text:
    Barbara Archer, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64163, 64165-64168, 64171-64173.
    Promulgated February 9, 1938.

      William H. Oppenheimer, Esq., and Robert Leach, Esq., for the petitioners.

      Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Doris C. Archer; Doris L. Archer; Lou Ella H. Archer (now Mrs. L. A. Elliott) ; Shreve M. Archer, Jr.; Georgianna Archer; Helen H. Archer; and Harriet H. Archer.

   OPINION.

Smith:

These proceedings, consolidated for hearing, involve income tax deficiencies for 1929 as follows:

The petitioners, residents of Minneapolis, Minnesota, and vicinity, are beneficiaries of the Archer Trust, which was created in 1919. The income of the trust was distributable annually. The questions in issue relate to the determination of the net income of the Archer Trust for 1929. The petitioners allege as errors in the determination of the net income of the trust the following disallowances by the respondent:

(a) Losses on sale of securities owned by the trust of $294,266.12.
(b) Loss of $33,000 paid by the trust to carry out and make good the act of Shreve M. Archer in endorsing as an agent of the trust and for its accommodation certain paper of Healy-Owen-Hartzel Co., in which company the trust was interested.
(c) Loss of $69,000 on sale of stock owned by the trust in the Capital National Bank of St. Paul.

By an amended answer in the case of each petitioner the respondent alleges that he erred in considering the profit on the sale by the trust of 444.6 shares of Northwest Bancorporation stock taxable under the capital gain provisions of the Revenue Act of 1928, instead of taxing it as ordinary income, and claims an increased deficiency due from each petitioner by reason of such mistake.

The points in issue will be considered in order.

A. — Loss of $894, 866.18 on Sale of Securities Owned by the Trust.

Findings of Fact. — On January 1, 1919, members of the Archer family created by written instrument a trust, hereinafter designated the Archer Trust, and transferred to it certain property for administration by the trustees under the terms of the trust instrument. In 1929 the Archer Trust sold over $3,000,000 worth of securities, realizing gains upon some sales and losses upon others.

During the latter part of the year 1929 the trust desired to sell additional securities. Prices of securities were greatly depressed. The trust found a purchaser for the securities in the person of Doris C. Archer, one of the beneficiaries.

At the time Doris C. Archer owned securities of a value between $200,000 and $300,000. On December 31, 1928, she had to her credit on the books of the trust an additional amount of $254,557.12. This was her absolute property, which she was entitled to withdraw at any time. During 1929 she had credited to her account an additional sum, as income from the trust, amounting to $77,560.22,, making a total credit to her account of $332,117.34. This was her absolute property, which she had the right to withdraw at any time.

In November or December of 1929 the trust sold to Doris C. Archer, at the then market prices, securities for $384,053.50. The trust sustained a loss upon the sale of the securities amounting to $294,266.12. In its return for 1929 the trust deducted from gross income this loss of $294,266.12, which has been disallowed by the respondent in determining the net income of the trust.

Doris C. Archer paid for the securities in part with the credit standing to her account upon the books of the trust. The balance of the money necessary to pay for the securities purchased from the trust was given to her by her husband, Shreve M. Archer, one of the trustees. Certificates for all of the securities thus purchased by Doris C. Archer were delivered to her in 1929 by the trust and deposited by her in her own safety deposit box. In most instances the securities were transferred into her name upon the books of the corporation which had issued them in 1929. In a few instances, however, the transfer was not made of record on the books of the issuing corporation until after the close of 1929.

There was no agreement or understanding between Doris C. Archer and the trustees, or any other person, that the securities thus purchased by her would ever be reacquired by the trust. It was the intention of the trustees to part with all right, title, and interest in and to the securities sold. The sales were bona fide and the trust sustained a loss upon the sales in the amount of $294,266.12.

Opinion. — The reason for the disallowance by the respondent of the claimed loss of $294,266.12 upon the sale of securities to Doris C. Archer is not entirely clear. There is nothing in the record which indicates that the sales were not bona fide.

The mere fact that the purchaser was a beneficiary of the trust selling the securities can not invalidate an otherwise valid sale. There is nothing illegal in a beneficiary purchasing securities frpm a trust. Hartford-Connecticut Trust Co. v. United States, 10 Fed.Supp. 179. In that case the District Court said:

The contention of the defendant that the transaction was a sham because the parties to the sale were trustee and life beneficiary of the trust estate, and the subject-matter was an item belonging to the trust corpus, is without merit. For the principles of general jurisprudence and the Revenue Act itself alike treat the trust as a separate entity. * * *

To the same effect see Terry v. United States, 10 Fed. Supp. 183; Marston v. Commissioner (C. C. A., 2d Cir.), 75 Fed. (2d) 936; Edward Mallinckrodt, Jr., 14 B. T. A. 194; Ida C. Calloway et al., Executors, 18 B. T. A. 1059; Budd v. Commissioner, 43 Fed. (2d) 509.

We do not think it material that Shreve M. Archer furnished a part of the funds for the purchase of the securities. Upon the authority of the above cited cases sales to the trustee would have had the same validity as sales to a stranger.

In his brief the respondent contends that the petitioners have fallen down upon their proof as to the amount of the claimed losses in that they have not shown the cost to the trust of the securities sold. The respondent states :

In determining a loss on the sale of securities it is elemental that the cost thereof must be established by competent evidence. Petitioners in their brief make no reference whatever to the details of the acquisition of these stocks nor is any reference made to the costs thereof. Evidently petitioners rest upon the ledger sheets of the Archer Trust as proof of the cost of the stocks here in question. These were introduced by petitioners’ witness H. E. Hyre, a public accountant in Minneapolis who first became accountant for the Archer Trust in 1927. Respondent submits that these ledger sheets have no probative value in showing the cost of the several securities here involved. * * *

Neither in the deficiency notice nor at the hearing of these proceedings was any question raised by the respondent as to the correctness of the accounts of the Archer Trust as showing the losses sustained upon the sale of the securities. There is nothing to indicate that the respondent questioned the correctness of the net income of the Archer Trust as shown by its books of account in respect of the sales of nearly three million dollars worth of securities in 1929 sold to others than Doris C. Archer. There is nothing to indicate that the books of account of the Archer Trust did not properly reflect the cost to the trust of all of the securities sold. If the respondent had intended to raise the question of the correctness of the books of the Archer Trust as showing the cost of the securities sold to Doris C. Archer, he should have raised it at the time of the hearing, when the books were introduced.

But we are of the opinion that the evidence of record shows that the books of account of the Archer Trust correctly reflect the costs of securities to it. The public accountant who had kept the books of account of the Archer Trust from 1927 testified in each instance that the books of account correctly reflected purchases and sales of securities. On cross-examination the respondent did not attempt to impugn the witness’ testimony. We are therefore of the opinion that the contention of the respondent made in his brief that the petitioners have failed to show the cost to the Archer Trust of the securities sold to Doris C. Archer is without merit.

This issue is decided in favor of the petitioners.

B. — Loss of $33,000 on the Mealy- Owen-Hartsel Go. Transaction.

Findings of Fact. — Several years prior to 1929 the Archer Trust purchased a one-fourth interest in a corporation known as the Healy-Owen-Hartzel Co. At the time of the purchase the company had a good record as far as earnings were concerned and, apparently, a good future. The company, however, encountered bad times and their loans at tbe bank would llave been called without some endorsement or guarantee. The trustees of the Archer Trust discussed the matter and, thinking that there was a good chance of the company pulling out of the hole, had Shreve M. Archer, for the benefit of the Archer Trust, endorse the notes of the Healy-Owen-Hartzel Co. at the bank and their loans from another corporation, hoping that thereby the Healy-Owen-Hartzel Co. would survive and make money. The corporation, however, continued to go doAvn hill and was finally liquidated and the Archer Trust, in addition to losing its stock interest, was called upon to make good to the extent of $33,000, the endorsement and guarantee of Shreve M. Archer. To protect this guarantee the Archer Trust had put up collateral belonging to it.

In 1929 the Archer Trust paid under such endorsement and guarantee, and to protect its collateral, $33,000. The deduction of this amount upon the return of the Archer Trust was disallowed by the respondent.

