author: Smith:

text:
    Estate of H. L. Rust, Deceased, H. L. Rust, Jr., and Benjamin S. Minor, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95880.
    Promulgated April 12, 1940.

      Henry Ravenel, Esq., for the petitioners.

      Philip A. Bayer, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency of $4,141.13 in the income tax of H. L. Rust, deceased, for the year 1936. The only question in issue is whether taxes which the decedent paid to the District of Columbia in March 1936 on real estate which he purchased in September 1936 are deductible from his gross income for 1936.

The facts are stipulated.

Petitioners are the duly qualified and acting executors of the estate of H. L. Rust, under letters testamentary issued by the Probate Court for the District of Columbia. For many years prior to and at the time of his death H. L. Rust (hereinafter referred to as the decedent) was a resident of the District of Columbia.

The decedent filed his Federal income tax return for the year 1936 with the collector of internal revenue at Baltimore, Maryland.

On September 17,1935, the decedent, as the holder of certain second mortgage trust notes, purchased at foreclosure sale certain real estate in the District of Columbia known as lot 299, square 2637, with improvements thereon known as 2101 Connecticut Avenue, N. W. The successful bid of the decedent was the sum of $275,000, subject to a prior deed of trust upon the property in the amount of $725,000. Under the terms of the sale the taxes were to be adjusted to the date of sale. Taxes for the fiscal year ended June 30, 1935, had been paid in full. Upon his bid price of $275,000 the decedent received a credit of $3,142.10 representing the portion of the taxes for the fiscal year ended June 30, 1936, allocable to the period July 1 to September 17, 1935.

On September 18, 1935, a deed to the property was executed and delivered to the decedent and the decedent continued to be the owner of the property throughout the year 1936.

On September 28, 1935, the decedent paid to the collector of taxes for the District of Columbia $7,441.67, being the first half of the real estate taxes assessed against the property for the fiscal year ended June 30, 1936.

On March 31, 1936, the decedent paid to the collector of taxes $7,441.67, being the second half of real estate taxes assessed against the property for the fiscal year ended June 30, 1936.

The record title to the property on July 1, 1935, was in the name_ of Kathleen M. Houghtaling. The real estate taxes for the fiscal' year ended June 30, 1936, in the aggregate amount of $14,883.34, were regularly assessed against the property in accordance with the Code of the District of Columbia in the name of Kathleen M. Houghtaling. The property had been on the tax list of the District for a number of years prior to the year 1936 in her name. The real estate tax rate for the District for the fiscal year ended June 30, 1936, was fixed by the Commissioners on July 19, 1935.

The decedent kept his books of account and made his income tax return for 1936 on the cash receipts and disbursements basis. In his return for that year the decedent claimed the deduction of $7,441.67 of taxes paid to the District on March 31, 1936, but the deduction was disallowed by the respondent in the determination of the deficiency.

Such taxes were not capitalized in the decedent’s accounts as part of the cost of the property but they have been so treated by the respondent in the determination of the deduction allowable for depreciation on the property for the year 1936.

At the request of the petitioners in this proceeding the deficiency of $4,141.13 asserted in the deficiency letter was assessed on the Commissioner’s Maryland #3 list dated July 21, 1939, and was paid by the petitioners on July 27, 1939. It is stipulated that if the Board should hold that the taxes of $7,441.67 do not represent an allowable deduction for the year 1936, the deficiency of $4,141.13, as shown in the deficiency letter, is correct, and that, if the Board should determine that the taxes’ in question are an allowable deduction for the year 1936, petitioners have overpaid the Federal income tax of the decedent for the year 1936 in the amount of $3,931.41.

The only question for our determination is whether the taxes for the last half of the fiscal year ended June 30, 1936, on the real estate which the decedent acquired September 17, 1935, such taxes having been, paid by the decedent on March 31, 1936, are deductible in the decedent’s Federal income tax return for 1936. The respondent has determined that they are not; that under the laws of the District of Columbia the taxes in question accrued and became a lien against the property on July 1, 1935, the first day of the fiscal year ended June 30,1936; and that, since the decedent did not acquire the property until September 17, 1935, such taxes constituted a part of the cost thereof.

The rule is well settled that the deduction for taxes paid on real estate is allowable only where the taxpayer is the owner of the property on the date when liability for the tax becomes definite and fixed, and that a purchaser of the property who pays taxes thereon which had become a lien upon the property at the date of purchase is not entitled to a deduction for such taxes in his income tax return but must treat them as a part of the cost of the property. John Hancock Mutual Life Insurance Co., 10 B. T. A. 736; Grand Hotel Co., 21 B. T. A. 890; California Sanitary Co., Ltd., 32 B. T. A. 122; Theodore Plestcheeff, 35 B. T. A. 508; affd., 100 Fed. (2d) 62; Carl K. Lifson, Administrator, 36 B. T. A. 593; affd., 98 Fed. (2d) 508; Walsh-Maguire Co. v. Commissioner, 97 Fed. (2d) 983.

The statutory provisions for the assessment and collection of taxes on both real and personal property in the District of Columbia are found in chapter 4, title 20, of the Code of the District of Columbia. The pertinent provisions of the Code are. substantially as follows:

Section 621 provides that the fiscal year of the District of Columbia shall commence on the first day of July of each year.

Sections 671-678 provide for the designation of the several parcels of real estate by square and lot number.

Section 681 provides for the levy, for each and every fiscal year, of a tax on real and personal property subject to taxation in the District of Columbia at a rate to be fixed annually by the Commissioners of the District.

Section 691 directs the assessors to prepare annual tax ledgers at such time as will 'allow preparation of tax bills for collection purposes.

Section 696 provides for assessment in the name of the owner, with exceptions not here material.

Section 697 provides for the assessment and valuation of real property annually.

Section 700 requires the Board of Assistant Assessors annually on or or before the first Monday of January to make out and deliver to the assessor a return of the amount, description, and value of the real property subject to be listed for taxation in the District.

Section 702 requires the Board of Equalization and Beview to convene on the first Monday of January in each year to equalize the value of real property made by the Board of Assistant Assessors and to hear complaints in respect of the assessed values. . .

Section 703 provides that:

The valuation of the real property made and equalized as aforesaid shall be completed as nearly as practicable on the first Monday of June, annually, after which date no other or further complaints as to valuations shall be received, and when approved by the commissioners shall constitute the basis of taxation for the next succeeding year and until another valuation is made according to law, except as hereinafter provided.

Section 704 provides that on or prior to July 1 of each year the Board of Assistant Assessors shall make a list of all real property which shall have become subject to tax and is not then on the tax' list1, affixing value thereon. Complaints as to such values are to be heard and determined between the first and third Mondays of July of the same year.

Section 705 provides that:

In addition to the annual assessment of all real estate made on or prior to July 1 of each year there shall be added a list of all new buildings erected or under roof prior to January 1 of each year, in the same manner as provided by law for all annual additions; and the amounts thereof shall be added as assessments for the second half of the then current year payable in the month of March. The board of equalization and review, hereinbefore referred to, shall hear such complaints as may be made in respect of said assessments for the second half of said year and determine said complaints between the first and third Mondays of January of. the same year.

Section 758 provides for the payment of real estate and personal property taxes in semiannual installments in the months of September and March, with penalties for delinquency. Exceptions are made in the case of taxes on family dwellings, which can be paid quarterly. (See secs. 740 and 741, Supplement 111.)

