author: Hill:

text:
    Walter Fitch, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65911.
    Promulgated February 23, 1937.

      Joseph D. Peeler, Esq., and J. B. Scholefield, G. P. A., for the petitioner.

      I. Graf, Esq., for the respondent.
   OPINION.

Hill:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $4,668.35. Of three issues raised in the pleadings, the parties have settled two by agreement. Petitioner concedes that respondent has properly included in taxable net income for 1929 items of dividends in the amount of $21,162.91, and respondent concedes that the net income as computed in the deficiency letter has been overstated in the amount of $6,000, representing one-balf of salary of $12,000 received by petitioner and his wife as community property during the taxable year.

This leaves for consideration here a single issue of law, namely, whether the gain derived by petitioner from the sale in the taxable year of certain stocks acquired through the exercise of stock rights may be treated in whole or in part as capital gain, where the stocks sold were held less than two years, but the original stocks in respect of which the rights were issued had been held for more than two years. Upon decision of the issue presented, the parties will be in agreement respecting the recomputation of the deficiency.

This specific question was considered by us in Rodman E. Griscom, 22 B. T. A. 979, 994, promulgated March 31, 1931, and again in Ellen Ayer Wood, 29 B. T. A. 1050, promulgated February 9, 1934. In those cases we reached the conclusion that shares of stock purchased within two years of the date of sale, although acquired under rights to subscribe received on stock held more than two years, were not “capital assets” within the meaning of section 208 of the Revenue Acts of 1924 and 1926, and section 101 of the Revenue Act of 1928. The present case is governed by the latter statute.

Respondent contends that no part of the profit derived by petitioner from sales of the stocks in question may be taxed as capital net gain, relying on our decisions in the Griscom and Wood cases, supra, while petitioner contends that a portion of each new share (held less than two years) was carried over from the old stock (held more than two years) and that the total gain or loss on the sale of the new share should be allocated to the old and new portions of the property sold.

Our decision in Ellen Ayer Wood, supra, following the Griscom case, was reversed by the United States Circuit Court of Appeals for the First Circuit on January 31, 1935. Wood v. Commissioner, 75 Fed. (2d) 364. The court held that where the taxpayer purchased, in the exercise of stock rights, new shares and sold them at a profit within two years thereafter, the original shares in respect of which the rights were issued having been held for more than two years, that part of the new shares properly allocable to the “rights” element was a capital asset for the purpose of determining the capital net gain tax under section 101 of the Revenue Act of 1928.

In Samuel Insull, Jr., 32 B. T. A. 47, 56, promulgated February 14, 1935, we again considered, among other things, a situation involving the sale of stock acquired on stock rights held less than two years, but where the original stock was held more than two years, and reached the same conclusion as we reached in the Griscom and Wood cases, supra, on the authority of those decisions.

On April 30, 1935, in Bradley W. Palmer, 32 B. T. A. 550, we reached the conclusion that proceeds of sale of stock rights held less than two years, but which were issued on stock held more than two years, were taxable as capital gain.

On the same date, April 30, 1935, a supplemental opinion at 32 B. T. A. 567, was promulgated in the Insull case, supra, and on August 1, 1935, at 32 B. T. A. 1070, a second supplemental opinion was promulgated in that case, each conforming our decision in the Insull case, on the question of taxing proceeds of sale of stock rights, to the conclusion reached in the Palmer case.

Our decision in the Insull case on the question of taxing profit derived from the sale of stock acquired on stock rights held less than two years but where the original stock was held more than two years, Avhich is the question in the present case, was reversed by the United States Circuit Court of Appeals for the Seventh Circuit, 87 Fed. (2d) 648.

The issue in the instant case was also raised in May Rogers, 32 B. T. A. 1176, promulgated August 8, 1935, and we held the entire gain taxable as ordinary income, declining to follow the decision of the First Circuit in Wood v. Commissioner, supra. The Rogers case is now pending on appeal to the- Second Circuit.

In Macy v. Helvering, 82 Fed. (2d) 183, the United States Circuit Court of Appeals for the Second Circuit, on February 17, 1936, reversed the Board’s decision contained in a memorandum opinion entered August 6, 1934, in Valentine E. Macy, Jr., et al., Executors, following our decisions in the Griscom and Wood cases, supra. This is the same court to which the Rogers decision was taken for review.

In the Macy case, the court held that a portion of the stock sold represented the taxpayer’s old stock interest in the shares which had been held for more than two years before the sale of the additional shares acquired under the stock rights, and that consequently a portion of the profit should be taxed as capital net gain, thus, to that extent clearly approving and following the views of the First Circuit in the Wood case. However, since the Commissioner had not presented his theory of the proper method of apportioning the profit between capital gain and ordinary income, the case was remanded to the Board for a determination of such apportionment. There is no question raised in the instant case respecting the proper method of apportionment.

The principle of allocation adopted by the First Circuit in the Wood case, by the Second Circuit in the Macy case, and by the Seventh Circuit in the Insull case, is the same as that urged by petitioner herein, and we, therefore, sustain petitioner’s contention. Our prior decisions, above referred to, in so far as in conflict herewith, will not be followed in the future.

The parties have stipulated that under the allocation method of computation the following is a correct statement of the ordinary income and capital gain derived by petitioner from the sales of the stocks in controversy:

Reviewed by the Board.

Judgment will he entered under Rule 50.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Lawyers Building Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Trinity Buildings Corporation of New York, Petitioner, v. Commissioner of Internal Revenue, Respondent. Whitehall Improvement Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. George A. Fuller Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Materials Delivery Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81460, 81461, 81462, 81463, 81464.
    Promulgated February 23, 1937.

      Allen G. Gartner, Esq., and Edward I. Sfroull, G. P. A., for the petitioners.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Leech:

These consolidated proceedings involve income tax deficiencies proposed by respondent for tlie calendar year 1932 against the petitioners, as follows:

Lawyers Building Corporation_ $3,406. 01
Trinity Buildings Corporation of New York_ 62, 491.15
Whitehall Improvement Corporation_ 20,335. 09
George A. Fuller Co_ 32, 249. 90
Materials Delivery Corporation_ 66.34

The facts, which were stipulated, are briefly as follows: The petitioners, during the taxable year, were 5 affiliates in a group of 15 affiliated companies whose parent was the United States Realty & Improvement Co., a New Jersey corporation. A so-called consolidated return was filed by the latter corporation for the calendar year 1932, on behalf of itself and 13 of its affiliates, including the petitioners. Each of these 13 affiliates filed the prescribed form 1122. This form constituted the authorization and consent of the subsidiary corporations included in such return by -which each subsidiary authorized the filing of such return by the parent, as agent, on its behalf, and consented to the provisions of the respondent’s Regulations 78 governing consolidated returns of affiliated corporations. The Savoy-Plaza Corporation, one of the afliliates, did not join in making the so-called consolidated return, for the reason that the corporation had been adjudicated a bankrupt on December 1, 1932, and the trustee in bankruptcy, believing, upon advice of its legal counsel, that it was required to file a separate return on behalf of the bankrupt corporation for the year 1932, refused to execute form 1122 on behalf of that corporation, and filed a separate return for that corporation for that year.

During the 11-month period ended November 30, 1932, the Savoy-Plaza Corporation suffered a net operating loss of $1,500,837.29. On that date, the liabilities of the Savoy-Plaza Corporation exceeded its book assets by the sum of $3,917,070.61. The respondent determined the tax liability of each corporation, whose income was included in the so-called consolidated return filed, on a separate basis. The correctness of that action of the respondent is the sole issue in this proceeding.

The “privilege” of affiliated corporations to have their income taxes computed upon a consolidated basis exists only by virtue of the conditional grant of that “privilege” by Congress. And, as this Board said in Smith Paper Co., 31 B. T. A. 28; affd., 78 Fed. (2d) 163; certiorari denied, 296 U. S. 627: “* * * petitioners, to enjoy its advantages, must bring themselves clearly within the specified conditions precedent to its grant. Rock Island, A. & L. R. Co. v. United States, 254 U. S. 141.”

The Revenue Act of 1932 is controlling here. This statute, in so far as material at this point, is quoted in the margin. By section 141 (a) of that act, such a privilege was extended to affiliated corporations. Under the authority granted by that statute, the respondent promulgated Regulations 78, the material provisions of which appear in the margin. The ■ action of the respondent is premised particularly upon article 18, which provides substantially, for present purposes, that, if there has been a failure to include in the consolidated return the income of any subsidiary, or a failure to file any of the forms required bj? these regulations, the tax liability of each member of the affiliated group shall be determined upon the basis of separate returns. Clearly, the petitioners were bound by these regulations since they filed form 1122, which was their formal consent to be so bound. Here, the income of the Savoy-Plaza Corporation was not included in the return for that year filed by the remaining members of the affiliated group nor did it file form 1122, consenting to be bound by Regulations 78 and authorizing the parent corporation to make a consolidated return on its behalf for the year in question, the filing of which, under Regulations 78, was made a condition precedent to the privilege of having the income taxes of the affiliated group computed upon a consolidated basis.