Opinion. — The contention of the respondent upon this point is that Shreve M. Archer acted for himself in endorsing the notes of the Healy-Owen-Hartzel Co. and that he alone was liable upon his endorsement; that Shreve M. Archer did not act for the Archer Trust in making the endorsement and, hence, that the Archer Trust sustained no deductible loss upon the payment of the $33,000. The evidence upon this point shows conclusively that Shreve M. Archer acted for the Archer Trust in making the endorsement of the notes. He made the endorsement merely as agent of the Archer Trust. It was the Archer Trust, and not Shreve M. Archer, who had a large amount at stake in the success or failure of the Healy-Owen-Hartzel Co. and it was the trust’s property which was placed with the bank as collateral on the note. The respondent was in error in disallowing the deduction of the loss.

O. — Loss of $69,000 on Sale of Stock Owned Try the Archer Trust In Capital National Bank of St. Paul.

Findings of Fact. — In 1919 the Archer Trust acquired 600 shares of the capital stock of the Capital National Bank of St. Paul at a cost of $90,000. In 1924 it paid an assessment upon these shares of $6,000. Its total investment in the stock was, therefore, $96,000. On May 4,1924, the Capital National Bank of St. Paul appointed a voluntary liquidating agent. This agent paid a liquidating dividend of $20 per share during the month of April 1927. Some of the stockholders of the Capital National Bank of St. Paul caused to be organized a corporation under the laws of the State of Delaware, known as the Northwest Properties Corporation, which had a capital stock of 10,000 shares of no par value. Pursuant to a plan of reorganization, on April 11, 1927, the Northwest Properties Corporation acquired all of the assets of the Capital National Bank of St. Paul in exchange for its stock, and $250,000 in cash.

It was provided in the plan of reorganization that each stockholder of the bank would receive one share of stock in the new corporation plus $25 per share as a liquidating dividend for each share of stock held in the bank. Under the plan of reorganization each stockholder had the right to receive from the Capital National Bank of St. Paul a check for $25 plus one share of stock of Northwest Properties Corporation, or a check for $45 plus a right to subscribe for one share of Northwest Properties Corporation at $20 per share, which right of subscription might be waived. If a stockholder did not exercise his right to subscribe for a share of stock in the .new corporation he executed a waiver and his stock was disposed of by the bank to some other stockholder at $20 per share. All of the stockholders of the bank, including the Archer Trust, took stock in the Northwest Properties Corporation under the plan, except certain stockholders owning 852% shares. These 352% shares were sold by the bank to other stockholders.

In 1927 the Commissioner was requested to rule upon the question as to whether the Capital National Bank of St. Paul and its stockholders realized gains or sustained losses where, as in the case of the Archer Trust, they had received, for each share held, $45 in cash and subscribed for a share of stock of the Northwest Properties Corporation at $20. Under date of December 7,1927, the Commissioner, over the signature of the Deputy Commissioner, advised as follows:

Ton inquire:
1. Is the National Bank entitled to claim a loss for Income Tax purposes in 1927 on the above transaction?
2. Are the stockholders entitled to claim a loss for Income Tax purposes in 1927?
3. What is the basis to be used by the Northwest Properties Corporation to compute its gain or loss upon the future disposition of the assets acquired from the bank?
Tou are advised in reply:
1. The transfer of the bank assets to the Properties Corporation for cash and stock, the distribution of such stock and such cash (or of cash received from such of the bank stockholders as exercised their right to acquire the Properties Corporation stock), constitute reorganization transactions such as are contemplated within the meaning of Section 203 (d) of the Revenue Act of 1926 as affected by Section 203 (e) (1) of the act and hence no gain or loss to the bank is recognized for income tax purposes.
2. The receipt of those stockholders of the bank who exercised their right to acquire the Properties Corporation stock, of cash, and of stock of the Properties Corporation in exchange for their bank stock and the payment by them of additional cash, is such a transaction with respect to such stockholders as is contemplated in Sec. 203 (f) of the Revenue Act of 1926 in which no loss is recognized. If tlie market value of the stock received in the transaction, however, plus the cash received is in excess of the sum of the basis at which the stockholder held his stock and the cash paid by him to the bank in the transaction, such excess is taxable gain to the stockholder.
Those stockholders who received only a liquidating dividend in cash on the surrender of their stock, realized a profit subject to normal tax and surtax or sustained a loss, respectively, to the extent that the amount of the liquidating dividend received was greater or was less than the basis at which they held their stock. This is based on the assumption that the bank stockholders involved surrendered their bank stock.
3. The basis of the assets of the bank in the hands of the Properties Corporation is the same as the’basis of such assets in the hands of the transfer bank.

The Archer Trust accepted as correct the ruling made by the respondent and the petitioners failed to claim in their income tax returns for 1927 any loss upon the transaction. The $27,000 cash received as liquidating dividends by the Archer Trust in 1924 and 1927 was treated as returns of capital reducing the base of the trust’s investment in the stock of the bank.

In 1927,1928, and 1929 the Archer Trust received liquidating dividends from the Northwest Properties Corporation amounting to $9,258. On November 26, 1929, it sold its 600 shares of Northwest Properties Corporation at the then market price for $4,800. In its tax return for 1929 the trust treated $2,058 as gain upon the sale of these shares but claimed as a loss in respect of the sale in 1929 the amount of $69,000, which the trust would have claimed as a loss in 1927 had the respondent ruled that it was a closed transaction in that year. The real claim of the petitioner for 1929 is that it sustained a loss of $66,942 upon the sale of the 600 shares of Northwest Properties Corporation in 1929. As above indicated, the respondent has disallowed the claimed deduction of $69,000, or any part thereof.

Of inion. — The contention of the respondent upon this point is that the Commissioner in 1927 made an error in his ruling with respect to the transaction in question; that in truth and in fact a loss was sustained in 1927 and not in 1929; and that the erroneous interpretation of the law by the Commissioner in 1927 is no bar to the disallowance of the claimed deduction in 1929.

The respondent based his ruling in 1927 upon the provisions of section 208 (d), 203 (e) (1), and section 203 (f) of the Revenue Act of 1926. Those provisions read in material part as follows:

(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, * * *
*******
(f) If an exchange would be within the provisions of paragraph (1), (2), (3), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. {.Italics supplied.']

It will be noted from the above that subdivision (d) and subdivision (e) are concerned only with cases where there is a gain to the taxpayer. Subdivision (f) refers to the provisions of paragraph (1), (2), (3), or (4) of subdivision (b). None of those provisions have application to the facts which obtain in this case.

The material fact is that the Capital National Bank of St. Paul was liquidated in 1927. Upon the liquidation the Archer Trust received for each share of bank stock a check for $45 as a liquidating dividend with the right to apply $20 thereof to the purchase of one share of Northwest Properties Corporation. If it had waived its right to subscribe for shares of stock of the Northwest Properties Corporation there could be no question but that the loss was sustained in 1927. But whether the right was exercised or not, the result must be the same. The Archer Trust sustained a loss in 1927 of $69,000 upon the liquidation of the National Capital Bank of St. Paul. The respondent was clearly in error in advising the Archer Trust that the loss was not deductible from the gross income of 1927. The petitioners do not argue otherwise. On brief the petitioners state:

The first question to be raised is the legal and moral right of the Commissioner of Internal Revenue after a matter has been finally and definitely submitted to him by a taxpayer and he has made a ruling thereon to reverse and change that ruling at a time when the statute of limitations has run and thereby deny the taxpayer because of the Commissioner’s own act relief which he is entitled to under the law. While perhaps technically such action can be justified as a legal matter it shocks the conscience and is the type of executive action which should be condemned by the Courts and which if persisted in destroys the confidence that is so essential if Government is to exist.

The real question in issue here is whether there is any authority under the law to allow the deduction of a loss in 1929 which was clearly sustained in 1927. We are of the opinion that neither the Board nor the courts have such authority. The erroneous ruling by the Commissioner in 1927 does not serve to permit the deduction of the loss in 1929. In Basil Robillard, Executor, 20 B. T. A. 685; affd., per curiam, Robillard v. Burnet, 50 Fed. (2d) 1083; certiorari denied, 284 U. S. 650, the Board said:

* * * An erroneous interpretation of the statute by the Commissioner does not conclude the United States on a subsequent modification of the ruling or create equities in favor of the petitioner requiring the judicial adoption of the first interpretation. American La France Fire Engine Co. v. Riordan, 294 Fed. ñ67; Langstaff v. Lucas, 9 Fed. (2d) 691; certiorari denied, 273 U. S. 721.