Sections 791-801 provide for the sale of real estate for delinquent taxes. The assessor is directed to prepare a list of real property on which taxes are in arrears on the first day of July of each year and the Commissioners are given authority to fix the date of sale. If no bid is received at the tax sale sufficient to pay the taxes due, the collector of taxes is authorized to bid the amount due, together with penalties and costs, and purchase the property for the District of Columbia. It is then provided in section 793 that the failure of the District “from any cause whatsoever, to enforce the liens acquired aforesaid shall not release the property from any tax whatsoever that may be due the District.” Section 800 also refers to the tax lien held by the District of Columbia on any property bid in at the tax sale.

The respondent’s contentions are that under the above provisions of the District of Columbia Code real estate taxes are assessed for each fiscal year as of July 1, the beginning of such year.

Ordinarily the listing and valuation for tax purposes of all real estate are required to be completed by the first Monday in June of each year, subject to a later adjustment not here material. The wording of section 705, “In addition to the annual assessment of all real estate made on or prior to July 1 of each year”, carries the plain inference that as to property already listed and valued the “assessment” is made on or prior to July 1. Of course, the tax can not be determined in amount and actually assessed until the rate is fixed. It is stipulated, however, that the real-estate tax rate for the year ended June 30, 1936, was fixed by the Commissioners on July 19, 1935. Thus it may be said that the amount of the tax on the real estate in question, for the entire fiscal year ended June 30, 1936, had become definite and fixed prior to the date of purchase of the property by the decedent in September 1935.

Does it follow that by reason thereof such taxes must be treated as a part of the cost of the property to the decedent ?

The Federal taxing statute authorizes the deduction of “taxes paid or accrued within the taxable year.” See section 23 (c) of the Revenue Act of 1934.

In Commissioner v. Coward (C. C. A., 3d Cir.), 110 Fed. (2d) 725, the court held, on facts quite similar to those in the instant case, that, where in a sale of real estate in the State of New Jersey the local taxes were adjusted to the date of sale, the purchaser was entitled to deduct in his Federal income tax return that portion of the taxes allocable to the period during which he was the owner of the property, although the taxes for the entire year had accrued prior to the date of purchase. In its opinion the court reasoned that the date of the “accrual” of the tax from an accounting standpoint was not controlling of the question of the right of the owner to the deduction of the taxes paid, and that:

* * * We mast determine whether a given payment is a forced contribution to the expense of government [that is, a tax], or whether it is something else — a voluntary capital expenditure, for example. Its solution must lie in a close analysis of the transaction of payment. It cannot, in our judgment, be solved by any rule of thumb that a property owner’s payment is not one of a tax on his property because a prior owner (on the accrual basis) might have been permitted to accrue it. For that permission to accrue may depend on technical exigencies of accounting utterly foreign to the later owner’s economic position in actually making the payment. * * *
Turning then, to the decisions which have actually come to grips with the problem at bar, we find them suggesting two and only two types of transactions where real estate taxes are not “taxes” within the meaning of the statute. In the first, property is sold and the buyer promises the seller to pay certain taxes on the property. There, by express contract, the payment of taxes is part of the consideration for the sale, and not a payment qua taxes. Falk Corp. v. Comm., 60 F. (2d) 204 (C. C. A. 7). It is also possible that such a contract might be implied in fact if the seller were personally liable for the tax, for it would be difficult otherwise to account for the buyer’s munificence in paying it. See Walsh-Maguire Co. v. Comm., 97 F. (2d) 983 (C. C. A. 6). The second transaction is the purchase of property to which a tax lien has attached. That property has in a sense two owners, the seller, and, through the lien, the state. Hence its full acquisition entails two payments, the nominal purchase price, and the taxes represented by the lien. Both have been treated alike as capital expenditures. Where, on the other hand, the tax payment falls into neither of these two categories — where it neither discharges (by contract, express or implied) the personal liability of another, nor what was originally a tax lien on another’s property — -the deduction has been permitted, Comm. v. Plestcheeff, 100 F. (2d) 62 (C. C. A. 6).

In the contract of sale here taxes were adjusted to the date of sale; that is, the purchaser contracted with the seller to pay only that portion of the 1936 taxes allocable to the period during which he was the owner of the property. There was no statutory tax lien on the property at the time of the sale; for apparently under the laws of the District of Columbia a lien for taxes does not arise until the property is sold for delinquent taxes. (See Code of the District of Columbia, secs. 791-801).

The owner of real estate in the District of Columbia is not personally liable for the tax thereon as in the case of the personal property tax, but “the property itself stands charged with the tax and may be levied upon.” Tumulty v. District of Columbia, 102 Fed. (2d) 254.

The taxes which the petitioners here seek to deduct are those for the latter half of the fiscal year commencing July 1, 1935, during all of which period the decedent was the owner of the property. Those taxes were not paid as a part of the purchase price, since in the purchase agreement taxes were adjusted to the date of the sale, the seller agreeing to pay that portion of the tax allocable to the period July 1 to September 17, 1935, while he was the owner, and the purchaser agreeing to pay the portion allocable to the remainder of the taxable year, when he was owner. Actually the decedent paid the taxes for the entire fiscal year commencing July 1, 1935, but of the taxes for the first half of the year amounting to $7,441.67, which he paid on September 28, 1935, $3,142.10 represented that portion of the tax allocable to the period preceding the sale and was credited against the purchase price. This amount was paid as a part of the purchase price of the property and so would not be deductible as a tax. That question, however, is not before us in this proceeding, the deduction here claimed being only for the $7,441.67 of taxes which the decedent paid March 31,1936.

We are of the opinion that the amount in dispute, which was paid by the decedent as a tax on the property for the period during which he was the owner, is deductible in the decedent’s income tax return as “taxes paid” within the taxable year.

Reviewed by the Board.

Decision will be entered that there is no deficiency' in income tax for 1936 but an overpayment of $3,931.41, which is refu/nddble tmder section 809 (a) of the Revenue Act of 1938.

Leech, Turner, Harrow, and Opper dissent.

Disney and Kern did not participate in the consideration of or decision in this report.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    Empire Trust Company, Margaret Prescott Tracy and William Ward Tracy, as Executors of the Last Will and Testament of William Dwight Tracy, Deceased, and Margaret Prescott Tracy, Individually, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90519.
    Promulgated April 16, 1940.

      Stuart McNamara, Esq., Ulysses S. Grant, Esq., and John F. Porter, Esq., for the petitioners.