It may well be true, as argued by petitioners, that the bankruptcy of the Savoy-Plaza Corporation, which occurred on December 1, 1932, left that corporation thereafter as a mere “shell” and that such “shell” could not, in fact, be affiliated with the remaining members of the affiliation. See Houghton & Dutton Co., 26 B. T. A. 52; Prosperity Co., 27 B. T. A. 28; H. Liebes & Co., 23 B. T. A. 787. However, obviously, at least for the period in 1932 preceding December 1, the elate of the bankruptcy of the Savoy-Plaza Corporation, that, corporation was a member of the affiliated group within the provisions of section 141 (d), supra,. That fact brings the Savoy-Plaza Corporation within the requirements of section 141, supra, just as effectively as though that undisputed affiliation continued' throughout the year. This is so since section 141 (a), supra, provides that “The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) * * *; and tire making of a consolidated return shall be considered as such consent.”

Petitioners do not question the validity of the regulations. Nor do they deny, at least very emphatically, that they are controlled by those regulations. The burden of their argument apparently is that the regulations quoted do not cover the situation presented here, where an affiliate became bankrupt during the taxable year. They argue that the respondent has construed these regulations in their effect on both the situation where the parent of an affiliated group becomes bankrupt during the taxable year (see G. C. M. 12207, C. B. XII-2) and where the subsidiary affiliate became bankrupt during such year (see G. C. M. 12208, C. B. XII-2).

In the first General Counsel’s memorandum mentioned, it was ruled that the trustee of the parent corporate bankrupt could file a consolidated return providing the requirements of Regulations 78 were met. In the second memorandum the ruling was:

Where a group of corporations is affiliated within the meaning of section 141 (d) of the Revenue Act of 1932, and a subsidiary company is in the hands of a trustee in bankruptcy or a receiver, who is operating the property or business of the company and is, therefore, required to make returns for the corporation under section 52 (a) of that Act, the income of such a subsidiary company may be included in a consolidated return for the affiliated group, provided the trustee in bankruptcy or the receiver, as the case may be, executes Form 1122 and consents to the provisions of Regulations 78 governing the making of consolidated returns.

Petitioners contend that in these two memoranda the respondent has construed the regulations covering the case here to mean that the trustee in bankruptcy for the Savoy-Plaza Corporation had an absolute right to file a separate return covering the year in controversy and that the filing of such a return complied with the mandatory requirements of the controlling Revenue Act of 1928, section 52 (a) and Regulations 77, article 392, construing the same, both of which, so far as are here material, are quoted in the margin. That is to say, petitioners’ argument is that, under the regulations governing the right of petitioners to have their income taxes for 1932 computed on a consolidated basis, as such, regulation is construed by the respondent, the trustee in bankruptcy for the Savoy-Plaza Corporation was mandatorily required or, at least was permitted to file a separate return for the bankrupt corporation for that year without affecting the right of the other members of the affiliation to have their income taxes computed on a consolidated basis.

Aside from the effect of such a construction of this regulation by the respondent, we disagree with the petitioners’ construction of the meaning of the two General Counsel’s memoranda, supra.

Clearly, under section 52 (a), supra, which is a Federal statute as is the Bankruptcy Act, the trustee in bankruptcy for the Savoy-Plaza Corporation was required to make the income tax return for that corporation for 1932 “in the same manner and form as corporations are required to make.” The respondent so construed that section in his appropriate Regulations 77, article 392, included in the margin.

In our judgment, the only effect of General Counsel’s Memorandum 12208, supra, was to clarify the situation in providing that where a subsidiary affiliate became bankrupt during the taxable year, the trustee in bankruptcy of that affiliate could do as the corporation would have done had bankruptcy not intervened, namely, file a separate return or join in a consolidated return for the affiliated group provided it formally consented to the provisions of Regulations 78 controlling the filing of consolidated returns.

It may well be that the trustee in bankruptcy for the Savoy-Plaza Corporation was advised and believed that it was required by law to file a separate return for the year 1932 and was similarly prevented from executing form 1122 authorizing the parent to file a consolidated return on its behalf and consenting to be bound by Regulations 78 applying to consolidated returns. But a mistake of law does not excuse. Fletcher American National Bank, 33 B. T. A. 453. This record does not disclose that the Federal District Court having jurisdiction of the bankruptcy proceedings involving the Savoy-Plaza Corporation denied the trustee in bankruptcy of that corporation permission to file form 1122 or join in the so-called consolidated return of the affiliates of that corporation. It is not revealed that the trustee asked for such permission. In view of the fact that this record shows that no liability would, in fact, have been assumed by the trustee, by the execution of that form or the joining in the so-called consolidated return as filed, it may well be doubted that such permission would have been denied.

In any event, the Savov-Plaza Corporation was a member of the affiliated group with petitioners during 1932, at least for the period preceding December 1 of that year. The other' members of that group, including petitioners, consented to be bound by thé regulations governing the filing of consolidated returns. The so-called consolidated return of the affiliated group failed to include the income of the Savoy-Plaza Corporation for that year, and the trustee in bankruptcy for that corporation failed to file form 1122 consenting to be bound by Regulations 78 and authorizing the parent company of the affiliated group to file a consolidated return on its behalf, as provided by Regulations 78. This failure to comply with those regulations made mandatory the computation by the respondent of the income taxes for the year 1932 of each member of the affiliated group on a separate basis. The deficiencies here resulted from such computation. They are affirmed.

Effect will be given to the stipulated adjustments in the settlement under Rule 50.

Reviewed by the Board.

Decision will he entered wider Rule 50.

       SEC. 141. CONSOLIDATED RETURNS OF CORPORATIONS.
      (a) Privilege to File Consolidated Returns. — An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which, the return is made consent to all the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.
      (b) Regulations. — The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.
      (c) Computation and Payment of Tax. — In any case in which a consolidated return is made the tax shall be determined, computed, assessed, collected and adjusted in accordance with the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the date on which such return is made; except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of 94 of 1 per centum.
      (d) Definition of “Affiliated Group/-’ — As used in this section an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
      (1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
      (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.
      As used in this subsection the term “stock” does not include nonvoting stock which is limited and preferred as to dividends.

         ART.-12. Making Consolidated Return and Filing Other Forms.

        (a) Consolidated Return Made by Common Parent.

      A consolidated return shall be made on Form 1120 by the common parent corporation for the affiliated group. Such return shall be filed at the time and in the office of the collector of the district prescribed for the filing of a seperate return by such corporation.
      (b) Authorizations and Consents Filed by Subsidiaries.

      * Each subsidiary must prepare two duplicate originals of Form 1122, consenting to these regulations and authorizing the common parent corporation to make a consolidated return on its behalf for the taxable year and authorizing the common parent corporation (or, in the event of its failure, the Commissioner or the collector) to make a consolidated return on its behalf (as long as it remains a member of the group), for each year thereafter for which, under article 11 (a), the making of a consolidated return is required. One of such forms shall be attached to the consolidated return, as a part thereof; and the other shall be filed, at or before the time the consolidated return is filed, in the office of the collector for the district prescribed for the filing of a separate return by such subsidiary. No such» consent can be withdrawn or revoked at any time after the consolidated' return is filed.

        ART. 18. Failure to Comply with Regulations.
      (a) Exclusion of a Subsidiary from- Consolidated Return.

      If there has bren a failure to include in the consolidated return the income of any subsidiary, or a failure to lile any of the forms required by these regulations, notice thereof shall be given the common parent corporation by the Commissioner, and the tax liability of each member of the affiliated group shall be determined on the basis of separate returns unless such income is included or such forms filed within the period prescribed in such notice, or any extension thereof, or unless under article 11 a consolidated return is required for such year.

       SEC. 52. CORPORATION RETURNS.
      (a) Requirement. — Every corporation subject to taxation under this title shall make a return, stating specifically the items of. its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.
      * * * * * * *
      Art. 392. Returns lyy receivers. — Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income of such corporations on Form 1120. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. * * *


author: Tuenek : AkuNdell,

text:
    Gussie K. Barth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82557.
    Promulgated February 26, 1937.

      Gussie K. Barth pro sc.