In Eichelberger & Co. v. Commissioner (C. C. A., 5th Cir.), 88 Fed. (2d) 874, the facts were that the taxpayer in 1930 sold land to another corporation owned by the same persons as those owning its stock. The loss was disallowed for 1930 because of this identity of stockholders. The purchaser never made any payment and it was agreed that the sale be canceled, but no reconveyance was made to the taxpayer. In 1932 the purchaser conveyed the land to a stranger, receiving stock which was turned over to the taxpayer and sold by it in 1932. The court held that the loss was properly deductible in 1932. In the course of its opinion the court stated:

* * * He [the Commissioner] cannot justly decide in 1930 that the sale did not realize the loss and thereby collect increased taxes, and in 1932 decide that it did realize the loss and collect taxes accordingly again. We said in Perkins, et al. v. Thomas, Collector, — Fed. (2d) — * * *: “It is manifestly unjust to allow the Government, having thus informed the taxpayer he could not have the deduction for his invested capital in 1928, now to say he could have it only then.” This is not a case of a taxpayer who neglected to assert his rights and so lost them by limitation. It is not a case of taking bad advice given by a mere revenue agent as in Darling v. Commissioner, 49 Fed. (2d) 1114. The right was claimed in the 1930 return and disallowed by the Commissioner. The United States got the benefit of his decision then and ought 1o abide by it now. The judgment is reversed with direction to correct the tax by allowing the deduction in contention.

With all due respect for the ruling made in the EicheTberger case, we are of the opinion that the language cited does not correctly state the law as it applies to the case at bar. We are of the opinion that the respondent correctly disallowed the deduction of the claimed loss of $69,000 in the determination of the deficiency for 1929.

D. — Glcdm of Respondent to an Increased Deficiency.

Opinion. — By amended answers the respondent claims an increase in deficiencies by reason of the fact that in the computation of the deficiencies of the Archer Trust for 1929 he treated as capital gain a profit realized upon th.e sale of 444.6 shares of Northwest Bancorporation stock. In his amended answers the respondent:

Alleges that during the taxable year 1929 the Archer trust sold 444.6 shares of Northwest Bancorporation stock acquired by the said trust under rights issued on August 15, 1929, on shares of stock held more than two years, at a profit of $12,695.20. * * * In the final determination the Commissioner computed the tax on this profit in accordance with the capital gain provisions of the Revenue Act of 1928.

The petitioners filed no replies to the amended answers. At the hearing of these proceedings counsel for the petitioners stated that the respondent might be right upon the point in issue and would not contest it.

The correct rule to be applied in this situation has been laid down by the United States Circuit Court of Appeals for the Seventh Circuit in Insull v. Commissioner, 87 Fed. (2d) 648. See also Macy v. Helvering (C. C. A., 2d Cir.), 82 Fed. (2d) 183. The computation of the gain should be in accordance with the principles laid down by the courts in the above-cited cases.

Judgment will be entered u/nder Rule 50.


source: Caselaw Access Project

author: KeRn:

license: Public Domain

text:
    Katherine S. Rheinstrom, Whose True Name Is Katherine Stewart Clifford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86035.
    Promulgated February 9, 1938.

      Donald F. Pratt, Esq., for the petitioner.

      I. M. Tullar, Esq., for the respondent.
   OPINION.

KeRn:

The first question involved in this proceeding is whether, in calculating the value of the property which forms the corpus of the gift made by petitioner to the trust established by her and subject to tax under the Revenue Act of 1932, as amended by the Revenue Acts of 1934 and 1935, there should be excluded the sum of $20,000, as petitioner contends, or, as respondent contends, the sum of $5,000. The pertinent section of the act, section 504 of the Revenue Act of 1932, is set out in the margin. The contention of the petitioner is based upon the argument that since there are four beneficiaries under the trust instrument (in addition to the petitioner herself), there are four gifts, and, therefore, there should be four exclusions of $5,000 each, or a total of $20,000.

In this case there was a gift of one corpus to one trust by virtue of one trust instrument. Although there were four beneficiaries, there was but one transfer made by the petitioner, which was to the trust itself. We must, therefore, conclude on the authority of previous decisions that but one gift was made, and only $5,000 may be excluded. Seymour E. Knox, 36 B. T. A. 630. Cf. Thomas E. Wells, 34 B. T. A. 315; affd., 88 Fed. (2d) 339; Commissioner v. Krebs, 90 Fed. (2d) 880.

Petitioner also contends that she retained a life interest in 50 percent of the income of the property given to the trustees and that the respondent erred in considering that she retained a life interest in only 40 percent of the trust income. The contention of the petitioner is based on the argument that, although 10 percent of the income of the trust is to be held by the trustees as a reserve fund pursuant to section (f) of the second article of the trust indenture, set out in our findings of fact, supra, to be accumulated and invested by them, the trustees do have the authority in their absolute discretion to pay any part of this income to petitioner during her life, as may seem best to the trustees; and, therefore, the petitioner has a reserved life interest in such part of the income of the trust the commuted value of which should be deducted from the present value of the corpus of the gift to the trust in the same way as was deducted the value of her life interest in the 40 percent of the income of the trust provided for by section (e) of the second article of the trust indenture. The deduction of her commuted life interest in the 40 percent has been allowed by the respondent. Despite some ambiguity in the brief, it is not our understanding that petitioner makes a contention that any part of the corpus of the trust should be exempt from the gift tax under article 3 of Begulations 79, because of a power reserved by her to alter the trust, for an examination of the trust indenture discloses no such power. Nor does the petitioner have any legal or equitable right to any distribution to her of any part of the 10 percent of the income which is subject to the provisions of section (f) of the second article of the trust indenture. She can only hope that the trustees, in their discretion, will make some distribution therefrom to her in the future as they have done in the past on two occasions. Even though we assume that petitioner has some right to this part of the income of the trust, she has nothing which may be valued according to any formula, and, therefore, no deduction can be made in addition to the deduction of the value of her reserved life interest in 40 percent of the trust income. Cf. Salomon v. State Tax Commission of New York, 278 U. S. 484; Boston Safe Deposit & Trust Co. et al., Executors, 30 B. T. A. 679.

Judgment will be entered for the respondent.

       SEC. 504. NET GIFTS.
      (a) General Definition. — The term “net gifts’* means the total amount of gifts made during the calendar year, less the deductions provided in section 505.
      (b) Gifts Less Than $5,000. — In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.


author: MuRdook: Mellott,

text:
    George W. Griffiths, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82624.
    Promulgated February 9, 1938.

      Herman A. Fischer, Esq., for the petitioner.

      O. H. Curl, Esq., for the respondent.
   OPINION.

MuRdook:

It seems desirable to review briefly some past events before discussing the transactions which give rise directly to the issues in this proceeding. Lay originally prevailed upon the petitioner to purchase the 5,000 shares of Oakridge Cemetery Corporation stock for $100,000. Thereafter, the petitioner sold the stock to the John W. Griffiths Investment Trust and sustained a loss of $92,500. A deduction of that amount was claimed and allowed on his income tax return for 1931. The petitioner learned late in 1932 that, because of something which Lay had done in the first transaction, a part, or all, of the loss might be recovered from Lay. The petitioner repurchased the stock from the John W. Griffiths Investment Trust in 1933 for $8,000. No question whatsoever is raised as to the propriety for income tax purposes of any of the transactions thus far described. Negotiations for the settlement with Lay had progressed to the point where the parties were all ready to close the transaction. The petitioner was then advised by his attorney of a method whereby he might possibly save himself from the payment of some income taxes. The steps taken to- minimize the taxes are the ones and the only ones which give rise directly to the issues in this case.

The following steps were all taken upon the .advice of the petitioner’s counsel. The G. W. G. Corporation was formed. The process of incorporation began on the 9th of January and was completed early on the 10th. Resolutions theretofore prepared in blank were adopted by the corporation. These authorized the corporation to purchase from the petitioner the stock and the right of action. A contract of sale was executed whereby the G. W. G. Corporation became the legal owner of the stock and the right of action against Lay. The petitioner was authorized to make the settlement with Lay in his own name on behalf of the corporation. The settlement with Lay was completed on January 11 by the petitioner in his own name. The record does not show that Lay or his attorneys were advised of the sale to the corporation. The petitioner deposited to the account of the G. W. G. Corporation the $100,000 which he received from Lay.