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

Hill:

The principal facts are not in dispute. The parties differ only as to the legal implications and conclusions to be drawn from them. The petitioners concede that the transfer of the securities from the trust to Mrs. Tracy and their sale to Connors were prompted by the sole desire to creat'é and make available a deductible loss to reduce income tax liability on their joint income tax return for the taxable year. They insist, however, that all steps necessary to a bona fide absolute gift of the trust securities to Mrs. Tracy were legally taken and completed, and therefore the motive and purpose are not material here. On the question of “motive”, as affecting this issue, petitioners cite Commissioner v. Eldridge, 79 Fed. (2d) 629, and Commissioner v. Hale, 67 Fed. (2d) 561, ás authorities for the doctrine that “a taxpayer may resort to any legal method available to him to diminish the amount of his tax liability.” The respondent does not dispute petitioners’ construction of the law, but argues that it has no application here, because these transactions were mere shams, in that they “served no other purpose than to reduce income taxes.” Respondent cites United States v. Phellis, 257 U. S. 156; Gregory v. Helvering, 293 U. S. 465; Electrical Securities Corporation v. Commissioner, 92 Fed. (2d) 593; Hendee v. Commissioner, 98 Fed. (2d) 934; Handbird Holding Corporation, 32 B. T. A. 238; Royal Marcher, 32 B. T. A. 76, as supporting this objection. These decisions deal with statutory reorganizations which, for recognition, depend upon technical requirements not present here. Respondent’s objection may not be sustained merely on the ground that the sole purpose of the transactions was to reduce tax liability. Bingham v. White, 31 Fed. (2d) 574. We are also of the opinion that there was a sale of the securities to Connors. The evidence convinces us that all elements necessary to pass title to him were present. This evidence is not disputed and must be accorded full credit. Under the showing the respondent’s objection that the consideration was nominal only is without point, and the sale must be recognized. Alcoma Corporation, 28 B. T. A. 1292. The respondent, however, urges another objection which we think is well taken and fatal to petitioner’s claim. Independent of the question of whether there was a sale of the trust securities, respondent contends that there was no gift thereof to Mrs. Tracy for the reason that there was no intent on the part of either the trustee or Mrs. Tracy that she should take and hold the securities as her property, but that the sole intent of both was merely that title thereto should pass through her to a vendee pursuant to an agreement for such transfer and sale as constituent steps of one integral plan. Respondent further contends that if there was a gift at all to Mrs. Tracy it was a gift of the proceeds of the sale and not of the securities. The evidence sustains the facts upon which such contentions are based and we think the contentions sound. In support of his contention respondent cites Weil v. Commissioner, 82 Fed. (2d) 561. In that case Weil, on October 1,1930, claimed he made a gift of corporation stock to his four minor children. He did not cause the stock to be transferred on the corporation’s books and executed no writing purporting to convey the securities. He took them from among his certificates of stock which he held in a safety deposit box and placed two certificates of 100 shares each in each of four envelopes bearing severally the names of his minor children in which he kept other securities belonging to them and put the envelopes back into the box. He preserved a memorandum of the certificate numbers and made entries of them on a loose-leaf memorandum book which showed the various securities owned by his children. According to a preconceived plan Weil, on October 9, 1930, caused the stock in question to be sold through a broker in the name of his children and an aliquot share of the proceeds to be credited to each of them. The court held that there was a gift of the proceeds of sale but not of the stock sold. In the IVeil case, as in the instant case, the taxpayer admitted that his decision to sell the shares was arrived at before he decided to make the gifts, and that his decision to make the latter before selling was motivated by his desire to “divide the income tax” which he thought permissible. The court said in part:

We think the controlling fact is that Weil proposed at all times to sell the stock and kept control of it to do so. * * * This retention of control for the purpose of exercising dominion over them by sale is inconsistent with a present absolute gift, the legal result of which would have been to prevent a sale.

In the instant case the trustee did not relinquish control of the securities until they were sold and Mrs. Tracy did not gain control of them at any time.

In point on the same issue is the Board’s decision in F. Coit Johnson, 33 B. T. A. 1003; affirmed in Johnson v. Commissioner, 86 Fed. (2d) 710. The question in that case related to the legal effect of a gift of a $400,000 bank check made by a taxpayer to his wife pursuant to a plan whereby and through which the funds represented were made the corpus of a trust and immediately loaned to the husband upon his unsecured interest-bearing note. Like the plan at bar, the scheme was carefully worked out in advance by lawyers, and intended, among other purposes, to reduce the taxpayer’s income tax burdens by creating an interest-bearing debt. That taxpayer paid interest to the trust on his said note and claimed a deduction from income for the same as “interest paid upon an indebtedness.” This Board sustained the respondent’s disallowance of the taxpayer’s claim upon the ground that there was no bona fide gift made, in first instance, from the latter to his wife of the trust corpus, and therefore, no debt created by the pretended loan. The Circuit Court of Appeals, in sustaining our decision, among other things, said:

Counsel for tbe petitioner asserts tfiat tbe transactions above described resulted in tbe following legal relations: Mr. Johnson made an absolute and unconditional gift of $400,000 to bis wife; with her own property she set up a trust having a capital of $400,000; the trustee loaned this sum to Mr. Johnson upon his demand note bearing interest, and he paid such interest to the trustee in. 1931. If such were indeed the legal relations of the parties, it would follow as of course that the taxpayer should be allowed the claimed deduction, for it is too well settled to require discussion that legal transactions cannot be upset merely because the parties have entered into them for the purpose of minimizing or avoiding taxes which might otherwise accrue. * * * Despite such purpose, the question is always whether the transaction under scrutiny is in reality what it appears to be in form. * * *
But there is a fallacy in the petitioner’s contention, and it lies in the premise that he made an absolute and unconditional gift of $400,000 to his wife, and that her money set up the funded trust. There was an agreement between them that the money he made available to her was to be used in only one way; she was to pass it to the trustee upon terms which bound the trustee to return it to him upon request. Everything was done at the same time and as part of one transaction. Not for an instant did Mr. Johnson lose control of his “gift”, nor did Mrs. Johnson or the trustee have possession of it free from a duty to return it to him. * * *

We think the principle underlying that decision is applicable to the situation here. In this case the trust securities were purportedly transferred to Mrs. Tracy but such transfer was in compliance with, and in pursuance of, an agreement between her and her husband as trustee that such securities be immediately sold to establish a deductible loss on the joint income tax return of the Tracys. It is obvious that the transfer of the securities to Mrs. Tracy was more symbolical than actual and that there was no purpose to transfer them to her apart from the agreed plan to sell them. On this phase of the transactions, the record shows that all steps, including (a) assignment of the securities to Mrs. Tracy by the trustee; (b) the trustee’s instructions to the bank to transfer the securities to her account; (c) the direction to the bank to deliver them to the brokers for sale; and (d) the orders to the brokers to sell, were incorporated in a single set of papers, all of which were simultaneously transmitted to the bank over the joint signatures of the Tracys. These several steps, all being part of the single plan worked out by the lawyers and carried out pursuant to instructions, constitute the transfer and sale each a part of a single transaction the purpose of which was not to vest property rights in, and dominion over, the securities in Mrs. Tracy, but to sell the securities to create a loss available as a deduction for; tax purposes for the joint benefit of the Tracys. The petitioners argue that after the supposed gift Mrs. Tracy had complete control over the securities and could, at her election, have revoked the order of sale and retained or otherwise disposed of them for her sole use; and that, therefore, a completed gift inter vivos must be recognized. The answer to that argument is that, under the agreed plan adopted and consummated for the sole purpose of effecting a sale of the securities to create a deductible tax loss as above indicated, none of the rights or powers so claimed for Mrs. Tracy were vested, or were intended to be vested, in her by the transfer in question.

On the basis of the facts of the transaction between the trustee and Mrs. Tracy, we hold that there was no gift to Mrs. Tracy of the trust securities in question. We arrive at this conclusion independent of the consideration of the power of the trustee to make a gift of trust securities to Mrs. Tracy for the conceded purpose. We are of the opinion, however, that the trustee did not have the power to make a gift of trust securities to Mrs. Tracy other than for her exclusive use and benefit. The trust instrument gave the trustee power to transfer to Mrs. Tracy a part of the trust principal “absolutely and in fee for her exclusive use and benefit? The alleged gift of trust securities herein attempted to be made was not for the exclusive use and benefit of Mrs. Tracy but was for the joint benefit of herself and the petitioner, who was both her husband and the trustee of the trust. In our opinion, the transfer here in question, for the purpose for which the record shows it was made, was not authorized by the trust instrument and was therefore ineffective to pass title. For this additional reason we hold there was no gift of the trust securities in question to Mrs. Tracy.