      T. G. Histon, Esq., and J. W. Smith, Esq., for the respondent.
   OPINION.

Tuenek :

The petitioner has abandoned her claim of error as to the inclusion in income of the item of additional rents which resulted in the deficiency determined herein, and we have left for determination only the issue involving her claim of overpayment. She claims that she was in error in reporting as income in her return for 1933 the sum of $10,911.91 received in that year from David Baron as her share in profits derived from the law practice conducted by him under the firm name of Barth & Baron. In support of this claim she contends that the partnership of Barth & Báron was dissolved by the death of Irvin V. Barth on November 13, 1931, and that the payments received during the taxable year were not income to her but were capital payments by Baron in purchase of Barth’s interest in the partnership at the time of his death. It is the position of the respondent that by the terms of the partnership contract, and under the laws of the State of Missouri, the partnership continued in existence after Barth’s death, and the amounts received by the petitioner under the partnership contract were properly reported by her in her income tax return.

Assuming that the petitioner is correct in her contention that the partnership terminated at the death of her husband and that no partnership existed thereafter, it does not follow from the facts in the record that she is correct in her claim that the amounts received by her from Baron represented a part of the corpus of Barth’s estate. The claim that the amount so received constituted corpus rests on the provisions of paragraph 9 of the partnership contract to the effect that “the partnership shall not be immediately dissolved by reason of the death of a partner but his interest therein shall be determined” by payments to his widow for a period of three years of specified percentages of what would have been the deceased partner’s distributive share in the proceeds from the business if he had remained alive. In short, the petitioner claims that Barth had contracted to sell his interest in the law practice carried on by the partnership at his death and that the payments received by her represented that interest and not income.

If an interest in the partnership was sold and the petitioner received some right on Barth’s death, which right was later converted into money, it is necessary to determine the nature of that right, the basis in her hands for income tax purposes, and the amount received upon its conversion into money. It is apparent from the record that the amounts received did not represent payment for capitaTassets. Und'Cl paragraph"!) ol the partnership contract it was provided that the formation of the partnership should in no way affect the ownership of the capital assets then on hand. It was also provided that books purchased to complete series already started were to be purchased individually and there is no showing nor claim that any books, furniture, or other assets of a capital nature were purchased by the partnership between May 1, 1929, when the partnership was formed, and November 13, 1931, when Barth died. In fact it is admitted by the petitioner in her brief that all such items belonged to Barth individually.

The interest which it is claimed that Baron acquired, and for which payment was made to petitioner, is referred to generally as “good will.” It is not claimed that a lawyer- can sell or bequeath his good will as a practicing attorney, but it is claimed that certain benefits were to be derived during the lifetime of the partners as the result of their association together in the practice of law, and that the payments made to the petitioner were payments for the benefits so derived by Baron from his association with Barth. It is also suggested that to some extent the payments covered Barth’s interest in fees earned, or partially earned, but not paid at the time of his death.

With reference to the first element of the so-called good will, it is claimed that the transaction was in the nature of a contract between Barth and Baron for the benefit of a third party, in this case the petitioner, and is analogous to a gift inter vivos and not income. Even though we assume that clause 9 of the partnership contract was, upon the death of Barth, a contract for the benefit of his widow and that she then received a valuable right, there is no proof in this record to show the value of that right when received, and, in the absence of such proof, we are unable to say that she did not receive during the months of November and December in 1931, and in 1932, and prior to the taxable year, amounts which equaled or exceeded the value of that right at the time she received it. Accordingly, under the theory advanced and on the facts in the record, it -was not error to treat the entire amount received in 1933 as income.

The same ruling must also follow with reference to fees earned or partially earned, but not paid at the time of Barth’s death. In Mulqueen v. Commissioner, 65 Fed. (2d) 365, affirming 25 B. T. A. 441, it was pointed out that the estate of a deceased attorney might well be said to have an inchoate right to some portion of the ultimate fee in a case on hand at the time of the attorney’s death and that this right was sufficient to form the basis for a contract with a second attorney to finish the work and pay over a portion of the fees when collected. There, as in this case, however, the proof did not show that any portion of the amounts received during the taxable year was attributable in any way to the interest of the deceased attorney in the work on hand at the time of his death. The court held in that case that under such circumstances it was not error to treat the whole amount as income. In the instant case it is quite likely that fees had been earned or partially earned, but not paid, at the time of Barth’s death and, to the extent that payments made by Baron to the petitioner represented such fees, those amounts were corpus and not income. There is no showing as to the extent of such fees at the time of Barth’s death, nor of his interest in work partially done, and, furthermore, we can not say on the record before us that amounts attributable to such fees and such work were not fully paid in 1931 and 1932, prior to the payments involved in the year 1933 before us. Accordingly, it was not error to treat the whole amount as income. Mulqueen v. Commissioner, supra. Cf. Walter T. Gudeon, 32 B. T. A. 100.

We are further of the opinion that this case falls within the doctrine of Bull v. United States, 295 U. S. 247. In that case it was provided that the estate of a deceased member of a partnership engaged in the business of ship brokers should receive for a period of one year the same share in the profits of the business as the deceased partner would have received if living. Certain amounts were received by the estate in excess of the deceased partner’s interest in the partnership profits accrued prior to his death. There, as in this case, no capital was invested by any of the partners. The Court said: “* * * the survivors have purchased nothing belonging to the decedent, who had no investment in the business and owned no tangible property connected with it. The portion of the profit paid his estate w~as therefore income and not corpus.” Later, in discussing the circumstances under which the payment of the specified share of the profits was to be made,, the Court further said: “The purpose may well have been to protect the good will of the enterprise in the interest of the survivors and to afford them a reasonable time in which to arrange for their future activities. But no sale of the decedent’s interest or share in the good will can be spelled out.”

Reviewed by the BoaRd.

Decision will be entered for the respondent.

AkuNdell,

dissenting: This case was tried and briefed on the narrow issue of whether the sum of $10,911.91 admittedly received by petitioner in 1933 was income from a partnership. Respondent contended that, by reason of the contract entered into between petitioner’s deceased husband and his partner, Baron, the death of the former did not serve to terminate the law partnership. On this point I think the respondent was wrong and the majority opinion does not question this conclusion. “Death operates as a dissolution of a partnership. The law has never been otherwise.” Exchange Bank v. Tracy, 77 Mo. 594. It seems equally clear that no new partnership was entered into between the surviving partner, Baron, and the estate of Judge Barth, or petitioner, individually. Exchange Bank v. Tracy, supra. It follows that on the issue raised the taxpayer should prevail.

I am further of the opinion that the sum received in 1933 was not income under any provision of the revenue act. As I construe the partnership agreement, the amount received was a partial liquidation of decedent’s interest in the partnership. At the time of Barth’s death he had an interest in the work then in process in the partnership office and the fees to be derived therefrom. ' That interest was an asset of his estate. Realizing the difficulty of fixing an exact valuation for that interest at any particular time, the partners agreed upon a method of liquidating it over a period of four years following the death of either one. It does not appear that the amount received by the widow exceeded the fair value of Barth’s interest in the firm at the time of death; at least, there is no claim that it does. Cf. City Bank Farmers Trust Co., Executor, 29 B. T. A. 190. It, therefore, seems wrong to me to affirm the Commissioner’s determination on this possibility, when it was not a point in issue, and the whole basis of the Commissioner’s determination has been shown to be wrong. Taylor v. Commissioner, 70 Fed. (2d) 619; affd., 293 U. S. 507.


author: HaRRon :

text:
    Mark D. Eagleton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79553.
    Promulgated March 2, 1937.

      Marie D. Eagleton pro se.

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

HaRRon :

Issue 1. — The first question for determination is whether the petitioner is entitled to deduct from gross income of the year 1932 the amount of $25,000, his investment in the preferred stock of the Bethlehem Pipe Fittings Corporation. Respondent disallowed the claimed deduction for the reason that it was “not substantiated.” ■

Section 23 (e) (2) of the Revenue Act of 1932 allows deductions from gross income for losses sustained during the tamable year if incurred in any transaction entered into for profit. Article 174 of Regulations 77 of the Bureau of Internal Revenue sets forth regulations applicable to obtaining allowance of a deduction for a loss arising from an investment in stock and provides that “If stock of a corporation becomes worthless * * * its cost or other basis * * * is deductible by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing is made of its worthlessness.”

The rule is well established that to deduct a loss arising out of an investment in stock the taxpayer must deduct the loss in the year in which it is sustained. DeLoss v. Commissioner, 28 Fed. (2d) 803; Leigh Carroll, 20 B. T. A. 1029; E. S. Lee, 15 B. T. A. 1213; Carl Muller, 4 B. T. A. 169. In the instant proceeding the question to be determined is whether the loss in question was sustained in the taxable year, 1932. If the stock had been worthless in 1931, as well as in 1932, petitioner would not be allowed to take the deduction for loss in 1932. Gowen v. Commissioner, 65 Fed. (2d) 923; certiorari denied, 290 U. S. 687; Squier v. Commissioner, 68 Fed. (2d) 25; Alfred K. Nippert et al., Executors, 32 B. T. A. 892.