The petitioner contends that in the settlement with Lay and in depositing the $100,000, he acted as a,gent for the G. W. G. Corporation, his undisclosed principal. The Commissioner has ignored the G. W. G. Corporation and has treated the transaction as if the petitioner had never sold the stock to the corporation, but had acted entirely for himself throughout the settlement with Lay. Counsel for the respondent contends before the Board that the G. W. G. Corporation should be ignored. His contention is not supported by any showing that the sale from the petitioner to the G. W. G. Corporation did not take place or that it was in any respect illegal. He makes no showing that the petitioner acted for himself rather than as agent for the G. W. G. Corporation in concluding the settlement with Lay. He contends that the “mission” of the G. W. G. Corporation was “sinful” and that its intervention was a “nefarious tax evasion scheme”, but such statements do not help to decide the case. He relies upon the case of Gregory v. Helvering, 293 U. S. 465, and upon the case of Bus & Transport Securities Corporation v. Helvering, 296 U. S. 391. Those oases dealt with the reorganization provisions of the statute and are not in point here, where the petitioner seeks to apply none of those provisions.

This is another case involving a wholly owned corporation. It requires careful scrutiny to see if there is any sufficient reason to disregard the corporate entity, which normally under the law must be recognized as a separate taxpayer from the petitioner. It is not fatal in such cases that the corporation was used deliberately to minimize income taxes. Here one taxpayer, the petitioner, made an actual bona fide sale to another. His income tax liability arises under that transaction rather than as a result of the settlement with Lay. This new corporation continued to exist, as indeed was necessary in order to carry out the installment sale contract. It paid a salai-y and dividends to the petitioner, which he reported in his income tax return. It paid him interest on the unpaid purchase price, which he may have reported on his income tax return. The Commissioner has not eliminated the salary and interest, as should be done if the separateness of the corporation is to be ignored. The steps taken and the reality of the corporation can not be disregarded. Cf. Chisholm v. Commissioner, 79 Fed. (2d) 14, reversing 29 B. T. A. 1334; Grand Rapids Trust Co. et al., Administrators, 34 B. T. A. 170; Seymour H. Knox, 33 B. T. A. 972; Marjory Taylor Hardwick, 33 B. T. A. 249; Edwards Securities Corporation, 30 B. T. A. 918; aff'd., 83 Fed. (2d) 1007; James E. Wells, 29 B. T. A. 222; David Stewart, 17 B. T. A. 604; Rands, Inc., 34 B. T. A. 1094; Ralph Hochstetter, 34 B. T. A. 791; William H. Albers, 33 B. T. A. 373; A. S. Eldridge, 30 B. T. A. 1322; affd., 79 Fed. (2d) 629; Jones v. Helvering, 71 Fed. (2d) 214; Commissioner v. McCreery, 83 Fed. (2d) 817.

This petitioner had sold and transferred his stock and the claim against Lay before the settlement with Lay had reached the stage where it had any income tax significance. That taxpayer, the O. W. G. Corporation, became entitled to the $100,000 paid by Lay as a settlement. The petitioner was not entitled to the $100,000 and the gain from the transaction can not be taxed to him. He correctly reported on the installment basis his gain for 1933 from the sale to the corporation.

The respondent, to sustain his burden of proof on the fraud issue in this case, relies entirely upon the circumstances of the transaction already discussed. He claims that the use of the corporation is evidence that a part of the deficiency is due to fraud with intent to evade tax. Since the additional income was not xnoperly included by the Commissioner, it follows that no fraudulent intent can be drawn from the use of the G. W. G. Corporation. But even if the petitioner were to lose on the income issue, nevertheless he would still win on the fraud issue because the record fails to indicate any fraudulent intent on his part. He made no effort to conceal the true facts and circumstances from the Commissioner. He acted upon the advice of counsel and, apparently, in the honest belief that it was proper under the revenue act. The Commissioner must make a stronger showing than he has done in this case to support the charge of fraud.

Reviewed by the Board.

Decision will be entered under Bule 50.

Mellott,

dissenting: The opinion of the majority holds that on January 10, 1933, there was a sale of the securities by the trust to the petitioner for $8,000, an immediate sale on the installment plan of the same securities by the petitioner to his newly created corporation for $100,000, followed by a sale by the corporation, as an undisclosed principal through petitioner as its agent, to Lay for $100,000. I can not accept this view.

A substantial portion of the sum paid by Lay was paid because of petitioner’s claim against him for fraud. In this connection the testimony of the lawyer who handled the transaction for the petitioner is illuminating. He said:

I told Mr. Griffiths that our rights against -Lay consisted of a cause of action involving a breach of trust in the general nature of a tort claim, and that in order to effect the settlement it would be necessary to unite the ownership of the stock and the tort claim, or claim for breach of trust, in the same person. I therefore told him it would be essential for him to reacquire the stock that had been sold to the John Griffiths Investment Trust, and he said he would.

The petitioner testified to the same effect. He stated that the attorney told him “that in order to clean it up I should buy the stock back from the Investment Trust because of my right of action against Lay, and I believe Lay’s attorney wanted it that way because the Investment Trust only had the stock and I had the right of action.”

While petitioner assigned to the corporation any rights which he might have against Lay to require him “to purchase said stock” it is significant that no attempt was made to assign to the corporation his “cause of action involving a breach of trust in the nature of a tort claim, or claim for breach of trust.” Perhaps such claim was not assignable under the laws of Illinois. Cf. Babcock v. Farwell, 146 Ill. App. 307; affd., 245 Ill. 14; 91 N. E. 683; North Chicago St. Ry. Co. v. Ackley, 171 Ill. 100; 49 N. E. 222. But even if it were assignable it is significant that Lay was not advised that any assignment had been made and the release was executed by petitioner personally rather than on behalf of the corporation. The release recited that:

* * * as part consideration for the payment to tbe undersigned by the said Robert D. Lav of the said sum of One hundred eighty thousand dollars ($180,000), I, the undersigned, George W. Griffiths, for myself, my heirs, administrators and assigns, do hereby release and forever discharge the said Robert D. Lay, his heirs, executors, administrators, and assigns, from all actions, causes of action, contracts, debts, liabilities, obligations, suits, claims and demands whatsoever which I, the undersigned ever had, now have, or which I, my heirs, executors, administrators or assigns or any of them, hereafter can, shall or may have for or by reason of any act of omission, cause, matter or thing whatsoever, from the beginning of the World to the date hereof.

The conclusion is inescapable that the major portion of the consideration paid by Lay was for the settlement of the tort action. Under the circumstances I am of the opinion that it constituted income to petitioner. The corporation set up by him was devised merely for the purpose of preventing the amount “paid from vesting even for a second in the man who” was entitled to receive it and the whole transaction is simply an attempt to attribute the fruits “to a different tree from that on which they grew.” Lucas v. Earl, 281 U. S. 111.

In addition, I am of the opinion that the principle recognized and applied by the court and the Board in connection with the sale of property by the S. A. MacQueen Co. is clearly applicable. See S. A. MacQueen Co., 26 B. T. A. 1337; affd., 67 Fed. (2d) 857. In that case the corporate owner of real estate had entered into an agreement to convey it to a purchaser for $150,000. The three stockholders of the corporation authorized the conveyance of the property to its president for a lesser sum and he executed a declaration of trust declaring his intention to distribute the profits to the stockholders in proportion to their holdings. The trust was carried out and the profit, being the difference between the sum paid by the president to the corporation and the sum received by him from the sale of the property, was distributed to the stockholders. It was held that substance and not form should control; that although in form there were two sales of the corporate real estate, in substance the transaction was a sale by the corporation through the agency of its president; that the obvious purpose of the procedure was to avoid the payment of tax and, under the facts, that the profit should be taxed to the petitioner.

Under the facts before us, I think finding should be made that although in form there was a sale by the corporation to Lay, in substance the transaction was a sale by the petitioner, through the agency • of the corporation, of securities owned by him, contemporaneous with the settlement by him of his tort action against Lay. “A given result at the end of a straight path is not made a different result because reached by following a devious path.” Minnesota Tea Co. v. Helvering, 302 U. S. 609. Cf. Shoenberg v. Commissioner, 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586.

Arundell, Smith, Turner, Arnold, and Harkon agree with this dissent.


author: Harron:

text:
    Richard S. Doyle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82713.
    Promulgated February 9, 1938.

      Bichará 8. Doyle, Esq., pro se.