The respondent concedes that Mrs. Tracy sustained a deductible loss on the sale of Utilities Service Oo. bonds which she purchased at the price of $5,250, April 12, 1929, and upon which she subsequently paid $20 as expenses of a bondholders’ committee. Upon the record, we find the sum of $5,270 to be the measure of Mrs. Tracy’s loss in the transaction, and hold said amount to be deductible on the joint return as a capital loss.

Reviewed by the Board.

Decision will be entered under Bule 50.

Akundell, Muedock, Black, and Disney dissent.


author: Murdock :

text:
    Walter M. Marston and Elizabeth C. Marston, Petitioners, v. Commissioner of Internal Revenue, Respondent. William E. Jones and Lillian D. Jones, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of Gordon Donald, Malcolm Donald, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 95064, 95801, 95802.
    Promulgated April 16, 1940.

      Frank L. Warfield, Esq., for petitioners in Docket No. 95064.

      Harold L. Ciarle, Esq., for petitioners in Docket Nos. 95801 and 95802.

      C. P. Reilly, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined the following deficiencies in income tax for the calendar year 1935:

Two issues are common to all three proceedings. Each petitioner alleges that the Commissioner erred in including in his income for 1935 the amount which he received in that year as a refund of the 1917 excess profits taxes of a partnership. The Commissioner alleges that if the amounts which he included were not income for 1935, then he erred in allowing each petitioner to deduct his share of the legal expenses incurred in recovering the refund. The petitioner in the Donald case also assigns as error the action of the Commissioner in including in income for 1935 interest on the refund accrued to the date of death of Donald. The facts in each case have been stipulated. The Board hereby adopts the stipulation in each case as its findings of fact.

Marston, Jones, and Donald were all members of a partnership from April 15, 1917, until the date of Donald’s death in 1922. The partnership paid excess profits taxes for 1917. Those excess profits taxes were deducted in computing the distributive share of each partner in the net income of the partnership. The distributive share of each partner, as thus computed, was included in his income for 1917. The income of the partners was not further reduced by any portion of the excess profits taxes for 1917 paid by the partnership. The income tax liability of the individual partners for 1917 was settled on the basis just described and the statute of limitations has long since run against any increase or decrease in their tax for 1917.

The Commissioner thereafter determined that the partnership had overpaid its 1917 excess profits taxes by $107,515.01. He refunded $31,772.12 and interest thereon in June 1927, but he refused to refund the balance of $75,772.89 and interest thereon, for the reason that any refund of that amount was barred by the statute of limitations. The partners then brought suit in the United States Court of Claims to recover the overpayment of $75,772.89 and interest. They won that suit and the amount of the tax, plus interest thereon to January 30, 1935, in the amount of $73,426.70, was returned to the partnership in 1935. The partnership made distribution after allowing for expenses of the suit.

Marston and Jones reported the full amount of their shares of the interest, before deducting the expenses, and claimed their shares of the expenses as a deduction on their returns for 1935. Donald’s executor reported that part of his share of the interest recovered which represented interest accrued on the refund from the date of Donald’s death and claimed as a deduction for expenses only that part of Donald’s share of the expenses applicable to the part of the interest returned as income. None of the petitioners returned as income for 1935 any part of the amount received by the partnership as a refund of excess profits taxes. The Commissioner, in determining the deficiencies, included in the income of each petitioner his entire share of the refund and interest and allowed each a deduction for his full share of the expenses.

The parties agree that a tax, paid in one year and later recovered, may be included in income of the year of recovery only in case the deduction of the erroneous amount of the tax for the earlier year resulted in the taxpayer paying less income tax for that year than he would have paid if the correct amount of the tax had been used properly in the computation of his taxable income. Houbigant, Inc., 31 B. T. A. 954; affd., 80 Fed. (2d) 1112; certiorari denied, 298 U. S. 669; Estate of William H. Block, 39 B. T. A. 338; Central Loan & Investment Co., 39 B. T. A. 981; Chevy Chase Land Co., 34 B. T. A. 150; Charles W. Nash, 34 B. T. A. 675; affd., 88 Fed. (2d) 477; Dixie Margarine Co., 38 B. T. A. 471. Cf. Grace M. Barnett, 39 B. T. A. 864. They disagree, however, on the question of whether these taxpayers paid less tax for 1917 than they owed, using the correct excess profits tax liability of the partnership for 1917.

The Commissioner points out that the larger erroneous amount of excess profits tax of the partnership for 1917 was deducted in computing each partner’s distributive share of the net income of the partnership. He argues that the smaller correct amount should have been deducted once in computing their tax liability for that year; the partners owe additional tax for 1917 which has long since been barred by the statute of limitations; and, therefore, it is proper to include the entire amount of the refund and interest in their income for 1935. The petitioners admit that they received the benefit, as the Commissioner contends, but rely upon the case of Reid v. Rafferty, 15 Fed. (2d) 264, as authority for the proposition that “the excess profits taxes paid by the partnership were deductible twice.” If they were entitled to deduct the correct partnership tax twice they overpaid their individual tax for 1917.

The Reid case was decided by the Circuit Court of Appeals for the Second Circuit in 1926. Keid was a member of two partnerships which paid excess profits taxes for 1917. Those taxes were deducted from the income of the partnership in determining his distributive share of the net income of the parnership which fee reported on his return, but on that return he claimed credit, in the form of a deduction from income, for his proportionate share of the excess profits tax imposed upon the partnership in accordance with section 1211 of the Revenue Act of 1917, amending section 29 of the Revenue Act of 1916. The Commissioner disallowed the credit and collected the additional taxes. . Reid sued to recover. The District Court held for the Commissioner, stating that Congress did not intend to allow an individual a double credit if his income was derived in part from a partnership, while to another, whose income arose from his own business, only one credit- was permitted. The Circuit Court paid little or no attention to the fact that the taxes had been deducted in computing Reid’s distributive share of the net income of the corporation, directed its attention to the specific provision allowing the individual partner a credit for his proportionate part' of the taxes, and, reversing the lower court, held for Reid. The effect of the decision was, of course, that the portion of the excess profits taxes paid by the partnership allocable to Reid’s interest in the partnership was deducted twice in determining his individual income tax liability. The petitioners in the present case point out that, inasmuch as they did not get this double benefit, they have overpaid their taxes for 1917. The Commissioner argues that they were not entitled to any such double benefit, the Reid case was incorrectly decided, and it should not be regarded as a proper authority in the decision of the present case.

Certiorari was not applied for in the Reid case. The Commissioner called attention to the decision in T. D. 3971, but never indicated in any published ruling that he acquiesced in it or intended to follow it. It does not appear that he ever interpreted the decision as requiring the allowance of a double benefit to partners. Gr. C. M. 13609, approved by the Commissioner August 31, 1934, states that the Commissioner decided in February 1934 to defend all cases raising the question decided adversely to the Government hi the Reid case. The references to the Reid case in New York Trust Co. v. United States, 87 Fed. (2d) 889; Johnson v. United States, 1 Fed. Supp. 778; and Seiberling v. United States, 22 Fed. Supp. 397, are merely statements that the case held that a partner’s net income must be credited with his share of the 1917 excess profits taxes imposed upon his partnership. Our attention has been called to no case in which the Reid case was relied upon in the decision of the case. Judge Littleton, of the Court of Claims, in a concurring opinion in Carver v. United States, 27 Fed. Supp. 608, expressed disapproval of the Reid case and said “that the Revenue Act of 1917 authorized and allowed only one deduction of the excess profits tax of the partnership in determining the distributable income of partnership taxable to the partners.” The Supreme Court, in the case of Ilfeld v. Hernandez, 292 U. S. 62, in discussing a claim involving a double deduction of losses, stated that, in the absence of a statutory provision definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers.

