departmental construction. In che Manhattan case the original regulation was amended, as it has been here, and the question turned, as here, upon “whether the loss [or gain] was to be determined in accordance with the original or the amended regulation.” The Court held that the amended regulation correctly expressed the will of Congress. In the Koshland case the regulations had continued to the same effect, even after repeated decisions by the Supreme Court indicated their error, with the result that when the question was finally presented to the Court it expressly and decisively overruled the departmental construction.

As already stated, the situation here with respect to the original and amended regulations is analagous to the situation in Manhattan General Equipment Co., supra. There the Court stated that “not only must a regulation, in order to be valid, be consistent with the statute, but it must be reasonable. International Railway Co. v. Davidson, 257 U. S. 506, 514.” So here, we must determine whether the amended regulation is consistent with the statute and whether it is reasonable.

Briefly summarizing the facts, it appears that petitioner acquired on the open market during the taxable year 574,880 shares of its own stock for which it paid cash. During the taxable year it sold 209,000 shares of its own stock for cash. The excess of the sums received over the sums paid out in the various transactions in its own stock amounted to $436,581.21.

Considering the magnitude and extent of petitioner’s operations during the taxable year, it could hardly be denied that it was dealing “in its own shares as it might in the shares of another corporation.” T. D. 4430, supra. There were trades between opposing parties in a large number of transactions negotiated through brokers. The stock was not retired. If petitioner’s transactions had been in the shares of stock of another corporation, no one would be so bold as to deny that it realized a net taxable gain therefrom. But petitioner says that since the transactions were in its own stock no gain or loss resulted because of the capital nature of each transaction. Simmons & Hammond Manufacturing Co., 1 B. T. A. 803; Hutchins Lumber & Storage Co., 4 B. T. A. 705; Union Trust Co. of New Jersey, 12 B. T. A. 688; J. H. Johnson, 19 B. T. A. 840; affd., Johnson v. Commissioner, 56 Fed. (2d) 58; certiorari denied, Johnson v. Burnet, 286 U. S. 551; Houston Brothers Co., 21 B. T. A. 804; Jewel Tea Co. v. United States, 15 Fed. Supp. 56.

In Houston Brothers Co., supra, the Board fully considered and carefully reviewed its prior decisions on this question, overruled its decisions in Behlow Estate Co., 12 B. T. A. 1365, and New Jersey Porcelain Co., 15 B. T. A. 1059, cases in which gain or loss was recognized in transactions involving the taxpayers’ own shares of stock, and reaffirmed the principle announced in Simmons & Hammond Manufacturing Co., supra. It is unnecessary again to cover this ground, particularly in view of the trend of decisions since Houston Brothers Co.

In S. A. Woods Machine Co., 21 B. T. A. 818, the Board, considered the same general principle and rested its decision, in part at least, upon the determination in the Houston Brothers Co. case. Upon appeal, Commissioner v. Woods Machine Co., 57 Fed. (2d) 635 (C. C. A., 1st. cir.), certiorari denied, 287 U. S. 613, the Circuit Court of Appeals reversed the Board. In the Woods case the corporate taxpayer received shares of its own stock in settlement of a patent infringement suit. the corporation retired the capital stock so received, but, nevertheless, the court held that taxable gain resulted. In determining the issue the court considered the statutory definition of “gross income” and the regulation interpreting the definition, section 213, Revenue Act of 1924, and article 543, Regulations 65, which are to all intents and purposes the same as section 22, Revenue Act of 1928, and article 66, Regulations 74. In the course of its opinion the court stated:

Whether the acquisition or sale by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction involved. Walville Lumber Co. v. Com. of Internal Revenue (C. C. A.) 35 F. (2d) 445; Spear & Co. v. Heiner (D. C.) 54 F. (2d) 134. If it was in fact a capital transaction, i. e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation, the Board rule applies. Doyle v. Mitchell Bros. Co., 247 U. S. 179, 184, 38 S. Ct. 467, 62 L. Ed. 1054; Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570. But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. The view taken by the Board of Tax Appeals (see Houston Brothers Co. v. Commissioner, 21 B. T. A. 804) presses accounting theory too far in disregard of plain facts. It is not supported by any decision which has come to our attention except those of the Board. In Knickerbocker Imp. Co. v. Board of Assessors, 74 N. J. Law 583, 585, 65 A. 913, 915, 7 L. R. A. (N. S.) 885, the plaintiff corporation was held liable for the franchise tax on its own stock which it had bought and held in the treasury. The court said: “Stock once issued is and remains outstanding until retired and canceled by the method provided by statute for the retirement and cancellation of capital stock.” (Dill, J.) In United States v. Kirby Lumber Co., 284 U. S. 1, 52 S. Ct. 4, 76 L. Ed. -, dealing with a question somewhat similar to the present one, the court said: “we see nothing to be gained by the discussion of judicial definitions. The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here.” (Holmes, J.) See too, Maryland Casualty Co. v. United States, 251 U. S. 342, 40 S. Ct. 155, 64 L. Ed. 297. As has often been said, taxes are practical things and should be dealt with on a practical basis.