      P. A. Sebastian, Esq., for the respondent.
   OPINION.

Harron:

The issue is whether $10,500 received by the petitioner in the year 1932 constituted capital gain or ordinary income. Petitioner contends that he erred in reporting in his gross income the amount of $10,500 as ordinary income along with other fees for professional services, so that petitioner alleges that the deficiency determined does not represent his true tax liability. During the taxable year petitioner had capital net losses aggregating $14,252.93. In his petition, petitioner claims that the $10,500 received in 1932 represents a capital net gain which should be applied against his capital net losses pursuant to section 101 of the Revenue Act of 1932. Respondent denies that the $10,500 received was capital net gain.

The petitioner claims that the $10,500 constitutes capital gain because it resulted from the “sale” of a “capital asset”, the statutory definition of which is “property held by the taxpayer for more than two years” (section 101 (c) (8), Revenue Act of 1932). He claims that the property sold was a part of his “interest in a partnership”, and that he had owned his interest in the partnership for more than two years. Even though the actual assignment purports to convey and release his proportionate share in specific claims for fees which were in litigation subsequent to the dissolution of the partnership, he argues that the assignment could only have the effect of conveying his share in the surplus of the partnership which might arise from the collection of those fees, since as a matter of general partnership law the partners do not own undivided interests in the specific assets of the firm but only have a right to proportionate shares of the earnings and surplus of the partnership, citing Fourth National Bank of the City of New York v. New Orleans & Carrollton Railroad Co., 78 U. S. 623; Blodgett v. Silberman, 277 U. S. 1; United States v. Kauffman, 267 U. S. 407; Helvering v. Walbridge, 70 Fed. (2d) 683; and other cases. He relies on the case of Dudley T. Humphrey, 32 B. T. A. 280, which applied this doctrine of partnership law to a sale by a partner of his entire interest in a partnership which had been held for more than two years, and argues that the same rule should apply in the case of an assignment of only part of a partner’s interest in the partnership. He argues in reply to the respondent that dissolution of a partnership does not change the nature of the partner’s interest so long as the partnership is in process of liquidation. He claims that the case of Helvering v. Smith, 90 Fed. (2d) 590, is distinguishable from the case at bar because in that case the transaction upon the retirement of a partner was held not to constitute a “sale” and furthermore the partner involved there had made no capital contribution to the partnership. Although urging primarily his position that a partner has no claim to specific partnership assets and therefore that petitioner merely sold part of his “interest in a partnership”, the petitioner argues alternatively that even if the petitioner be assumed to have had an individual interest specifically in the two Woolworth cases those two cases were partnership assets purchased by the firm for $5,500 in July 1929, more than three years prior to his assignment, and therefore the profit realized constitutes capital gain to the petitioner under the statute.

We do not agree with all of the contentions of the petitioner and conclude that the $10,500 received by him in 1932 constitutes ordinary income rather than capital gain. We will discuss first the contention last mentioned above to which most of the respondent’s argument is addressed. The respondent contends that at no time did the Woolworth cases become capital assets. He argues that they were not capital but merely income items; that if fees for the services rendered therein had been received in the ordinary course of collection they would have constituted ordinary income items, and that neither the assignment of the claim for fees nor the fact that suit was filed thereon served to convert the claims or the cases into capital assets. He further argues that the claims for fees were not held for more than two years since they did not come into existence until the tax refunds were apjuoved by the Commissioner of Internal Revenue in December 1930 and paid by checks which were received in January of 1931.

These arguments thus summarized present several questions both of fact and of law. It may be noted at the outset that there appears to be a factual misstatement in the petitioner’s argument that the partnership paid $5,500 for the Woolworth cases when it was organized in July 1929. That was only the valuation placed on the cases by the members of a prior partnership for the purposes of liquidation of that partnership. That sum was not paid for those cases by the new partnership; the new partnership only repaid to Hamel and the petitioner the $30,000 which they had paid out as a part of the settlement of the prior partnership and these two individ-uáis turned over to the new partnership approximately 125 cases in all with no particular values assigned to any of them. Furthermore no sum was ever set up on the books of either partnership purporting to assign an asset value to any of these cases.

A clear distinction must be drawn between the Woolworth cases themselves and the claims for fees arising out of them. The cases themselves, before any right to fees arose, were merely contracts of employment which only gave the partnership the right to perform services and to receive compensation which in the 1918-1919 case at least was contingent on the success of the refund claims. A mere contract of employment has been held not to be a capital asset even though it be assigned after being held for more than two years. Thurlow E. McFall, 34 B. T. A. 108. Therefore the contracts here, or the “cases” as they are referred to, could not become capital assets no matter how long they were held. When the refunds were made rights of a different nature arose, namely, claims for fees. It was these latter rights rather than the contracts of employment which were assigned. To determine whether the property assigned was held for two years therefore depends on when the claims for fees arose rather than on when the contracts of employment were acquired by the partnership.

Without passing on the question of whether in any event a claim for compensation for services which has accrued can become a capital asset by being held for two years after its accrual, it is of course true as respondent argues that the mere fact that the claim is assigned or that suit is instituted for its collection does not convert it into a capital asset. The nature of the claim remains the same. The only significant inquiry is whether as required by the statute the claim was held for more than two years. It is apparent as the respondent argues, that the claims in the instant case were not held for as much as two years after they accrued before they were assigned. The assignment occurred on December 18,1931, although payment for that assignment was deferred until June 17, 1932.

The 1918-1919 case had definitely been taken on a contingent fee basis so that no claim for fees in any amount arose until the refunds were made. The refund checks were issued on December 30, 1930, and received by the Woolworth Co. in January 1931, both less than two years before the assignment of petitioner’s interest on Decembel 18, 1931. There is no evidence in the record as to what fee understanding existed regarding the 1920-1926 case. From the fact that there was a dispute as to whether the petitioner’s partnership through Hamel had even been employed in that case, it may be inferred that there was no very definite understanding regarding fees. In such case if the partnership established that it was employed in the 1920-1926 matter it would presumably be entitled to “reasonable fees.” The claim for reasonable fees would certainly not arise before the work on the case was completed which was in October of 1930 which was less than two years before the assignment of the claim by petitioner on December 18, 1931.

It is clear that there is no significance in the fact that work on the 1918-1919 case was completed in January of 1930 since that case was on a contingent fee basis and the completion of the work gave rise to no claim for a fee. It was only when that work was crowned with success in the form of a refund claim that any claim for a fee arose. It is also immaterial that the appropriate division of tire Bureau of Internal Revenue made recommendations for the allowance of refunds in both cases about the middle of January of 1930. It is apparent that those recommendations had no finality from the fact that the Joint Congressional Committee to which they were directed required a great deal of additional work on the claims for the years 1920-1926 before giving its approval in October of 1930. None of the Woolworth refunds were listed on the Commissioner’s schedule of overassessments until December 6, 1930, when they were approved by the Commissioner, and it is the signing of the schedule of overassessments which gives finality to refund claims. See United States v. Wurts, 91 Fed. (2d) 547. But even if the recommendations made in January 1930 were considered final, that date was not as much as two years prior to the assignment on December 18, 1931. The fact that payment on account of the assignment was delayed until June 17, 1932, would not alter the time for which the claims were field, which is the determining factor under the statute. Thus under any view of the question the claim for fees did not come into existence as much as two years prior to the petitioner’s assignment of his interest therein, wherefore the claims did not constitute capital assets within the statutory definition.

We come now to a consideration of the petitioner’s chief claim that his assignment of December 18, 1931, pursuant to the agreement of the same date did not have the legal effect of transferring his interest in claims to specific fees but rather his interest in that part of the surplus of the partnership which might arise from collection of those fees. ■ From this he argues that it constituted a conveyance of a part of his “interest in a partnership” which, like the conveyance of a partner’s entire interest considered in the case of Dudley T. Humphrey, supra, constitutes a capital asset if his interest in the partnership has been held for over two years, irrespective of how long the particular assets of the partnership have been held.

At the outset it must be noted as appears in our findings of fact that neither the assignment nor the contract to assign took the form of assignments of a part of a percentage interest in a partnership but rather purported to assign the petitioner’s interest in specific fees which were the subject of litigation. As stated by the petitioner in his brief:

By the agreement of December 18, 1931 petitioner intended to sell, transfer and assign to Mr. Hamel all of Ms right, title and interest in the claim against Rusch & Jackson in the suit instituted for the $50,000 which had been attached in the hands of Davies, Auerbach & Cornell, and to waive and release to Mr. Hamel all of his interest in the suit pending in the Supreme Court in Newark, New Jersey, against Woolworth Company, which he considered of no value.