We think that the partners, in computing their individual income tax liability for 1917, were not entitled to benefit more than once from their proportionate share of the excess profits taxes paid by their partnership for 1917. This conclusion removes the entire foundation of all of the petitioners’ arguments on this point. They received for 1917 a benefit by deducting the taxes which were returned to them in 1935. They were not entitled to that benefit and, therefore, following the decisions already cited, the refund was income for 1935. This conclusion makes it unnecessary to consider the Commissioner’s contention which he made only as an alternative in case the Board held against him on the first point.

The only issue remaining for decision is that in the case of the estate of Gordon Donald. The petitioner there contends that interest on the award up to the date of the death of Donald was a capital asset of the estate and can not be income when captured in 1935. He might as well have made the same contention in regard to the principal of the award. However, the evidence fails to show that any asset representing the interest or principal of the claim was taken into the estate as a capital asset. The facts indicate, on the contrary that not until a number of years after Donald died was it reasonable to expect that such a refund might ultimately be recovered. We find no merit in this contention of the petitioner.

Reviewed by the Board.

Decision will be entered under Rule 50:


author: Harron :

text:
    London-Butte Gold Mines Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95858.
    Promulgated April 16, 1940.

      Lewis A. Dieh, Esq., for tRe petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Harron :

During its development stage, the petitioner in 1933 and 1934 mined and sold ore to two smelters for prices totaling $48,289.63, which amount was in part impounded with the District Court and in part withheld by the smelters pending the outcome of the litigation between petitioner and another mining company to determine the rightful owner of the ore mined and sold by petitioner. On May 20, 1935, after the petitioner had passed into its production stage, the Supreme Court of Colorado finally determined that the petitioner was the owner of the ore and therefore entitled to the impounded funds. Thereafter those who had withheld funds made payments to petitioner as the owner of those funds. The respondent included the amount of $48,289.63 in the 1935 taxable income of petitioner. The petitioner assails respondent’s action in this respect as erroneous.

Disregarding momentarily the special facts that petitioner is a mining company and that its business was in the developmental stage prior to February 20, 1935, and, in the production stage thereafter, could petitioner have accrued on its books in 1933 and 1934 the proceeds from the sales of ore made in those years, or were those proceeds accruable on the books only after May 20, 1935 ?

Petitioner keeps its books and reports its income for taxation on the accrual basis. It is a settled rule that income is not accruable until the right to receive the income and the amount of income to be received is established. Income is not accruable unless the taxpayer has good reason for believing that the income can be collected. Leo M. Klein, 20 B. T. A. 1057; American Fork & Hoe Co., 33 B. T. A. 1139. In Commissioner v. Darnell, Inc., 60 Fed. (2d) 82, the court said:

* * * if income has neither actually been received during the taxable year, nor the right to its receipt been definitely fixed during the year, as to both the existence of an obligation on the part of the payor and the amount to be paid, such income is properly to be allocated only to that year in which it was in fact received or in which the right to receipt became fixed and liquidated.

Herein the ownership of the ore which petitioner sold to the two smelters was in dispute until May 20, 1935. While the smelters did not deny their obligation to pay for the ore, the right of petitioner, as opposed to another mining company, to receive payment for the ore was not fixed and certain until May 20, 1935. The proceeds of the sales, therefore, would not have been accruable as income, ordinarily, until May 20, 1935, when the right to receive such proceeds was established. North American Oil Consolidated v. Burnet, 286 U. S. 417; United States v. Safety Car Heating & Lighting Co., 297 U. S. 88. The respondent so determined and included the proceeds from the sales of ore made in 1933 and 1934 in the taxable income of petitioner for 1935.

The petitioner, however, contends that since under the provision contained in articles 235 (a) and 23 (a)-15 of Begulations 77 and 86, respectively, the proceeds would have constituted a capital receipt or reinvestment of capital in 1933 and 1934, if then received or ac-cruable, such proceeds constituted a return of capital in 1935 when received. The petitioner’s contention that net receipts from minerals sold during the development stage of a mine constitute a return of capital because the above articles permit the crediting of net receipts against development expenses is not sound.

Articles 235 (a) and 23 (a)-15, supra, in so far as applicable provide as follows:

Allowable capital additions in case of -mines. — (a) All expenditures in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development state.

On stipulation it was agreed by petitioner and respondent “that if the proceeds from the ore sales had been received by petitioner during its development stage, that is prior to February 20, 1935, it would have been credited to development expense and not classed as income under Article 235 (a) of Regulations 77, and Article 23 (m)-15 of Regulations 86.” While the above stipulation refers to the term “income”, it can only mean that the proceeds from the 1933 and 1934 sales, if they had been received in such years, and assuming that the development expenses were in excess thereof, would not have been taxable income, but income nevertheless and not a return of capital.

Section 22 of the Revenue Acts of 1932 and 1934 provides that gross income includes:

* * * gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.

Articles 55 and 22 (i)-5 of Regulations 77 and 86, respectively, provide that:

In the case of a manufacturing, merchandising, or mining business “gross income” means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.

It is stated in Spring City Foundry Co. v. Commissioner, 292 U. S. 182, that, on an accrual basis, “total sales” are manifestly accounts receivable arising from sales, and these accounts receivable, less the cost of the goods sold, are includable in “gross income.” Apparently by “net receipts from minerals sold” referred to in article 235 (a) and 23 (m)-15, supra, is meant the total value or aggregate accounts receivable arising from total sales, less the cost of the goods sold. Under such regulations a mining company, during its development stage, is permitted to credit “net receipts from mineral sold”,' if any, against development expenses. In this case, did petitioner have any net receipts from mineral sold in 1933 and 1934 to credit against development expenses ? The answer must be in the negative because it was not until May 20,1935, that the petitioner’s right to receive the proceeds of sales was established. Under its system of accounting it could not properly accrue the amounts in question as income or receipts from sales prior to May 20,1935.

The petitioner points to the fact that it set up the sales as accounts receivable in 1933 and 1934 and that vrhen the proceeds were received in 1935 they were credited to such accounts. However, bookkeeping entries are not determinative of tax liability. Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216.

It is held that the petitioner had no “net receipts from minerals sold” in 1933 and 1934 which it could accrue on its books to be credited to expense during its development stage under articles 235 (a) and 23 (m)-15, sufra. It is further held that, since the proceeds of the sales here in question were not properly accruable as income prior to May 20, 1935, such proceeds can not be treated in 1935 for income tax purposes except upon the same basis as any other income received or accrued in 1935. Petitioner had reached the production stage of its business on February 20, 1935. Thereafter, receipts in 1935 from sales of ore not properly accruable in' prior years could not be credited against development expense under articles 235 (a) and 23 (m)-15, sufra, which permit such credit only during the development stage of the mine. The amount of $48,289.63 constituted taxable income in 1935. The action of the respondent in including the amount of $48,289.63 in petitioner’s taxable income for 1935 is approved.