To the same effect are Allyne-Zerk Co. v. Commissioner, 83 Fed. (2d) 525 (C. C. A., 6th Cir.), affirming 29 B. T. A. 1194; Dorsey Co. v. Commissioner, 76 Fed. (2d) 339 (C. C. A., 5th Cir.), affirming memorandum opinion of this Board; certiorari denied, 296 U. S. 589.

In the last mentioned case the court specifically considered the last sentence of article 66, Regulations 74, supra, and the amendment thereto, T. D. 4430. In its opinion the court states:

The point of law dealt with by the Board is whether the transaction was controlled by the last sentence of Regulations 74, Art. 66: “A corporation realizes no gain or loss from the purchase or sale of its own stock.” A reading ■ of - the whole Regulations, which had existed at least since 1918, shows that it referred mainly to the original sale of the capital stock and to stock turned back by stockholders to be resold to raise more capital. It was amended in 1934 by T. D. 4430 to distinguish clearly between original capital transactions and ordinary commercial dealings in its own stock as in that of another corporation. It may1 well be that a corporation taking its cash and buying its own stock makes neither gain nor loss by the mere purchase. That is true of any purchase for cash. But when in a business exchange for its real estate it receives in part its own stock it is converting by sale a previous purchase, and if what it receives has a fair market value the gain or loss realized in the exchange must be measured and taxed. It is not the purchase of the stock but the sale of the real estate that is regarded.

The petitioner contends that the S. A. Woods Machine Co. reversal in no wise involved or turned upon the principle of Simmons & Hammond Manufacturing Co., which, it is asserted, is the present rule of the Board. It is so urged despite the reversals of Board decisions in Schiller Piano Co., 23 B. T. A. 376; reversed on confession of error by Commissioner, Schiller Piano Co. v. Commissioner, 58 Fed. (2d) 1085; Boca Ceiga Development Co., 25 B. T. A. 941; reversed, Commissioner v. Boca Ceiga Development Co., 66 Fed. (2d) 1004; and despite the decisions of the Board in Houghton & Dutton Co., 26 B. T. A. 52; James D. Robinson, 21 B. T. A. 1018; affd., Robinson v. Commissioner, 67 Fed. (2d) 972; Niagara Share Corporation, 30 B. T. A. 668.

While no one of the foregoing decisions specifically overruled the doctrine of Simmons & Hammond Manufacturing Co., supra, the decisions are at variance with the principle of the latter case. Indirectly, if not directly, Simmons & Hammond Manufacturing Co. has been overruled. In the Houston Brothers Co. case the Board stated, after its review of the authorities: “The foregoing considerations, in our opinion, demonstrate the soundness and wisdom of the rule of the regulations and of the Simmons & Hammond case. When a corporation engages in a transaction which involves the receipt or disposition of its own shares, no gain or loss is recognizable in determining its taxable income.” The Houston case was not appealed, but the principle upon which it was decided was expressly repudiated by the court in Commissioner v. Woods Machine Co., supra, wherein it is stated that .the Houston decision “presses accounting theory too far in disregard of plain facts.”

An examination of the Simmons & Hammond Manufacturing Co. case, supra, reveals certain facts analogous to those in this proceeding. There, the corporate taxpayer purchased 94 of the 323 shares of its own outstanding stock from four stockholders. It paid three stockholders $6,800 cash for 34 'shares, and paid one stockholder $8,697.40 in cash and $5,449.61 in property of the company for 60 shares. During the same taxable year the corporation sold the 94 shares, purchased at a cost of $20,947.01, to its two principal stockholders, 47 shares each, for the sum of $10,340, and claimed a loss as a result thereof of $10,607.01. The Board refused to allow the loss, holding that the purchase and resale by the corporation of 94 shares of its own stock “constituted a capital transaction”; that by the purchase of its own stock the corporation sustained no loss; that the resale of the stock resulted in no loss to the corporation; and that the method used by the corporate taxpayer “was in truth and in fact a distribution of surplus” to its two principal stockholders, Simmons and Hammond.

Under the facts in this proceeding we are unable to see how it could be said that petitioner’s purchases and sales of its own stock were, in truth and in fact, distributions of its surplus. The various transactions in its own stock were directed toward remedying a harmful situation among the retailers of its products, toward protecting its employees, its trade brands, and its business, and in pursuance of a long established policy of widening its stockholding base. We have found no evidence in this record indicating that distribution of the corporation’s surplus was the objective of these transactions. The fact is that petitioner’s cash was reduced with each purchase, and increased after each sale by the proceeds thereof, and that during the interval between purchase and sale the shares appeared in an account designated “Investments in Non-competitive companies.”

As above noted, the record establishes that the primary purposes of the corporation in buying and selling its own stocks were to get wider stock ownership and to support the market, both normal business motives frequently employed. Albeit there is no testimony that the immediate profit motive was present, the reader of this record would be naive indeed who would, not observe such a motive interlarded in the entire situation. The instant tax year does not present an isolated instance. It presents merely the current result of a practice extending over a period of several years.