The petitioner claims however that irrespective of the terms of the assignment its legal effect could only be the conveyance of his proportionate share in the surplus of the partnership which should arise upon collection of these fees and that this is the equivalent of an assignment of part of his “interest in a partnership.”

It is true that as a matter of general partnership law a partner’s interest in the partnership is not an interest in specific assets but only in the surplus which will arise upon liquidation of those assets. It also appears to be true that dissolution of the partnership does not of itself serve to change the character of the partner’s interest into an interest in specific assets so long as the assets are not liquidated or distributed. However, the partners clearly may contract with one another regarding the disposition of the assets and by such contract can make immediate distribution of the assets or the rights to the proceeds from liquidation of particular assets. In the case at bar the partners did enter into an agreement for the disposition of the various properties of the partnership. The agreement recites “the desire of the partners that an agreement be reached among them for an accounting and settlement of the affairs of said partnership.” Two liquidators were therefore appointed, to have the powers and duties specifically described and no others. The cases of the partnership were divided into four schedules: those in which bills had been rendered prior to June 1, 1930; those in which bills had been rendered between June 1,1930, and July 7, 1931, the date of dissolution; those to be considered as closed cases as of July 7, 1931; and those on which the work was yet unfinished. The Woolworth cases were listed in the second category although as pointed out in our findings of fact no bills were ever actually rendered in those cases. As to the first three classes of cases it was provided precisely what disposition should be made by the liquidators of the proceeds of collection: (1) Out-of-pocket expenses of collection should be paid (not to include any charge for the time or ordinary office expense of the partner primarily responsible for the collection thereof); (2) forwarding fees and charges for engineering or accounting services in connection with, each case should be paid in accordance with the fee contract or understanding in the particular case; (3) any balance should be distributed to the partners on fixed percentages which for the different schedules of cases represented the basis of sharing partnership profits in existence when bills in the various schedules of cases were rendered or the fees became due. Thus in the schedule of cases in which bills were rendered between June 1, 1930, and July 7, 1931, which is the schedule in which the Woolworth cases were listed, the petitioner pursuant to the agreement was entitled to receive 21 percent of each fee after the two types of expenses enumerated above were paid in connection with such fee. It does not appear that the partnership had any indebtedness other than that in connection with the individual cases provided for above so that it was able to make the agreement for the division of the proceeds of collection set out above.

Thus it appears that although the petitioner may not have obtained by mere operation of law a percentage interest in specific claims to fees upon the dissolution of the partnership, nevertheless by the contract between the partners he obtained something different from the mere claim to the undivided surplus of the corporation which might arise upon liquidation. He obtained rather the right to a percentage of the proceeds of specific fees after the enumerated expenses in the case of each fee were discharged. This right to a percentage of the proceeds of specific fees, if not the same thing as a percentage ownership of the fees themselves, was nevertheless a right acquired by the contract of July 7, 1931. It was this right which was assigned on December 18,1931, and it therefore was not a capital asset within the statutory definition, not having been held for two years before its disposition.

Even if the right conveyed by the petitioner could be held to consist of a part of his claim to a part of the surplus of the partnership upon liquidation we do not think that is equivalent to the conveyance of a part of his “interest in a partnership” such as the conveyance of the entire interest in a partnership which was held to constitute a capital asset in the case of Dudley T. Humphrey, supra. Nor do we think the conveyance here can be said to constitute a “sale” as required by the statute. Helvering v. Smith, supra. In Dudley T. Humphrey a retiring partner sold his entire right, title, and interest in a going partnership and in the good will thereof. It appears that he had contributed one-ninth of the capital of the firm. The payment to him, therefore, represented payment for his interest in the capital and good will of the firm and was truly a sale of his partnership interest. In Helvering v. Smith, on the other hand, the retiring partner under the articles of copartnership had no interest in the future earnings of the partnership and he had made no contribution to the capital of the partnership. The transaction whereby he obtained payment in cash for his estimated share of the proceeds of fees already earned but not yet collected was held not to constitute a “sale” of an “interest in a partnership” because he received nothing which he would not have been entitled to on a partnership accounting or which represented any purchase of his right to future earnings or his interest in the firm assets.

In the instant case the payment to the petitioner did not purport to represent any compensation for his share in good will or future earnings of the partnership. It hardly could have since the partnership had already gone out of business. Furthermore, the payment did not purport to compensate him to any extent for any capital contribution to the partnership. It does not appear that any capital contribution remained to be recovered by the petitioner. The $30,000 which had been paid out by the petitioner and Hamel in obtaining the cases turned over to the new partnership had been repaid to them within the first year of the new partnership’s existence. The record does not show that any other credit had been given them for the cases in their capital accounts, but however that may be the payment here in question did not purport to compensate the petitioner therefor. The payment here was strictly for the purpose of terminating his interest in claims to specific fees. This commutation of payment on account of these fees as truly as in the case of Helvering v. Smith gave the petitioner nothing which was not already his. It is true that the payment does not represent his interest in the exact amount which might actually be received in the litigation for those fees, which might be greater or less than $.10,000, but equally in Helvering v. Smith the advance payment on account of uncollected fees was necessarily a mere estimate of the possible collections. In the instant case it is clear that the petitioner at least thought that the maximum possible collection on both Woolworth claims to be $50,000 and fixed the price of his assignment at $10,500, 21 percent of that sum, the amount (less expenses) to which he would have been entitled upon collection of $50,000. We thus conclude following Helvering v. Smith, supra, that the petitioner’s assignment did not amount to the sale of a part of his interest in a partnership.

For all of the foregoing reasons we conclude that the $10,500 received by the petitioner in 1932 was not the profits from the sale of a capital asset and therefore it constitutes ordinary income rather than capital gain.

Decision will be entered for the respondent.


author: Hill :

text:
    Otis Elevator Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80713.
    Promulgated February 17, 1938.

      T. I. McKnight, Esq., and Fayette S. Dv/nn, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Curtis Risley, Esq., for the respondent.
   OPINION.

Hill :

The first issue raised by the pleadings in this case is whether respondent erred in determining the limitation on the foreign tax credit to which petitioner is entitled under section 131 of the Revenue Act of 1928, by treating the taxes deducted from dividends received by petitioner from a subsidiary British corporation as taxes paid by the British corporation rather than as taxes paid by petitioner. This issue presents the specific question of whether the taxes deducted from the dividends received by petitioner from its British subsidiary constituted income taxes paid by it to a foreign country, within the meaning of the statute.

Under British law, stockholders in British corporations are required to report as income, in addition to the amount of dividends actually received, amounts which, reflect their respective proportions of the tax paid by the corporation on its own profit, thus treating the tax in effect as having been paid by the stockholders. This viewpoint regards the tax as being substantially a part of the dividends distributed to the stockholders and by them paid to the government through the agency of the corporation.

Petitioner contends that it is entitled to credit against its United States income tax the full amount of British tax deducted from the dividends received from its British subsidiary as income tax paid by it to a foreign country, while respondent determined and here contends that petitioner is entitled to a credit equal only to the amount of the British tax “deemed” to have been paid by it under the provisions of subsection (f).

In the cases of Mary Duke Biddle and George W. Elkins, 33 B. T. A. 127, the same British tax was involved and the same question presented as in the instant proceeding. We there held that a citizen of the United States receiving dividends from a British corporation is not entitled under section 131 of the Revenue Act of 1928 to a credit of the amount of the British tax, ánd that such citizen is not required to include the British tax in gross income as a part of dividends so received.

The Biddle case was taken on review to the United States Circuit Court of Appeals for the Second Circuit, where our decision was affirmed. See 88 Fed. (2d) 718. The Elkins case was taken on review to the United States Circuit Court of Appeals for the Third Circuit, where our decision was reversed. See 91 Fed. (2d) 534. The Third Circuit followed a prior decision of the same question by the First Circuit in United Shoe Machinery Corporation v. White, 89 Fed. (2d) 363. The Supreme Court granted certiorari, and in an opinion rendered January 10, 1938, 302 U. S. 573, affirmed the Second Circuit in the Biddle case, and reversed the Third Circuit in the Elkins case. On authority of such decision of the Supreme Court, respondent’s action on the first issue in the instant proceeding is approved.

The second issue raised by the pleadings in this case involves the question whether the limitation of the proviso clause of subsection (f) should be applied separately to that portion of the income tax of each of petitioner’s foreign subsidiaries which petitioner is “deemed” to have paid, or whether the limitation of such proviso should be applied to the total amount of the taxes “deemed” to have been paid by petitioner through all of its foreign subsidiaries.