Decision will he entered for resfondent.


author: Kern :

text:
    H. H. Wegener, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92333.
    Promulgated April 16, 1940.

      Charles H. Garnett, Esq., and G. F. Miller, G. P. A., for the petitioner.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Kern :

The only issue before ns is whether the respondent erred in including in petitioner’s income for 1935 the amount of $23,592.08 as additional income from drilling operations on the Husk County, Texas, oil leases.

In computing petitioner’s income tax liability the respondent considered Gant, Garvin & Wegener to be a partnership for income tax purposes and petitioner a partner. He considered that petitioner, as an individual contractor, drilled oil wells on the leased property at an agreed price, and determined that in the taxable year petitioner realized from such drilling operations a taxable net profit of $70,776.23, and had failed to include $23,592.08 of that amount in income.

The petitioner contends that Gant, Garvin & Wegener is not a partnership, and that the $23,592.08 was not taxable income to him.

It appears from the record that petitioner became associated with Gant and Garvin in the development of the Eusk County oil and gas leases early in 1932. No partnership agreement was entered into at that time, and it is obvious from the record that the parties did not intend to form a general partnership. It was a joint enterprise in which Gant, Garvin, and Wegener, and their individual interests in the Eusk County, Texas, oil and gas leases were jointly and severally liable for full performance of all obligations imposed upon Gant and Garvin under the original agreement and the supplement thereto. In order to borrow money they jointly and severally (as a partnership and as individuals) assigned their interests in the oil leases in trust as security for loans and provided for the payment of the loans from the joint income from the sale of oil and gas. These loans were repaid from oil and gas produced by the joint operation of the leases. In financial statements the petitioner stated that the Eusk County, Texas, operations were a joint venture and not a partnership. A joint bank account was opened in 1932. Letterheads bearing the name of Gant, Garvin & Wegener were printed and used in the business. Late in 1932 books of account were set up in the name of Gant, Garvin & Wegener, and thereafter billings were made, to and accounts paid by the firm. The enterprise was conducted by Gant, Garvin, and Wegener, who consulted with each other concerning the business and shared equally in the profits and losses. From the facts in the record we conclude that the development and operation of the Eusk County, Texas, oil and gas leases by petitioner and Walter H. Gant and Knox L. Garvin was a joint venture conducted under the name of Gant, Garvin & Wegener. As such it was properly treated as a partnership by the respondent for income tax purposes under section 801 (a) (3) of the Eevenue Act of 1934, and petitioner properly returned bis proportionate share of the net income from such venture. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110.

But the fact that Gant, Garvin & Wegener is considered a partnership for the purpose of computing its net income and the members of the firm are considered partners for the purpose of reporting their distributable shares of its taxable net income under the Federal revenue laws, does not necessarily mean that it is a general partnership and the members of the firm are partners for all purposes in the conduct of its business. Cf. Dolores Crabb, 41 B. T. A. 686; Sterling Morton, 38 B. T. A. 1270. It remains a joint venture, and such cases as Leo Schwartz, 7 B. T. A. 223; S. U. Tilton Estate, 8 B. T. A. 914; and Augustine M. Lloyd, 15 B. T. A. 82 (cited by petitioner), which deal with partnerships, are not controlling.

Petitioner argues that, regardless of whether Gant, Garvin & Wegener is a partnership, he is not subject to tax on one-third of the profit received from drilling because as to him it was a distribution of a part of his capital investment. This argument, while ingenious, is not in accordance with the facts. Gant, Garvin & Wegener, as coadventurers, were engaged in the business of developing and operating the leasehold. They jointly borrowed money for this purpose and entered into an agreement under which petitioner, who was a driller, undertook to drill the oil wells at an agreed price per foot. In the taxable year they paid petitioner under this contract $130,594.50 for the footage drilled. This was not a mere paper transaction. It was a transaction in which Gant, Garvin & Wegener paid out cash for oil wells, which became capital assets of the joint venture in which petitioner had the same individual interest as his coadvénturers. The $130,594.50 which was paid to petitioner by Gant, Garvin & Wegener was merely changed from capital assets in cash to capital assets consisting of oil wells, in which petitioner retained the same undivided interest he had in the cash. He can not, therefore, be said to have subtracted from the newly acquired assets a part of hjs capital investment therein and at the same time continue to hold an equal interest with his coadventurers in the property. He can not retain his capital in the joint venture and withdraw it too. It is true that the joint venture had a right to elect to treat “intangible” development costs as ordinary and necessary expenditures in its income tax return, Begulations 86, art. 23 (m) — 16, but it did not do this. Obviously it elected to capitalize the entire development cost, and we see no reason for treating it otherwise.

Petitioner argues in effect that in the taxable year he was engaged in drilling oil wells on his undivided one-third interest in the leased property at his own expense and without profit, and at the same time he was drilling oil wells on the undivided two-thirds interest of Gant and Garvin at a profit under a contract with them. We do not think the facts in the record add up to this construction.

It was necessary for the owners of the leases to borrow money to develop the property. Early in 1932 and before a loan was secured from the bank, each of the parties necessarily contributed his proportionate share of the cost of drilling and petitioner billed Gant and Garvin with their share of the cost. At this time they were associated under an oral agreement and there had been no assignment to petitioner of a one-third interest in the leasehold. In October 1932 petitioner and Gant and Garvin jointly borrowed $80,000, and petitioner acquired a one-third interest in the leasehold by assignment. Thereafter Gant, Garvin & Wegener conducted the business as coadventurers and not as individuals, using their joint capital, their joint credit, and their joint efforts in developing and operating the oil properties. A new agreement for drilling was entered into, which was subsequently changed as to price per foot, but the entire footage drilled at the agreed price was billed by petitioner to Gant, Garvin & Wegener, paid from the bank account of Gant, Garvin & Wegener, and treated as a capital investment. From the facts in the record and the relation of the parties, we conclude that the development and operation of the property was carried on by the joint venture and that petitioner as an individual drilled the oil wells for Gant, Garvin & Wegener, and not for himself as to his interest, and for Gant and Garvin as to their interest. We do not think that the joint venture was paying petitioner a profit for drilling wells on his own property.

Petitioner received from Gant, Garvin & Wegener the full contract price of $130,594.50 for the oil wells drilled during the taxable year. The cost of the drilling was $59,818.21. Obviously, he realized a profit in the amouiit of $70,776.23, which is income taxable to him.

The determination of the respondent is affirmed.

Decision will he entered under Rule SO.


author: Disnet:

text:
    Harry C. Aberle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92651.
    Promulgated April 16, 1940.

      James F. MoMuTlan, Esq., and Andrew R. MeQown, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Disnet:

In this proceeding there is involved income tax for the calendar year 1935 in the amount of $693.71. A stipulation of facts was filed, including documents attached thereto, and the facts therein set forth are found by us by reference. Such facts so far as necessary to examination of the question presented may be summarized as follows:

The petitioner, who resides in Pennsylvania, filed his income tax return for the calendar year 1985 with the collector for the first district of Pennsylvania.

In 1922 Frederick C. Aberle acquired from Benjamin Barron certain real estate in Philadelphia, Pennsylvania, subject to mortgages, one of which was to the Philadelphia Savings Fund Society and the other of which was satisfied on February 26, 1934. Frederick C. Aberle did not assume the mortgages. On the date of acquisition of the property, Frederick C. Aberle executed and delivered to the petitioner a declaration of trust which recited that the petitioner had furnished one-fourth of the purchase price for the conveyance and that a one-fourth interest in the property was held for the petitioner. Of the purchase price petitioner had furnished $23,323.82. After acquisition of the property, petitioner at various times, made contributions upon the mortgages, in a total amount of $55,411.71, and he has had allocated to him $10,561.54 of the amount of depreciation sustained upon the property, leaving his net investment in the property $44,850.17.