In September 1931 the Bethlehem Pipe Fittings Corporation ceased all manufacturing and business operations. There is no evidence before us to show what the financial status of the corporation was at that time, but it appears from the record that the directors of the corporation decided then that the venture was not profitable and should be discontinued. The petitioner was the chief financial backer of the corporation, a director, owner of 50 percent of the preferred stock (according to his testimony), a creditor, and in close touch with those actively conducting the business. It is reasonable to assume that he was in a position to ascertain whether the corporation was solvent in 1931 and whether his stock had any value then, but the record is silent on this point. Petitioner at the hearing was put on notice by respondent that this item was disputed as a matter of fact and that proof as to facts was necessary.

In 1932 the corporation was dissolved. Prior to its dissolution, all assets were transferred to the petitioner in payment of the indebtedness to him of $44,000. The only evidence relating to the aggregate value of the corporation’s assets is petitioner’s testimony that in his opinion they were worth approximately $20,000. These assets consisted principally of a building which had cost the corporation $15,000 and against which there was a first mortgage lien of $11,000, which petitioner assumed, machinery, and other equipment which had been used. From the evidence it is doubtful whether these assets had a value greater than the amount of the debt to petitioner. We are of the opinion that the stock was worthless in 1932.

It is material to petitioner’s contention to show that the stock in question had some value at the end of the year 1931 to overcome any presumption that the loss was sustained prior to the taxable year, 1932. The petitioner, in effect, has asked that this be assumed. However, it is certainly doubtful whether the assets transferred to petitioner in 1932 had any greater value at the end of 1931 than they had in 1932 and there is no evidence before us to show that the corporation had any other assets in 1931 or that it was in a better financial condition at the end of that year than in 1932. From the record and in the absence of evidence to show that the corporation was solvent at the end of 1931, we are unable to assume that the corporation was in fact solvent at the end of 1931. If the corporation "was insolvent at the end of the year 1931, the loss on its stock was sustained in that year and petitioner should have deducted the loss in his return for the year 1931 without waiting until the corporation was liquidated or dissolved. See John Crosby Brown, 27 B. T. A. 176, 182; Squier v. Commissioner, supra.

The petitioner cites C. W. Deeds, 14 B. T. A. 1140; Henry W. Cushman, 13 B. T. A. 41; Edward J. Slater, 12 B. T. A. 60; and News Publishing Co., 6 B. T. A. 1257. However, those cases are distinguishable from the instant proceeding in that they involved going concerns whereas in the instant proceeding the corporation had ceased to do business in the prior year. The case of Fred Grittman, 11 B. T. A. 122, cited by the petitioner, is not here governing. There it appeared that although the corporation did not operate until about four years after the taxpayer first purchased its stock, it did not become insolvent, and its stock worthless, until the year in which the loss was claimed on the stock.

From a review of all the evidence, we are unable to determine that the claimed loss was sustained in 1932 so as to be deductible from gross income in the taxable year. The petitioner has failed to establish error in respondent’s disallowance of the deduction. Therefore, the respondent’s action in disallowing the loss for' 1932 is approved.

Issue ?j. — There is no question in this issue with respect to whether Waechter earned the total amount of $24,000 claimed as compensation paid to him in the taxable year, nor as to whether the salary was reasonable. The question is whether petitioner, on a cash receipts and disbursements basis, may deduct the amount of $19,000 as a business expense in the taxable year when payment was by checks which have never been cashed. The question is whether this amount was “paid or incurred” in the taxable year so as to be deductible under the provisions of section 43 of the Revenue Act of 1932.

Section 23 (a) of the Revenue Act of 1932 permits the deduction of salaries “paid or incurred” during the taxable year, and section 48 (c) of such act states that the term “paid or incurred” shall be construed according to the method of accounting on the basis of which the net income is computed. Section 43 of the same act sets forth the period for which deductions and credits shall be taken. (See also article 341 of Bureau of Internal Revenue Regulations 17.)

The petitioner was on a cash receipts and disbursements basis and he was required to make his return on that basis. If the amount in question was not paid in 1932 he may not take the deduction in that year. “It is the purpose of the [Revenue] Act to require returns that clearly reflect taxable income. That purpose will not be accomplished unless income received and deductible disbursements made are treated consistently.” See United States v. Mitchell, 271 U. S. 9. In that case the Court also stated that “it was not the purpose of the Act to permit gross income actually received to be diminished by taxes or other deductible items disbursed in a later year, even if accrued in the taxable year. It is a reasonable construction of the law that the same method be applied to both sides of the account.” The provisions of the revenue act referred to in the quotation are practically the same as the pertinent provisions in the Revenue Act of 1932 referred to above.

Payment by check is a conditional payment subject to the condition subsequent that the check is paid on presentation thereof to the drawee. When this method of payment is carried through to the performance of the condition subsequent, it is reasonable to conclude that the payment dates back to the time of giving the check, and it has been held accordingly. See Estate of M. A. Bradley, 19 B. T. A. 49, 52, and Commissioner v. Bradley, 56 Fed. (2d) 728, affirming 19 B. T. A. 49. In the case of the Estate of M. A. Bradley, it was pointed out by this Board that “to hold that delay in depositing a check suspends the maker’s rights until deposit, would introduce uncertainty into the determination of income so as to make accuracy in accounting impossible. It would distort the reasonable intention of the law.” In that proceeding the facts showed that a check given in payment of taxes on June 25, 1926, was duly paid on September 21,1926, and that the payment related back to the date of its delivery.

The issue here involved is not the same as in the case of Estate of M. A. Bradley, for the checks given to Waeehter in 1932 were never cashed, were returned to the petitioner before the close of the year. Also, the checks could not have been cashed, for at the end of 1932 petitioner’s bank balance was only $3,713 and on January 1, 1933, the bank account was closed. Waeehter was credited with $19,000 on the books of the partnership on January 1, 1933. After giving Waeehter this credit on the partnership books, Waeehter could withdraw money and the withdrawals probably would be considered as dating back to the date of the credit. We are not required to pass upon the effect of the credit in 1933 for income tax purposes of petitioner for that year, because that year is not before us. But the transaction throws light on the issue that is before us. We are unable to conclude that the credit given in 1933 was the same as cashing the checks given in 1932 so as to relate the payment back to 1932. Two methods of payment are involved — first, an attempted payment by checks which was not carried through to performance of presenting the checks to the drawee for payment; second, establishing a credit on a new set of books to the account of the employee involved. If the first method of payment had been carried out and the checks had been cashed in 1932 or 1933 payment would relate back to the time of giving the checks, under the general rule set forth in Commissioner v. Bradley, supra. But the payment involved was effectuated by the second method and we can not find any support for holding that the credit transaction resulted in payment to Waeehter as of any other date than the date of entry of the credit on the partnership books in 1933. In other words, we are unable to hold that the credit given in 1933 related the payment back to 1932. In so holding, we can see no element of uncertainty in determining petitioner’s income in the taxable year or jeopardy to accuracy of accounting, the elements going to the reasonableness of the rule of the case of the Estate of M. A. Bradley, supra. Shortly before the end of 1932 petitioner took back the checks, preventing any diminution of his income for the year 1932 and making it entirely possible to make accurate his accounting records for 1932 as to cash disbursed or subject to reduction by any outstanding checks. From petitioner’s testimony it is evident that he was aware that the arrangement with Waechter would keep cash on hand intact, for he stated as follows:

It takes a large sum of money to continue to try to do business with the necessity of advancing to clients. At one time we had over $200,000 in advances to clients alone. So, with that amount of money in the firm, I naturally wanted my partner to put in as much as he could, and if he could not put anything in, at least not to take any out.

It is therefore held that no payment was made in 1932 of the $19,000 involved, that petitioner is not entitled to the deduction, being on a cash basis, and the disallowance by the Commissioner is affirmed.

During 1932 petitioner gave Waechter a check for $10,000 for services performed in 1931 and Waechter cashed this check in 1932. Petitioner obtained a deduction of this amount in his income tax return for 1931. Consequently, there is no issue before us as to an amount of $10,000 paid in 1932. Petitioner has stated in his brief as follows: “Petitioner has at no time claimed, and does not now claim, that he should receive credit in his 1932 return for that payment [$10,000 back salary], having received credit therefor in his 1931 return.”