This question was considered by the First Circuit, and decided adversely to petitioner’s contentions, in United Shoe Machinery Corporation v. White, supra. While the views of that court respecting the credit of British tax on dividends against the United States income tax were disapproved by the Supreme Court in the Biddle and Elkins cases, we do not think that fact militates against the soundness of the court’s reasoning on the separate and unrelated question under consideration here. On that question, the court in its opinion said:

On tlie third point the plaintiff contends that the limitation on credit under 238 (e) should be computed by lumping all dividends from, and all taxes on, its foreign subsidiaries, treating them for the purposes of credit under this clause as if they constituted a single foreign subsidiary. The short answer to the contention is that the statute plainly contemplates nothing of the sort. It begins, “For the purposes of this section a domestic corporation which oims a majority of the voting stoch of a foreign corporation from which it receives dividends," etc. Later the statute refers to “the accumulated profits of such foreign corporations.” It is clear that the clause is written with a single foreign subsidiary in mind. If any general aggregation of dividends and taxes with respect to all foreign subsidiaries of a taxpayer who happened to have several had been in mind, as the plaintiff asserts, such an intention would certainly have been indicated in the wording of the section. We think it clear that the section does not have the meaning contended for by the plaintiff.

The statute applicable in the cited case was section 238 of the Revenue Act of 1921, which corresponds to section 131 of the Revenue Act of 1928.

From a careful consideration of the language used in subsection (f), we think the construction contended for by petitioner is not only unwarranted, but, if consistently applied, would lead to inequitable results not contemplated by Congress.

On the second issue, respondent’s determination is approved. In accordance with the facts stipulated by the parties,

Judgment will he entered under Rule 50.

       SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF THE UNITED STATES.
      (a) Allowance of credit. — The tax imposed by this title shall be credited with:
      (1) Citizen and domestic corporation.— In the ease of a citizen of the United States and of a domestic corporation, the amount of any income, war-proflts, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
      * * * * * *
      (f) Taxes of foreign subsidiary. — For the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 23 (p)) in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the credit allowed to any domestic corporation under this subsection shall in no ease exceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. * * *


author: Abundell :

text:
    Oregon Casualty Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86401.
    Promulgated February 17, 1938.

      Robert T. Jacob, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Abundell :

Tlie question here is whether the petitioner is such an organization as is exempted from tax under section 103 (7) of the Revenue Act of 1932, which provides as follows:

The following organizations shall be exempt from taxation under this title—
(7) Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The Treasury regulation issued under this section interprets the statutory provision as requiring that the organization not he engaged “in a regular business of a kind ordinarily carried on for profit.”

It was stated by the Board in the case of Produce Exchange Stock Clearing Association, Inc., 27 B. T. A. 1214; affd., 71 Fed. (2d) 142, that

* * * Generally speaking, our conception of a business league exempt from income tax is an association of business men or of business enterprises, incorporated or unincorporated, which has for its purpose the furtherance of the interest of its members by way of furnishing of information to its members, or the performance of services which are not ordinarily carried on by businesses for profit, and which is not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The Circuit Court of Appeals in the same case stated that:

* * * The numerous subdivisions of section 103 of the Revenue Act of 1928 (26 USOA — Sec. 2103) and the corresponding provisions in the earlier acts, specify organizations which, in the great majority of instances, are evidently granted exemption because of the benefit to be derived by the public from their activities.

The respondent contends that the petitioner is not exempt from tax because “it is not in any sense conducted for the common interest ©f the community, or a number of persons, or for the good of, or in the interest of the trade”, but only as an adjunct to and in the interest of the private business of its members, citing Growers Gold Stor age Co., 17 B. T. A. 1279, and Produce Exchange Stock Clearing yls-sooiation, Inc., supra. He argues further that the type of service rendered by the petitioner is usually rendered in consideration for fees by corporations operated for profit, citing Retailers Credit Association of Alameda County v. Commissioner, 90 Fed. (2d) 47, affirming 33 B. T. A. 1166. Respondent also contends that the net earnings of the petitioner inure to the benefit of its individual members since any excess of the assessment collected in any year over the amount needed for operating expense is used to proportionately reduce the assessment for the following year.

We have concluded that the petitioner is entitled to the exemption which it claims since we do not think the arguments advanced by the respondent are valid on the facts of this case.

It is clear that there is a substantial public interest in the checking of the charges for insurance policies in order to assure conformity with established rates. This is shown prima facie in the present case by the fact that this procedure was ordered by the insurance commissioner of the state, under his power to regulate the insurance business in the public interest. The interest of the public in requiring insurance companies to maintain a sound actuai’ial basis is not limited to the large body of customers of the insurance companies, but extends to the whole community, which would be indirectly at least, if not directly, affected by the failure of its insurance companies. It is to preserve a sound actuarial basis for charges by the insurance companies through the prevention of cut-throat competition that rate checking is required. It is a common thing in the fire insurance field, and has the same justification for existence in other insurance fields where established rates are prescribed. There is a provision of the Oregon statutes which says that “The business of conducting a rating bureau in this state is public service in character and shall be conducted without profit to any party, except that fair and reasonable compensation shall be paid for all services actually rendered and necessary to the business.” (Oregon Code 1930, 46-1605.) While it is not altogether clear from the statute whether this provision is limited to fire insurance rating bureaus, nevertheless, even apart from any statutory designation, we are convinced that the business of a rating bureau is public service in character. Rate checking also operates in the interest of the insurance companies themselves, although because of its expense it might not be undertaken by the companies voluntarily. The petitioner’s other function, of furnishing statistical information regarding undesirable risks, likewise operates in the interests of the public as well as of the insurance trade. The petitioner thus comes within the requirements for exemption which are emphasized in Growers Cold Storage Co., supra, and Produce Exchange Stock Clearing Association, Inc., supra.

The other arguments of the respondent merit little attention. His argument that the type of service rendered by the petitioner is usually rendered by corporations operated for profit does not find support in the evidence. On the contrary, it appears that the Oregon Eating Bureau, which performs for fire insurance companies the same function as the petitioner does in its field, is a nonprofit organization. Also, the evidence regarding the National Bureau of Casualty & Surety Underwriters, while showing that that organization will do rating for nonmembers upon the payment of fees, does not show that it is operated for profit. We can not find from the evidence that the petitioner was engaged “in a regular business of a kind ordinarily carried on for profit.”

It is of course clear that the petitioner had no “earnings” as that term is commonly understood and there were, therefore, no earnings to inure to the benefit of any private individuals or member corporations. The petitioner was organized and operated as a nonprofit institution and had no capital stock outstanding. Assessments were made as needed to meet the expenses of operating the association apportioned on the basis of the business written by each member. In any period when the assessments exceeded the expenditures there would of course be some cash on hand. This was never distributed to anyone, but was retained for meeting future expenses. Since the assessments were apportioned on the basis of the prior year’s business written by each member and adjusted at the close of the year to conform with the business written during the current year, there were sometimes credits to members which would apply in reduction of subsequent assessments. We do not think; that these credits inured to the benefit of private individuals in the sense which would require the denial of the exemption provided for in section 103 (7), supra. Cf. King County Insurance Association, 37 B. T. A. 288.

Decision will be entered for the petitioner.

       Akt. 528 (Reg. 77). Business leagues, chambers of commerce, real estate boards, and boards of trade. — A business league is an association of persons having some common business interest, the purpose of which is to promote such common- interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not' a business league, since its activities do not further any common business interest, even, though all of its income is devoted to the purpose stated. A stock exchange is not a‘ business league, a chamber of commerce, or a board of trade within the meaning of the law and is not exempt from tax.


author: MtjRdock:

text:
    Anna F. Ardenghi, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68201.
    Promulgated February 17, 1938.

      Oleaveland J. Bice, Esq., for the petitioner.

      O. B. Marshall, Esq., for the respondent.
   OPINION.

MtjRdock:

The Commissioner determined a deficiency in income tax for the year 1930 in the amount of $7,018.73. The facts have been stipulated and those pertaining to a particular issue will be discussed in connection with that issue.