Frederick 0. Aberle died October 11, 1934, and under his will petitioner as his son received a one-fourth interest in the real estate above referred to, and thereafter was the owner of an undivided one-half interest therein. On October 30, 1934, petitioner and his coowners, through their counsel, advised the Philadelphia Savings Fund Society of their intent to divest themselves of the ownership of the property in the near future, and stated it was their understanding that the taxes for 1934 and prior thereto had been paid and asked to be advised at the early convenience of the Philadelphia Savings Fund Society whether it desired to accept a deed from the owners at that time, On November 17, 1934, the mortgagee advised that it was not in a position at the moment to give an answer whether it would take a deed to the property, but that it would write petitioner’s counsel a little later in that regard. On December 5, 1934, the mortgagee addressed petitioner’s counsel, inquiring whether the owners of the property would agree to assume the costs incident to the transfer of title to the mortgagee and stating that upon reply the mortgagee would then be in a position to give a prompt answer. On December 6,1934, petitioner through his counsel advised the mortgagee that the owners would agree to assume the costs incident to the transfer of title to the mortgagee, such costs to include recording of deed, title insurance in a nominal amount, not to exceed $2,000, cost of acknowl-edgements to the deed, and revenue stamps, all upon condition that the mortgagee accept a deed prior to January 1, 1935, or that in event that the deed should not be given by that date, that it would be given within 30 days thereafter, and that in any event the owners would be saved harmless for payment of 1935 real estate taxes assessed against the property, and that the mortgagee would, when such taxes became due and payable, and before delinquency, pay or cause the same to be paid. A prompt answer was requested as to whether the mortgagee would accept the title.

On December 14, 1934, petitioner’s counsel wrote the mortgagee, referring to a telephone conversation of a day or two prior thereto and the mortgagee’s statement that it would accept a deed to the property upon the conditions set forth in the recent exchange of correspondence, and stating that deed was being prepared and that title insurance had been ordered. A letter of confirmation of the agreement was requested. On December 15, 1934, the mortgagee wrote petitioner’s counsel, confirming a verbal statement of the vice president of the mortgagee accepting the proposition made by petitioner’s counsel in the letter of December 6,1934. Immediately thereafter and in accordance with the agreement of the owners to pay the costs incident to the transfer of title, the petitioner and others applied to a title company for title insurance. The title company on December 29,1934, furnished petitioner a settlement certificate showing various requirements of an insurable title.

On January 4, 1935, a deed from the petitioner and his coowners covering the property was mailed to the mortgagee, unexecuted, with a letter stating that the deed had been approved by the Real Estate-Land Title & Trust Co. and that if the deed met with approval and the mortgagee would return it, it would be. executed and a time of settlement arranged.

On January 14, 1935, the mortgagee answered, stating that the conclusion had been reached that the deed might be accepted, accompanied by title insurance, and that the deed was being returned for execution and return, upon receipt of which settlement would be arranged. The deed was executed on January 21,1935, by the owners of the property and was returned to the mortgagee by letter of January 22, 1935, advising that the owners were ready to complete the settlement at once and asking an early date therefor.

On January 31, 1935, a settlement was effected between the owners of the property and the mortgagee. The owners of the property paid expenses of $281.50 in connection with the transfer of title.

City and school taxes in Philadelphia, Pennsylvania, are assessed against the registered owner of realty as of January 1 of each year, at which time the record owner becomes personally liable for the taxes assessed. The city and school taxes so assessed against the properties covered by the mortgage as of January 1, 1935, were $4,865.16, and that amount was accrued by the Philadelphia Savings Fund Society on its books as of February 28, 1935, as representing city and school taxes assessed against the property as of January 1, 1935. The taxes so assessed were paid by the Philadelphia Savings Fund Society on or about February 28, 1935.

The petitioner in his income tax return for the year 1935 claimed and deducted a loss upon the transaction in connection with the property above referred to in the amount of $44,850.17. The Commissioner in determining the deficiency took the view that the loss sustained by the petitioner is a capital loss, limited to $2,000, in accordance with the provisions of section 117 (d) of the Eevenue Act of 1934, and therefore allowed a capital loss of $2,000.

The only question presented to us here is whether the loss suffered by the petitioner is an ordinary loss deductible in full, or whether it is a capital loss limited by section 117 (d) of the Eevenue Act of 1934. The parties seem to have no controversy as to whether the property was a capital asset. In short, the question narrows itself to whether the agreement to hold the petitioner harmless from taxes accruing as his personal liability on January 1,1935, constitutes such consideration for the transfer of the property as to make it a “sale or exchange” within the text of section 117. Since the petitioner neither executed nor assumed the mortgage upon the property, no consideration for the transfer can be found in his being freed from such mortgage. Commonwealth, Inc., 36 B. T. A. 850.

The petitioner argues in substance that the situation presents in effect an abandonment of the property and that the date of tax incidence, January 1, 1935, passed merely because of delay in the process of transfer and should not enter into consideration. He points out that in the first letter on October 25,1934, to the mortgagee from petitioner’s counsel, it was suggested that the intent of the owners of the property was to divest themselves of ownership in the near future, thus automatically relieving the owners of personal liability for the payment of 1935 taxes, and that, for its own interest, the mortgagee agreed, prior to January 1,1935, that the taxpayer would be relieved of the taxes if the transaction could not be closed prior to January 1,1935.

Petitioner claims his loss in 1935. He cites Greenleaf Textile Corporation, 26 B. T. A. 737; affd., 65 Fed. (2d) 1017, to demonstrate that his loss- was not suffered until there was “irrevocable divesting of title”, and that:

* * * Hence the only year in which the taxpayer in the instant case could claim a loss with respect to the encumbered real estate was the year 1936 in which the taxpayer conveyed the property to the mortgagee, thus irrevocably divesting himself of title thereto. The conveyance is the identifiable event fixing the time of the loss.