Issue 3. — The petitioner claims that the respondent erred in disallowing $2,153.22 of the deduction claimed as ordinary and necessary business expenses because the disallowed portion constitutes the expenses of maintaining the law office at 2318 Randolph Street. The evidence shows that the petitioner did use the office at 2318 Randolph Street in connection with his law practice, and, hence, any ordinary and necessary expenses paid in carrying on such business at that address are deductible. Sec. 23 (a), Revenue Act of 1932. No business other than the petitioner’s law practice.was carried on at that address, since the business formerly carried on by the Bethlehem Pipe Fittings Corporation had been abandoned. The petitioner’s acquisition, ownership, and use of that building, together with the machinery and supplies stored therein, were 'not related to his law business, except, of course, the use of the office. Some of the expenditures, so far as the evidence shows, may have been capital expenditures rather than business expenses; others may have been incurred to protect petitioner’s investment in the property and may not have had any relation to his law business.

Petitioner paid $551.3,0 interest on the mortgage outstanding on the Randolph Street property. In his income tax return he sought to deduct this amount as “rent” charged to himself as owner for office space. The building had been transferred to him by the Bethlehem Pipe Fittings Corporation. The facts show that this was payment of interest on the mortgage on the building. It is, therefore, not deductible as a business expense, but is deductible under section 23 (b) of the Revenue Act of 1932 as interest paid' on indebtedness. It is held that this amount is deductible.

Petitioner sought to deduct $254.75 paid for telephone service as a business expense. It has been found as a fact that petitioner used the Randolph Street building office in connection with his law practice, and that telephone service there was in connection with his law practice. Petitioner testified that checks introduced in evidence totaling $245.75 were paymfents for telephone service. There is a discrepancy of $9 unexplained, which appears to result from some inaccuracy. It is held that the amount of $245.75 is deductible as a business expense.

Respondent disallowed as unsubstantiated, $1,347.17, miscellaneous payments claimed deductible. From the evidence and in accordance with che findings of fact it is held that the following payments for various services at the Randolph Street building law office are deductible as business expenses: $10.90, towel service; $72.71, electricity; $36.81, gas service; total, $120.42.

From examination of the evidence, we are able to identify the following totals as payments for repairs to roof, $111.50; purchase of stove, $53.05;-insurance, $378.51, but there is no proof that all or any portion of each of these items were expenditures made in connection with the law office on Randolph Street. Also, there is no evidence to show whether any or all of the balance of $683.69 of miscellaneous expenditures relates to petitioner’s business. It is, therefore, held that these miscellaneous expenditures totaling $1,226.75 are not deductible.

Issue I. — This issue requires considering the character of petitioner’s business in handling cases brought to him by outside attorneys and whether the total fees collected from this business and all disbursements thereof should be reported by petitioner in his income tax return. Petitioner explains and argues that only part of these fees constitute his income and that he is only the conduit through which there passes certain fees “earned by”1 and belonging to outside attorneys; and that as for the fees belonging to others, he is not bound to make report of receipt or disbursement. According to his argument, respondent is in error in adding to his taxable income the amount of $16,618.84, because it is not his income and because the figure itself is not the difference between two accounts which balance each other.

Respondent’s theory is that all the fees collected by petitioner in the cases brought to him by outside attorneys are his fees and should be reported in his gross income; that the amounts paid to outside attorneys are in the nature of expense and should be deducted from gross income; that as a matter of logic, since petitioner collected $68,177.89 in fees for outside attorneys and paid them only $51,559.05, the difference must be in petitioner’s possession and must be included in petitioner’s taxable income. We do not agree with respondent that the amount of $16,618.84 is necessarily a true figure of a surplus of fees collected as against fees paid out..

It is elementary that the purpose of the income tax law is to tax income actually derived rather than constructively received, and it is assumed that individuals are not to be penalized for being the agency through which income is derived for someone else. See Bettendorf v. Commissioner, 49 Fed. (2d) 173, 175, 176. It has been held that the purpose of the income tax laws is to tax income to the person having the beneficial interest therein but not the mere collector or conduit of income belonging to another. See Central Life Insurance Society Mutual v. Commissioner, 51 Fed. (2d) 939. Hence, where a person receives money as trustee for another, the tax should not fall on the collector but on the person who has á beneficial interest therein, or if income is produced by property belonging to individuals jointly, and total income is collected by one, it has been held that the individual receiving the total income is taxable only on the portion in which he individually had the beneficial interest, the portion paid his associate or associates being received merely in trust for such party or parties. See Stephen J. Hallaban, 14 B. T. A. 584, 597.

In the instant proceedings the undisputed testimony of petitioner shows that he received cases from outside attorneys under agreement with them to divide the fees equally. In 1932 petitioner collected from these cases, $186,152.60. His share of the fees totaled $117,974.71. Associates’ fees totaled $68,177.89. Petitioner’s fees were about 63 percent of the total fees paid. From the evidence, we are satisfied that the fees allocated to associates were their fees ab initio by the terms of the agreement by which the cases were turned over to petitioner so that petitioner was only taxable for part of the fees yielded by the cases. The petitioner and the outside attorneys had a joint interest in these cases (the outside attorneys having obtained the cases in the first instance) and although petitioner collected the total of fees (the total income produced), he is taxable only on the portion in which he had a beneficial interest. During the taxable year petitioner’s interest in the total fees collected was $117,974.71. This he reported in his gross income. From the record and evidence before us, we are unable to determine that his interest consisted of any more than that amount. From petitioner’s sworn testimony we are satisfied that he was not entitled to and did not retain any part of the $68,177.89 collected for associates.

As for tlie amount of $16,618.84, we are not convinced that this figure represents an excess in petitioner’s favor in the accounts with associates so as to constitute income as alleged by respondent. It is apparent that petitioner’s associate attorneys had something of a drawing account with petitioner. He paid them fees which he collected for them, but he also advanced money to them in anticipation of making collections. At the end of a year the outside attorneys may not have received all held for them in their account of collections, or it is possible they might have overdrawn. But from the method of keeping the accounts, we believe respondent was in error in regarding as one account the credit account of fees collected for associates in 1932 and the debit account of amounts disbursed to associates in 1932, for these two sets of figures are not debits and credits of one account. There is no possibility of a true balance. Upon the undisputed testimony of petitioner, we are satisfied that he reported his entire income in the taxable year and that he did not retain as his own unreported income any of the fees collected by him for associate attorneys.

From the record and the testimony of petitioner, we are of the opinion that he has reported his full income for the taxable year and that consequently respondent was in error in adding the amount of $16,618.84 to petitioner’s taxable income.

Eeviewed by the Board.

Judgment will be entered under Rude 50.

ARUndell and Turner dissent on the holding covered by the second headnote.

       SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
      The deductions and credits provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or Incurred”, dependent upon the method oí accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.


author: MuRdook:

text:
    Claude Neon Electrical Products Corporation, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75685.
    Promulgated March 5, 1937.

      Frank Mergenthaler, Esq., for the petitioner.

      I. N. TuTlar, Esq., for the respondent.
   OPINION.

MuRdook:

The petitioner is a Delaware corporation. It owned at all times material hereto all of the outstanding stock of the Electric Products Corporation, a California corporation, referred to in the stipulation as the California Corporation. Epco was organized on October 27, 1930. At all times during its corporate existence its out.standing capital stock was owned by the California Corporation. The income of Epco and of the California Corporation for 1931 was included in the consolidated income tax return filed by the petitioner for the year 1931. The principal activities of Epco consisted of the purchase of the petitioner’s common stock and the resale of that ■stock. During 1930 it sold the stock only to employees of the affiliated companies without attempting to make a profit on the sales. During that year it purchased 5,005 shares from the California Corporation and 201 shares from the petitioner, and sold 4,721 shares to employees. This left 485 shares which it carried on its books at the beginning of 1931 at cost. It purchased, during 1931, 3,060 shares from the California Corporation, and received 100 shares as a stock dividend. It acquired by purchase from other sources during the year, 1,275 shares. It sold during the year, 124 shares to employees of the affiliated companies, 500 through brokers, and 1,152 directly to the public. Sales of 569 shares to employees were canceled during the year, as were sales of 215 shares to the public. Thus Epco at the close of 1931 had on hand 3,928 shares of the common stock of the petitioner. Epco realized a profit of $4,162.38 from the sale of the stock of the petitioner in 1931. The fair market value of the 3,928 shares which it had on hand at the close of 1931 was $27,496 less than the cost to it of those shares. The foregoing is a partial summary of the stipulated facts.