The first question is whether or not the Commissioner erred in including in the petitioner’s income $38,418.72 representing dividends, $2,170.84 representing interest, and $275.26 representing interest, which amounts were paid to the petitioner in 1930 from the estate of her deceased husband. William Whitman Farnam (hereinafter referred to as the decedent) died on June 28, 1929, in blew Haven, Connecticut. He left no issue but was survived by his wife, Anna F. Farnam, the petitioner in this proceeding. The latter married Vincent R. Ardenghi on October 7,1930. She filed an individual income tax return for the calendar year 1930 with the collector of internal revenue for the district of Connecticut. The residue of the decedent’s estate, after provision for specific bequests, was left to the petitioner. His executor was the Union & New Haven Trust Co. The will authorized the executor to advance to the petitioner out of income any sums which she might desire during the settlement of the estate. The executor paid a total of $57,326.60 to the petitioner during the period January 1 to November 7, 1930. The executor filed an income tax return for the estate for that period. The correct gross income of the estate for that period was $67,402.63, including dividends and interest in excess of the amounts which the Commissioner has included in the petitioner’s income. The executor claimed deductions in that return for Connecticut succession taxes paid on August 27, 1980, which greatly exceeded the gross income of the estate for the period. No deduction was claimed on that return for the Federal estate taxes of $127,498.44 paid on June 28, 1930. The stipulation contains a statement that the Federal estate tax and the Connecticut succession tax were paid by the executor from the corpus of the estate. We find from an analysis of the executor’s accounts that the payments made to the petitioner, which the Commissioner has included in her income, were made from income of the estate. Although the petitioner received $57,601.86 from .the estate in 1930 and did not report any of that amount as a part of her gross income, the Commissioner has included the lesser amounts by allocating the payments on a percentage basis to various classes of income received by the estate, some of which were not taxable, and by eliminating a part of the distribution as being estate income of 1929. The allocation is not contested.

This issue is raised by assignments of error (a), (b), and (e) of paragraph 4 of the petition. The question may be stated in this way: Where the income of an estate in process of administration is payable to a beneficiary and is actually paid to her in the taxable year, may she escape tax on the amounts received because Federal estate and state succession taxes paid by the estate during the year exceeded its gross income?

The Board held in the case of Walter S. Gurnee et al., Executors, 13 B. T. A. 262, that income of an estate distributed to a beneficiary was taxable to the beneficiary even though the estate and inheritance taxes paid by the estate exceeded the gross income of the estate. The Board reasoned in that case that the beneficiary’s distributive share of the income of the estate was fixed by the trust instrument, was actually distributed to her, was not affected by the taxes paid by the estate or the deductions allowed to the estate and, under the express provisions of the statute, was to be included in the income of the beneficiary. In the case of Agnes Sitterding, 32 B. T. A. 506, estate and inheritance taxes in excess of the income of the estate were charged against the corpus of the estate and amounts were distributed to the beneficiaries and charged against the income of the estate. The Board held that the distributions were paid out of income and were properly taxed to the beneficiary. The decision of the Board was reversed, 80 Fed. (2d) 939. The court held that, since the estate did not receive enough income to pay the taxes, there was-no income to be distributed and, therefore, no income to be taxed, either to the estate or the beneficiary. The Board in the case of Rena S. McCahan, 35 B. T. A. 943, pointed out that the distributions there were made from corpus or from tax exempt income and, therefore, would not be taxable to the beneficiary, either under the decision of the Board in the Sitterding case or under the decision of the court in that case. A contention was made in the case of Minnie L. Wolf, 32 B. T. A. 959, that the taxable income of the estate was exhausted by the payment of inheritance taxes. The fact was that the income of the estate was actually distributed to legatees as interest on their legacies (allowable under Pennsylvania law). The Board said that there is no rule of law which requires disregard of the fact, that distributions were actually made from income, in favor of a legal presumption, that the taxes were paid from income. That decision of the Board was affirmed, 84 Fed. (2d) 390.

In each of the foregoing cases the inheritance tax paid exceeded the gross income of the estate. With all due respect to the Circuit Court of Appeals for the Fourth Circuit, which reversed the Board in the Sitterding case, we think the question of whether or not a beneficiary is subject to tax must depend upon whether or not the beneficiary has received a distribution during the taxable year from the income of the estate or trust. If the estate had income and distributed a part of that income to the beneficiary, it is taxable to the beneficiary, regardless of the not inconsistent fact that inheritance taxes in an amount in excess of the income of the estate were paid either from other income and corpus, or solely from corpus. Section 162 (c) provides:

In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, * * * there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

The Commissioner has determined that the distributions here taxed to, the petitioner were from income of the estate. The stipulation does not show otherwise. An analysis of the receipts and disbursements of the decedent’s estate indicates that the distributions to this petitioner were from the income of the estate, as the will provided. It follows that the Commissioner did not err in taxing a portion of those distributions as a part of this petitioner’s income. Cf. Jackson v. Price, 74 Fed. (2d) 707.

The petitioner next claims the right to deduct the amount by which the Federal estate and state ■ succession taxes exceeded the income of the estate. The decedent’s will provided that all inheritance and succession taxes should be paid out of the estate. The taxes paid in 1930 exceeded the income of the estate for that year by $176,622.31. That is the amount which the petitioner claims the right to deduct. The petitioner argues that the word income, as used in section 162 (c), should be construed to include a minus quantity. She cites no authority for this contention. The word does not. refer to a minus quantity. Cf. Woolford Realty Co. v. Rose, 286 U. S. 319. Under her theory a deduction which the statute expressly disallows would be allowed indirectly. Section 23 (c) of the Revenue Act of 1928 provides that estate, inheritance, and succession taxes “shall be allowed as a deduction only to the estate.” That Congress never intended to allow any such deduction as the petitioner here claims is obvious when this section is read in conjunction with section 703 and the legislative history of the latter provision.

The next issue is raised in paragraph (4) (c) of the petition. The petitioner claims that the Commissioner erred in failing to allow as a loss or deficit received from a trust the sum of $1,455.94. The petitioner created a trust in October 1930. The trust was irrevocable and the income was to be paid to the petitioner for her life. The trust, during the remainder of 1930, paid transfer taxes of $1,440.94 and paid $15 as rental for a safe deposit box. The income of the trust for 1930 consisted of dividends of $6,477.81 and of tax-free interest on Liberty bonds in the amount of $1,750. The petitioner reported on her return $6,477.81 as dividends received from the trust and claimed a deduction of $1,455.94 representing expenses of the trust. The Commissioner disallowed the deduction and reduced the dividends reported by $1,455.94. Section 167 provides that where any part of the income of a trust is distributed to the grantor, such part of the income of the trust shall be included in computing the net income of the grantor. That provision applies here. The difference between the dividends received by this trust and the expenses paid by it was all distributable to the petitioner and therefore had to be included in computing her net income. That is what the Commissioner has done. She claims in addition the right to deduct the expenses of the trust. Those expenses have already been used to offset an equivalent part of the income .of the trust. There is no statutory authority for allowing her a deduction or for allowing her to benefit further from the expenses of this trust. Elsie Samstag, 26 B. T. A. 957.

The final issue relates to the proper amount of dividends of the United Illuminating Co. to be included in the petitioner’s income for 1930 on the cash basis. The corporation in question declared a dividend payable December 31, 1929, and on that date mailed checks in payment of the dividend, which checks were dated January 1, 1930. The petitioner’s share of that dividend was $7,367. The check in payment of that amount was received by her agent on January 2, 1930, and that amount was included in her income tax return for 1930. The trust which she set up in October 1930 thereafter held shares of United Illuminating Co. stock. The corporation declared another dividend payable December 31, 1930, and on that date mailed a dividend check for $10,108 to the trustees. The check was dated January 1, 1931, and was received by the trustees on January 2, 1931. The Commissioner has excluded the dividend of $7,367 from the petitioner’s income for 1930 and has included instead the dividend of $10,708. The result was to increase dividends by $3,341. The facts in this case are even more favorable to the contention of the petitioner than were the facts in the case of Avery v. Commissioner, 292 U. S. 210, upon which she relies. In the Avery case the checks were dated December 31, and were received on January 2, whereas here they were dated January 1, and were received on January 2. The money was not unqualifiedly subject to the petitioner’s demand in the years in which the checks were mailed. The Commissioner contends that since there was nothing to indicate that payment by check was mandatory there is a failure of proof that a demand for payment on December 31 would have been unavailing. A similar situation existed in the case of Edward S. Harkness, 31 B. T. A. 1100, and the Board there rejected a similar contention made by the respondent. The Commissioner erred in including the dividend of $10,708 in the petitioner’s income for 1930.

Decision will be entered under Rule 50.