Another contention upon which petitioner rests its case is that a corporation’s own stock is not “property” or “assets” in its own hands. citing People v. Kelsey, 93 N. Y. S. 369; Stevens v. Olus Manufacturing Co., 130 N. Y. S. 22; Borg v. International Silver Co., 11 Fed. (2d) 147. We find little of assistance in these cases. One phrase from the Borg case is noteworthy, however, and that is where the court, in making its pronouncement of its conclusion, states: “It makes no difference whether this satisfies ideal accounting or not.” We are not concerned with the bookkeeping entries that would be required to record the transactions in petitioner’s own stock, nor is it material to our purposes whether the increment of gain be denominated “contingent profits” or be called by some other name.

The courts of the various states have established by an overwhelming weight of authority that a solvent corporation can purchase and hold its own shares of stock, and the question of whether it holds the purchased stock as an asset is largely a matter of intent. Pabst v. Goodrich, 133 Wis. 42; 113 N. W. 398, and cases cited; Draper v. Blackwell & Keith, 138 Ala. 182; 35 So. 110; City Bank v. Bruce, 17 N. Y. 507; Johnson County v. Thayer, 94 U. S. 631; Adam v. New England Inv. Co., 33 R. I. 193; 80 Atl. 426; Scriggins v. Dalby Co. (Mass., 1935), 195 N. E. 749; San Antonio Hardware Co. v. Sanger (Texas), 151 S. W. 1104; see also note in 61 L. R. A. 621 and discussion of Leland v. Hayden, 102 Mass. 542, appearing at page 623; Cook on Corporations, §§ 311, 313; 7 E. C. L. 551, “property” includes corporation’s own stock; and 7 E. C. L. 552 regarding corporate intent.

This petitioner held its shares in its treasury with the unquestioned intention of selling and reissuing them, preferably by placing the stock in the hands of permanent investors. The technical status of the stock while in its hands concerns us little.

Petitioner advances as a further argument in opposition to taxing the gain resulting from petitioner’s transactions that the purchases and the sales were capital transactions which affected the .corporation’s capital structure. This argument is fully met by the provisions of the amendment to the regulations. So far as transactions, capital in their nature, are concerned, T. D. 4430, supra, expressly and correctly excludes them from classification as taxable transactions. It seeks to reach only those transactions which are actually and in truth ordinary commercial dealings by a corporation in its own stock. The fallacy in petitioner’s position is that its dealings in its own stock do not fall within the category of capital transactions.

To hold the contrary and sustain petitioner’s position that no taxable profit accrues when a corporation, with no proven purpose of effecting changes in its capital structure, goes into the market and buys its own stock, places and holds the same in its investment account and then, a favorable opportunity presenting itself, sells the same through the market at a higher price than it paid for the same, would require us to engage in the exploration of the metaphysical concepts of accounting far beyond the realm of practical legal reasoning. It “presses accounting theory too far in disregard of plain facts.”

We have observed that the Supreme Court has held that a regulation or administrative practice which has been long followed and has received legislative sanction should not be overturned except for weighty reasons. That such regulation or practice is based on a false premise; that it elevates to a position of authority a concept which runs counter both to reason and ordinary business judgment; that it prefers a highly artificial interpretation to the usual rationale of normal minds would seem to be “weighty reasons” for dethroning such a regulation or practice.

In our opinion the regulation, as amended, is reasonable, and is consistent with the statute. The prior regulations do not meet these tests. Therefore, the respondent’s determination is approved.

In so far as Simmons & Hammond Manufacturing Co., supra, and cases following it conflict with this decision, they are hereby overruled.

If, as a result of our decision herein, petitioner’s taxes to the States of Virginia and North Carolina are thereby increased, provision should be made for proportionately increasing petitioner’s allowable deductions.

Keviewed by the Board.

Decision will be entered under Rule 50.

MoRRis, Murdock, and Leech dissent.

AruNdell and TurNer did not participate in the consideration of or decision in this report.

       Art. 66. Sale by corporation of its capital stock. — The proceeds from the original sale by a corporation of its shares of capital stock, whether such proceeds are in excess of or less than the par value of the stock issued, constitute the capital of the company. If the stock is sold at a premium, the premium is not income. Likewise, if the stock is sold at a discount, the amount of the discount is not a loss deductible from gross income. If, for the purpose of enabling a corporation to secure working capital or for any other purpose, the shareholders donate or return to the corporation to be resold by it certain shares of stock of the company previously issued to them, or if the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction and the proceeds of such sale will be treated as capital and will not constitute income of the corporation. A corporation realizes no gain or loss from the purchase or sale of its own stock. (See article 176.)

        Acquisition or disposition by a corporation of its own capital stock. — Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
      But where a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of applicable statutes.

       SEC. 22. GROSS INCOME.
      (a) General definition. — “Gross income” includes • gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.