The statute provides that inventories shall be taken whenever, in the opinion of the Commissioner, their use is necessary in order to determine clearly the income of a taxpayer. Sec. 22 (c), Revenue Act of 1928. The Commissioner promulgated Regulations 74, containing article 105 relating to inventories by dealers in securities and providing that a dealer in securities who in his books of account regularly inventories unsold securities on hand in one of the three approved methods may make his return upon the basis used in his accounts. It defines a dealer as a merchant of securities with an established place of business regularly engaged in the purchase of securities and their resale to customers with a view to the gains and profits that may be derived therefrom. This has been held to be a proper regulation. The stipulation of facts and the additional evidence show that Epco at the close of 1931 was a merchant of the common stock of the petitioner, with an established place of business, and was regularly engaged in the purchase of those securities and their resale to customers with a view to the gains and profits that might be derived therefrom. Thus it was a dealer within the definition of that term contained in the Commissioner’s regulations. In its books of account, beginning 1931, it regularly inventoried all of the unsold common stock of the petitioner which it had on hand. Its method of inventorying was at cost or market, whichever was lower. That was one of the three methods approved by the regulations. Therefore, under the statute and the regulations promulgated by the Commissioner, Epco had a right to make its return for 1931 upon the basis used in its accounts, that is, upon the basis of inventorying at market, which was lower than cost, its holdings of unsold common stock of the petitioner.

The Commissioner argues, in support of his action denying the use of inventories to Epco, that the statute placed an important discretionary power in him relating to the use of inventories and his determination carries great weight. The statute did indeed give the Commissioner a great deal of authority and discretion in regard to the use of inventories, but, having promulgated a regulation of general application, the Commissioner can not deny its effect to one taxpayer which comes within its provisions. The respondent contends further that Epco did not meet the requirements laid down by article 105, since it did not regularly inventory unsold securities, did not inventory all securities by the same method, and was not consistent in the method used although it did not obtain permission of the Commissioner to change its method. He says Epco did not regularly inventory its unsold securities because it had no opening inventory for the year 1930 at cost or market, whichever was lower. However, the evidence shows that Epco became a dealer during the year 1931 and was not a dealer during 1930 or at the beginning of 1931. Thus it had no right to use a closing inventory for 1930 or to use an opening inventory at market for 1931. It had a right to carry its securities at cost at that time. A taxpayer beginning business as a dealer in any year takes up its securities at cost and uses for the first time an inventory at market at the close of the first year. The case of Epco is no different. Since this is so, and since Epco used the inventory method at the close of 1931, which was the first time it was entitled to use that method, it was not offending that part of the regulations which provides that the inventory method must be adhered to in subsequent years unless another be authorized by the Commissioner. Beginning with the closing inventory of 1931, Epco regularly inventoried the common stock of the petitioner. Epco at the close of 1931 owned, in addition to the common stock of the petitioner, 10 shares of tlio preferred stock of the petitioner. It did not inventory the preferred shares and does not claim the right to inventory them. The Commissioner argues that this is in violation of the regulation that all securities must be inventoried by the same method. The regulation, however, means only that all securities in which the taxpayer is a dealer must be inventoried by the same method and recognizes that a dealer may have other securities which need not be inventoried. The evidence shows that Epco met the requirements for the use of inventories. The Commissioner acted contrary to his own regulations in denying to Epco the use of a closing inventory for the year 1931.

The final argument made by the Commissioner in his brief is that Epco was not a dealer entitled to the use of inventories because its only activity and primary function was the distribution of the common stock of its parent. He finds no specific support for this argument in his regulations, but cites as his only authority the case of Berks County Trust Co. v. Commissioner, 78 Fed. (2d) 810, in which the court quoted with approval the following statement made by the Board Member from the bench at the close of the hearing:

One wlio undertakes as the agency of a project to exploit the securities of that project and nothing else, who does not buy and sell securities, qua securities, but who undertakes only to sell the securities of a particular project, of one company, is not within the language of the regulations and was not within the intention of the statute.

The facts in that case were that William A. Sharp, with an associate, organized a corporation to build a hotel on ground to be sold to the hotel by Sharp. The two promoters subscribed for all of the preferred stock. The hotel was built and first and second mortgages in the total amount of $1,700,000 placed on it. The two associates bought some of the second mortgage bonds and agreed to sell the balance of the second mortgage bonds, amounting to $400,000. The portion of these which Sharp was unable to sell, he purchased solely for the purpose of sale and not as an investment. He maintained an office during 1930 for the purpose of selling these bonds, and devoted most of his time to that work. He employed a salesman and sold $45,000 worth of the bonds during 1930. In his return for that year he deducted the difference between the market value of the bonds as of January 1, 1930, and the market value thereof on December 31, 1930, claiming that he Avas a dealer in securities. The court held that in view of the facts of the particular case, Sharp Avas not a dealer in securities as contemplated by the regulations. The compass of that decision should not be expanded to embrace the present case, where the facts are different. It does not appear that Epco Avas used during 1931 primarily to exploit the securities of its parent as opposed to buying and selling the stock as stock. It purchased a substantial part of the stock Avliich it had for sale from outside sources and the evidence as a whole indicates that it was not used by its parent merely as an agency for the distribution of the stock. On the contrary, the evidence indicates that its principal function was to earn a profit.’ Furthermore, the Commissioner has placed such limitations upon the use of inventories as he, in the exercise of his discretion, has deemed proper and sufficient. The Board will not further narrow the use of inventories by prescribing additional limitations sufficient to deny the use of inventories to Epco.

Reviewed by the Board.

Decision will he entered wider Rule SO.


author: Millee : Hill,

text:
    Herman A. Holsten, as Ancillary Executor for the Estate of Luisa Terry Ponvert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81568.
    Promulgated March 9, 1937.

      J. Robert Sherrod, Esq., for the petitioner.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Millee :

This is a proceeding involving a deficiency in estate tax in the amount of $104,539.90. The issue is whether or not respondent erred in including in the gross estate of decedent, a nonresident alien, as property situated in the United States, the value of certain bonds issued by private and public corporations of the United States, which bonds were physically located in Cuba at the time of decedent’s death.

The decedent, Luisa Terry Ponvert, at the time of her death on January 8, 1934, was a citizen and resident of Cuba, and was not engaged in business in the United States.

At the time of her death decedent was the oivner of certain bonds having a value, including accrued interest, of $872,544.30, at which value they were included by respondent in decedent’s gross estate in determining the deficiency involved herein. Said bonds were all physically located in Cuba at the time of decedent’s death. They had been, theretofore, issued by domestic corporations of the United States, the United States Government, the United States Federal Land Banks, and states and municipalities of the United States. The bonds were all coupon and not registered bonds.

The Federal Land Bank bonds included among the bonds herein-above referred to had a face value of $170,000 and a fair market value, plus accrued interest, at the time of' decedent’s death, of $160,609, at which last stated value they were included by respondent in decedent’s gross estate.

The applicable statute is the Revenue Act of 1926, which, so far as material here, is set forth in the margin.

The question presented is whether the property in controversy constituted a part of the gross estate of the alien decedent, Ponvert, situated in the United States, within the meaning of the statute, at the time of decedent’s death. In our opinion, such was .not the intent of Congress.

The Supreme Court has decided that similar bonds, physically situated in the United States, were properly included in the estate of a nonresident decedent, for purposes of tax determination. Burnet v. Brooks, 288 U. S. 378. In the instant case, the Commissioner proposes that we go one step farther and hold that such bonds, physically situated in Cuba, were actually situated in the United States. So to hold would distort the meaning of the word and the intent of the statute.

A careful reading of the statute shows that Congress intended to use a different basis for tax determination in the case of a nonresident alien decedent. It selected as a method of establishing that basis, the test of situs of property in the United States; except that stock in a domestic corporation, owned and held by a nonresident, was required to be included, regardless of situs. It would have been easy, if Congress had wished, to require the inclusion as well, of bonds issued by domestic corporations. This it did not do, and the special provision regarding stocks, is, in itself, evidence of intent to treat bonds as in a separate class, and to require their inclusion only when they are actually, physically situated in the United States.

In determining legislative intent we must assume that the principles impliedly invoked by the statute were principles of law theretofore declared and then held. It would be quite inadmissible to assume that the Congress was legislating in disregard of existing doctrine. Burnet v. Brooks, supra. The distinction made, by the provisions of the statute, between bonds and stocks in domestic corporations follows, logically, principles of law theretofore established. Those principles are clearly set out by Beale in his treatise on Conflict of Laws (vol. 1, p. 573), as follows:

A bond is a “common law specialty” and bas a situs at the place where it is situated; it is in all respects libe a chattel. A bond therefore should be held to be taxable at its situs and not taxable elsewhere except at the domicil of the owner, in those states where the right to tax is settled by authority, though contrary to legal principle.
The true nature of a share of stock in a corporation is that it confers upon the owner of the share membership in the corporation. The stock is a creature of the law that created the corporation, and its ownership depends solely upon the provisions of that law. The right of the owner of the stock is therefore created and guarded by the law of one state, and always within the power of that law; and must be regarded as within its juridiction. This says the Supreme Court of the United States, is “the law of the property.” It has accordingly been held that a state which charters a corporation may tax the shares of its capital stock, even though owned by a non-resident.

Another guiding principle, applicable in the taxation of nonresident aliens, is set forth in a statement of White, C. J., speaking for the Court in United States v. Goelet, 232 U. S. 293:

It may not be doubted, as observed by the trial court in these cases (omitting the consideration of taxes imposed on property having a situs within the jurisdiction of the taxing authority), speaking in a general sense, that the taxing power, when exerted, is not usually applied to those even albeit they are citizens, who have a permanent domicil or residence outside of the country levying the tax. Indeed, we think it must be conceded that the levy of such a tax-is so beyond the normal and usual exercise of the taxing power as to caxise it to be, when exerted, of rare occurrence and in .the fullest sense exceptional.

and in United States v. Bennett, 232 U. S. 299, the same principle was restated, to the effect that a statute “would not be construed without clear intendment manifested to that effect as including a tax on a citizen permanently domiciled outside of the geographical limits of the United States.” The Court went on to say that as taxing statutes are usually confined to persons within the territorial jurisdiction of a taxing authority, and that to do otherwise would be exceptional, the statute involved should not be construed as having been adopted to accomplish such unusual and strange results, unless such a view was compelled by its terms.

The taxing statutes of the United States have been extended to include the transfer of property by citizens, and aliens as well, permanently domiciled outside of the United States. Nevertheless, the principle still stands, that such statutes should be construed according to their “clear intendment.” Unless the interpretation contended for by the Commissioner, of the applicable statutes involved in the instant case, is compelled by their terms, such interpretation should not be adopted.

Reliance can not be placed upon Burnet v. Brooks to secure the result desired by the Commissioner; in fact, the reasoning in that case leads to the exactly opposite conclusion. The Court, in that case, began its consideration of the question of legislative intention in the enactment of the pertinent sections as follows:

As to tangibles and intangibles alike, it made the test one of situs, and we think it is clear that the reference is to property which according to accepted principles, could be deemed to have a situs in this country for the purpose of the exertion of the federal power of taxation. [Italics supplied.]

What were the accepted principles to which the Court referred, and which were in the mind of Congress ? Answering this question, the Court went on to say:

The argument is pressed that the reference to situs must, as to intangibles, be taken to incorporate the principle of mobilia sequuntur personam and thus, for example, that the bonds here in question though physically in Nciv Yorh should be regarded as situated in Cuba where decedent resided. But the Congress did not enact a maxim. When the statute was passed it was well established that the taxing power could reach such securities in the view that they had a situs where they were physically located. As securities thus actually present in this country were regarded as having a situs here for the purpose of taxation, we are unable to say that the Congress in its broad description, embracing all property “situated in the United States,” intended to exclude such securities from the gross estate to be returned and valued. [Italics supplied.]

The conclusion is inescapable that the Court in Burnet v. Brooks, supra, relied upon the physical presence of the bonds in the United States, to bring them within the established principles referred to. In the instant case the bonds were physically present in Cuba. The doctrine of mobilia sequuntur personam is not involved. De Ganay v. Lederer, 250 U. S. 376. It is a question of physical situs. That is the test established by Congress. Applied in the case of Burnet v. Brooks, that test brought the bonds in question within the language of the statute. Applied in the instant case, that test excludes such bonds from the gross estate contemplated by Congress as a basis for tax determination.

The conclusion set out above is further confirmed by another statement of the Court in Burnet v. Brooks, supra, where, in considering the possibility of violation of established principles of international law in the imposition and collection of taxes, the Court said that the bonds, physically situated in the United States as they were, were “within the reach of the power which the United States by virtue of its sovereignty could exercise as against other nations * * *. This, view of the scope of the sovereign power [it said] in the matter of the taxation of securities physically within the territorial limits of the sovereign is sustained by high authority and is a postulate of legislative action in other countries” (italics supplied), citing Winans v. Attorney General (1910), A. C. 27.

The Supreme Court, in Burnet v. Brooks, supra, went on to examine carefully the language of the various revenue acts from 1916 to 1924, inclusive, together with the rulings of the Commissioner of Internal Revenue and the Treasury regulations which had been promulgated over a period of years, for the purpose of interpreting the words “situated in the United States” as they had appeared in each of the acts referred to. As the opinion clearly shows, these rulings and regulations, uniformly, spoke in terms of bonds, actually physically situated in the United States. They also spoke, uniformly, of stock in domestic corporations, regardless of physical situs. By way of summary the Court said:

We find no ground for questioning the intention of the Congress, when in the Revenue Act of 1924 it reenacted the provision as to the property of nonresidents “situated in the United States”, to impose the tax with respect to-bonds physically within the United States and stock in domestic corporations. Brewster v. Gage, 280 U. S. 327, 337, 50 S. Ct. 115, 74 L. Ed. 457. [Italics supplied.]

The language of section 303 (b) in the Revenue Act of 1924 is identical with the language of section 303 (b) in the Act of 1926. As the Treasury Department regulations issued in connection with the 1924 Act (Regulations 68, art. 50, T. D. 3683) again spoke in terms of bonds physically present in the United States, the statement of the Court, above quoted, becomes even more conclusive of the intent of Congress in reenacting the same provision of the 1926 Act. The reference to Brewster v. Gage, 280 U. S. 327, cited by the Supreme Court, reads as follows:

It is the settled rule that the practical interpretation of an ambiguous or doubtful statute that has been acted upon by officials charged with its administration will not be disturbed except for weighty reasons. [See also Guaranty Trust Co. of New York v. Commissioner, 79 F. (2d) 245, (Second Circuit), 16 A. F. T. R. 245 and cases there cited.]

There can be no doubt that the Supreme Court in Burnet v. Brooks, supra, had clearly in mind the different theory used for the inclusion of domestic stocks; for while it spoke in every instance of the actual, physical presence of the bonds in the United States as the basis of inclusion for tax purposes, it spoke equally clearly of the fact that physical situs was not necessary in the case of domestic stocks: '

We think that the Government’s construction of the provision is the more reasonable one, that the place where the stock was held was not an element in the application of section 303 (d) and that this provision was designed to insure the inclusion of the stock of a domestic corporation in all cases whether the certificates were physically present in the United States or not.

The Treasury Department regulations adopted under the Revenue Act of 1924, contained further evidence of adoption of the interpretation which we have placed upon the words “situated in the United States.” As the Court said in Burnet v. Brooks, supra, these regulations :

* * * expanded the provision as to the “situs of property of nonresident decedents” so as to include stock in foreign corporations when the certificates were held, hero, by providing: “Real estate within the United States, stocks and bonds physically in the United States at date of death, moneys due on open accounts by domestic debtors, and stock of a corporation or association created or organized in the United States, constitute property having a situs in the United States”. Reg. 68, Art. 50, T. D. 3683. [Italics supplied.]

Thus, we see that when a new type of property (stock in foreign corporations) was brought to the attention of the Treasury Department for classification under the act, it adopted a regulation making such foreign stocks, together with bonds, subject to inclusion for purposes of taxation, only if physically situated in the United States.

Congress was informed of this regulation and of the several preceding ones, when it reenacted sections 302 and 303 of the Revenue-Act of 1924, in the Act of 1926. We assume that by such reenactment, it expressed its intention to continue in effect the interpretation set out in these successive regulations; thus excluding from the gross estate of a nonresident alien decedent, for purposes of tax determination, such bonds as are here involved.

Reviewed by the Board.

Decision will be entered for the petitioner.

Hill,

dissenting: The majority opinion proceeds upon the theory that the tax in controversy is measured by the value of the decedent’s property, which at the time of his death, was “situated in the United States”; that the question of what constitutes property situated in the United States within the meaning of the statute is one of legislative intention, which must be determined in the light of those accepted principles pursuant to which property may be deemed to have a situs in this country for the purpose of Federal taxation; and that, upon authority of Burnet v. Brooks, 288 U. S. 378, it was well established when the statute was enacted that the taxing power could reach stocks and bonds physically present in the United States, in the view that they had a situs where they were physically located.

With so much I agree, but error lies, I think, in predicating the majority opinion upon the assumption that intangibles, such as stocks and bonds, have a taxable situs only at the place where the certificates are physically located, or that such was the accepted doctrine at the time the applicable revenue act was passed.

While it was held in the Brooks case, supra, that stocks and bonds of a nonresident alien decedent physically present in New York were includable in the decedent’s gross estate, the Supreme Court in its opinion said nothing to indicate that the place where the certificates were physically located constituted the sole taxable situs, nor that the domestic bonds, which comprised part of the Brooks estate, were not also subject to the tax because the domicile of the debtors was. in the United States. All of the securities involved in that case were in this country, and hence it was sufficient for the Court to predicate its holdings solely upon that ground.

It is to be noted, however, that, in addition to the securities mentioned, Brooks at the time of his death had a credit balance of $14,517.98 representing cash on deposit with Lawrence Turnure & Co. in New York City. Section 303 (e) pf the Revenue Act of 1926 provides that moneys, deposited with any person “carrying on the banking business” by or for a nonresident decedent who was not engaged in business in the United States at the time of his death, shall not be deemed property within the United States. The Board found that the decedent was not engaged in business in the United States at the time of his death, but did not find as a fact whether or not Turnure & Co. was carrying on the banking business, since that point was immaterial in the view of the case taken by the Board. The Supreme Court in its opinion said:

The securities should be included in the gross estate of the decedent; the inclusion of the balance of the cash deposit will depend, under the statute, upon the finding to be made with respect to the nature of the business of the concern with which the deposit was made.

The Court further pointed out that in the exercise of its power Congress, save as stated, “did not except debts due to a nonresident from resident debtors.”

Thus, the view of the Court was clearly indicated that unless the deposit came within the specific exemption of the statute, that is, unless Turnure & Co. was engaged in the banking business, the amount' of the deposit would be includable in the gross estate. Yet, the deposit was merely a domestic credit owned at the time of his death by a nonresident alien decedent, and obviously could not be included in his gross estate under the theory applied to the securities physically located in this country. Such credit, it would seem, could be said to come within the purview of the taxing statute only because of the then accepted principle that domestic credits had a situs for taxation at the domicile of the debtors.

Prior to Farmers Loan & Trust Co. v. Minnesota (January 6, 1930), 280 U. S. 204, it had long been the accepted doctrine of the courts of this country that intangibles, such as bonds and other securities, might have a taxable situs in four jurisdictions, namely, (1) at the domicile of the creditor or owner, Kirtland v. Hotchkiss (October 1879), 100 U. S. 491; Bullen v. Wisconsin (April 10, 1916), 240 U. S. 625; (2) at the debtor’s domicile, Blackstone v. Miller (January 26, 1903), 188 U. S. 189; Liverpool, etc., Insurance Co. v. Orleans Assessors (May 15, 1911), 221 U. S. 346 (and authorities there cited); (3) at the place where the instruments are found— physically present, De Ganay v. Lederer (June 9, 1919), 250 U. S. 376 (and authorities cited) ; and (4) within the jurisdiction where the owner has caused them to become integral parts of a localized business, Board of Assessors v. Comptoir National (November 30, 1903), 191 U. S. 388; Metropolitan Life Insurance Co. v. New Orleans (April 8, 1907), 205 U. S. 395.

At the time of the enactment of the Revenue Act of 1926, which is the statute governing this proceeding, it was an accepted principle, long theretofore established by decisions of the Supreme Court of the United States, that debts had a situs for taxation at the domicile of the debtors. This doctrine was equally as well established as the principle that securities are also subject to tax in the jurisdiction where the instruments are found — physically present — the basis upon which was rested the decision in the Brooks case.

Blackstone v. Miller, supra, decided January 26, 1903, involved the question of the power of the State of New York to impose a succession or transfer tax upon debts, including a deposit in a trust company, owing by residents of New York to a citizen of Illinois, who died domiciled in that state. The New York statute levied the tax only “on property within the State” where the decedent was a nonresident of the state at the time of his death. Thus, the question was whether the debts involved constituted property within the State of New York, the domicile of the debtors. The Supreme Court upheld the right of New York to impose the tax, holding that the debts had a taxable situs in the state of the debtors’ domicile, notwithstanding they were also taxable in Illinois, saying:

If the transfer of the deposit necessarily depends upon and involves the law of New York for its exercise, or, in other words, if the transfer is subject to the power of the State of New York, then New York may subject the transfer to a tax. United States v. Perkins, 163 U. S. 625, 628, 629; McCulloch v. Maryland, 4 Wheat. 316, 429. But it is plain that the transfer does depend upon the law of New York, not because of any theoretical speculation concerning the whereabouts of the debt, but because of the practical fact of its power over the person of the debtor. * * * What gives the debt validity? Nothing but the fact that the law of the place where the debtor is will make him pay. * * *
Power over the person of the debtor confers jurisdiction, we repeat. And this being so, we perceive no better reason for denying the right of New York to impose a succession tax on debts owed by its citizens than upon tangible chattels found within the State at the time of the death.

And in Liverpool, etc., Insurance Co. v. Orleans Assessors, supra, decided May 15, 1911, the Court said:

The legal fiction, expressed in the maxim mobilia sequuniw personam yields to the fact of actual control elsewhere. And in the case of credits, though intangible, arising as did those in the present instance, the control adequate to confer jurisdiction may be found in the sovereignty of the debtor’s domicile. The debt, of'course, is not property in the hands of the debtor; but it is an obligation of the debtor and is of value to the creditor because he may be compelled to pay; and power over the debtor at his domicile is control of the ordinary means of enforcement. Blackstone v. Miller, 188 U. S. 205, 206. Tested by the criteria afforded by the authorities we have cited, Louisiana must be deemed to have had jurisdiction to impose the tax. The credits would have had no existence save for the permission of Louisiana; they issued from the business transacted under her sanction within her borders; the sums were payable by persons domiciled within the State, and there the rights of the creditors were to be enforced. If locality, in the sense of subjection to sovereign power, could be attributed to these credits, they could be localized there. If, as property, they could be deemed to be taxable at all, they could be taxed there.

Bonds, like simple contract debts, are merely choses in action, and their situs for purposes of taxation is to be determined under the principles applicable to similar intangibles. This is made plain by the opinion of the Court in Blodgett v. Silberman, 277 U. S. 1, from which the following is quoted :

The question here is whether bonds, unlike other choses in action, may have a situs different from the owner’s domicile, such as will render their transfer taxable in the State of that situs, and only in that State. We think bonds are not thus distinguishable from other choses in action. * * * While bonds are so treated, they are nevertheless in their essence only evidences of debt.

That Congress had the power or jurisdiction to impose the tax in dispute is conceded by the prevailing opinion, and" I think it is so clearly settled by the BrooTcs decision as not to require discussion here. Bather, the question is whether the bonds, by the value of which the present tax is measured, constituted property “situated in the United States”, as that term was used by Congress in the statute.

In Burnet v. Brooks, supra, the Court in its opinion said:

Again, so far as the intention of the Congress is concerned, we think that the principles thus impliedly invoked by the statute were the principles theretofore declared and then held. It is quite inadmissible to assume that the Congress exerting federal power was legislating in disregard of existing doctrine, or to view its intention in the light of decisions as to state power which were not rendered until several years later.

(Blackstone v. Miller, supra, was not overruled until 1930, nearly four years after the enactment of the Bevenue Act of 1926.)

As shown above, the doctrine theretofore declared and then held at the time the 1926 Revenue Act was passed recognized that domestic credits, such as the bonds we are concerned with in this case, had a taxable situs at the domicile of the debtors, as well as at the place where the certificates or paper evidences were physically located, or at the domicile of the creditors or owners, or where they had become parts of a localized business. It follows that for precisely the same reason which the Court found sufficient in the Brooks case, the bonds here in question should be included in decedent’s gross estate.

It is unimportant that the doctrine referred to, as applied to the power of a state to tax under the Fourteenth Amendment, was later overruled in Farmers Loan & Trust Co. v. Minnesota, supra. It was an accepted principle at the time of the enactment of the taxing statute, and is controlling in the determination of the Congressional intendment.

Furthermore, the Supreme Court, in the later case of First National Bank of Boston v. State of Maine, 284 U. S. 312, took care to point, out that it was there dealing with the power of the states; under the due process clause of the Fourteenth Amendment, and, after discussing the desirability that the taxation of intangibles, as well as tangibles, be limited to one state, the Court solved the problem as to which of the states should be permitted .to impose the tax by applying the maxim mobilia segmmtur personam. That the rule there laid down as applicable to the states does not apply to the Federal Government was positively and definitely stated in the Brooks case, wherein the Court, in dealing with a case under the Federal estate tax statute, rejected the doctrine of mobiUa sequuntur personam which it had applied in the decision just mentioned.

For the reasons indicated, it is my opinion that the decision in the case at bar should be for the respondent. ' .

TURNER agrees with this dissent.

       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 * * *.
      Sec. 303. Por the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      * * * a- * # *
      (b) In the case of 'a nonresident, by deducting from the value of that part of his gross estate which at the time of his death is situated in the United States * * *.

       [Revenue Act of 1926.] Sec. 303. (d) Por the purpose of this title stock in a domestic corporation owned and held by a nonresident shall be deemed property within the United States * * *.

       See also People, etc. v. Graves, - U. S. - (January 4, 1937), where the Supreme Court said: “Where we speak of a ‘business situs’ of intangible property in the taxing State we are indulging in a metaphor.”