This position, though correct, is wholly inconsistent with his contention that he did not, on January 1, 1935, become personally liable for the taxes so that the agreement by the mortgagee to pay same would constitute consideration, making the transaction a sale under the statute. We are unable to see how he can consistently claim his loss in 1935 and yet claim that there was no consideration for the transfer. Assumption of taxes for which he became liable is obviously a valuable consideration. The taxes here became a personal liability of the petitioner on J anuary 1, 1935, by virtue of the fact upon which petitioner relies to place his loss in 1935 — his ownership on January 1, 1935. The fact that he had a contract, not yet consummated, that the mortgagee would pay the taxes, did not relieve him from liability. Assuming that he could have claimed a loss by abandonment in 1934, which is in effect his contention, he can not claim it in 1935. By that time valid consideration had arisen. The fact that he had a contract that the mortgagee pay the taxes only serves to accentuate the conclusion that such contract constituted consideration, and that there was a sale. The petitioner particularly provided in the agreement that he would transfer only upon condition either that the matter be closed by deed before January 1 (in which case there would be no consideration of value, he not being yet liable for taxes) or, if closed after J anuary 1, that he be saved harmless from taxes. In other words, after January 1 he would convey only for a consideration — a valuable consideration. On December 29, 1934, the title insurance company furnished a certificate indicating a number of requirements to be met before the title could be insured, in accordance.with petitioner’s agreement by his letter of December 6 to furnish insurance “in á nominal amount, not to exceed $2,000.” Whether these requirements were met before January 1, the- record does not show, but petitioner did not proffer a deed until January 4. The mortgagee on January 14, 1935, stated that “in view of your statement that the Estate is amply sufficient to pay all debts, legacies, and taxes, we hare concluded that we may accept the Deed accompanied by Title Insurance.” In other words, the mortgagee did not accept petitioner’s title until January 14, because conditions had not been met and in fact still required the title insurance, which apparently had not yet been furnished. The deed was not executed until January 21, 1935, and settlement was not made between the parties until January 31, 1935. Had the mortgagee, because of dissatisfaction with the condition of the title, refused it instead of accepting it, subject to furnishing of insurance, on January 14, and had the petitioner then made the same deal with some other party, plainly there would have been consideration, in the assumption of taxes, for the conveyance. Thus it is demonstrated that an executory agreement which' was pending prior to January 1, but at all times was subject to being defeated by failure to comply with the title requirements made by the mortgagee, can not be said to affect the situation. Indeed it appears in the letter of January 14 that the mortgagee actually then waived requirements as to clearing the title, on a statement that the estate was sufficient to pay debts, etc. This shows that consummation of any deal was even then optional with the mortgagee. In his income tax return the petitioner stated that “ January 1935 property was turned over to the Phila. Saving Fund Society.” The transaction, though initiated in 1934, did not have any tax consequences here involved until 1935. Lucas v. North Texas Lumber Co., 281 U. S. 11, in which, as herein, a sale was agreed upon in one year, but the papers were not prepared until the next, and vendor’s income was held to arise in the latter year.

In Harry F. Doyle, 39 B. T. A. 940; affd., 110 Fed. (2d) 157, we held that the petitioners had income in 1934 in the amount of moneys received in 1929 and 1930 on an executory contract to sell a house, because “It was not until 1934 that the petitioner learned as a result of the decision of the court that they could not obtain specific performance of the contract * * Similarly, herein the petitioner did not know until 1935 whether there would be performance of the mortgagee’s agreement, conditioned on title, etc., to take the property. If, as in the Doyle case, he had been selling for a profit, moneys received on purchase price in 1934 would not have been income until 1935. By the same token he had no loss until 1935, after his personal tax liability had arisen.

Under the law of Pennsylvania, secs. 20713-20715, also sec. 20936, Compilation of 1920, the owner of real estate is subject to a personal liability for tbe payment of taxes. His goods and chattels are subject to distraint and sale for failure to pay delinquent taxes. He can not escape such liability even by transferring title to an irresponsible party. Pennsylvania Co. for Insurances, etc. v. Bergson, 307 Pa. 44; 159 Atl. 32. There was no evidence of insolvency of petitioner. We conclude and hold that there was valid and valuable consideration for the transaction consummated in 1935, and that it constituted “sale or exchange” of a capital asset under section 117 (d) of the Revenue Act of 1934. In Pender v. Commissioner, 110 Fed. (2d) 477, it was held under the same revenue act that the mortgagors’ conveyance of the mortgaged property and other property in consideration of release of liability was a sale. The court said the sale “can not be deprived of its character as a sale merely because made to the holder of the notes secured by the mortgage.” In Commissioner v. Coward, 110 Fed. (2d) 725, the court, in holding that a purchaser could deduct taxes paid, pointed out that there was at date of purchase no lien, no personal liability, and no agreement to pay taxes as part of the consideration.

The action of the respondent in applying the capital loss provision is therefore approved.

Beviewed by the Board.

Decision will he entered under Buie 50.'


author: Van Fossan:

text:
    Estate of J. Harold Dollar, Deceased, Robert Dollar, II, and Keith R. Ferguson, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent. Agnes Barr Dollar, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97282, 98727, 97283, 98728.
    Promulgated April 17, 1940.

      E. F. Treadwell, Esq., and Keith B. Ferguson, Esq., for the petitioners.

      Arthwr Murray, Esq., for the respondent.
   OPINION.

Van Fossan:

The only issue for our determination is whether or not certain stock was community property of Dollar and his wife during the years 1934 and 1935. Petitioners contend that decedent and his wife orally agreed, both before and after July 29, 1927, and before the taxable years, that all property owned by decedent was community property. Respondent argues that petitioners have not shown that deceased and Mrs. Dollar made an agreement converting all of decedent’s property into community property.

Before the amendment of the Code of California, July 29, 1927, a wife’s interest in property was no more than an expectancy, Stewart v. Stewart, 204 Cal. 546; 269 Pac. 439, and income derived from community property before that date was includible in the husband’s income for Federal income tax purposes. United States v. Robbins, 269 U. S. 315. In 1927 the Legislature of California enacted a statute, effective July 29, 1927, giving each spouse a vested interest in the community but leaving the management in the hands of the husband. California Civil Code, sec. 172a. Income from community property acquired after that date belongs equally to husband and wife and should be reported separately by each in filing Federal income tax returns. United States v. Malcolm, 282 U. S. 792. Amendments which increase the community rights of the wife do not, however, give the wife a vested interest in property owned by the husband before their enactment. Spreckels v. Spreckels, 116 Cal. 339; 48 Pac. 228; Levell v. Metropolitan Life Insurance Co., 118 Cal. App. 426; 5 Pac. (2d) 430. Nor is the income from such property divisible community income for purposes of the Federal income tax. Hirsch v. United States, 62 Fed. (2d) 128.

The passage of section 172a of the California Civil Code did not, of itself, affect Mrs. Dollar’s interest in property acquired by Dollar prior to the effective date of that section. We must inquire, therefore, as to the existence of an agreement entered into after July 29, 1927, between decedent and Mrs. Dollar converting that property into community property in which she would have a one-half interest.

Under California law a husband and wife may make agreements concerning their interests in property. California Civil Code, sec. 158. They may, by agreement, convert separately owned property into community property. Yoakam v. Kingery, 126 Cal. 30; 58 Pac. 324. Such an agreement need not be in writing. In Kenney v. Kenney, 220 Cal. 134; 30 Pac. (2d) 398, the court said:

In the instant case the respondent testified that the parties had orally agreed both before and after marriage that all property then owned by them or subsequently acquired was to belong to them equally or as respondent put it, “fifty-fifty”. That this agreement not only existed between the spouses but was in fact consummated by them during their marital life is established and confirmed by their acts * * *.

In the case of In re Sill's Estate, 121 Cal. App. 202; 9 Pac. (2d) 243, the court said:

* * * Without regard to the presumption found in section 164 of the Civil Code, it is well settled that the separate property of either or both spouses may be transmuted into community property and this may be done without the necessity of any written agreement providing the agreement or understanding to that effect is fully consummated. (Estate of Kelpsch, 203 Cal. 613 (265 Pac. 214) ; Title Insurance & Trust Co. v. Ingersoll, 153 Cal. 1 (94 Pac. 94) ; Estate of Wahlefeld, 105 Cal. App. 770 (288 Pac. 870) ; Vieux v. Vieux, 80 Cal. App. 222 (251 Pac. 640) ; Martin v. Pritchard, 52 Cal. App. 720 (199 Pac. 846).) It clearly appears from the foregoing authorities that “the agreement or understanding between the parties is not required to be in any particular words and need not be attended with any particular formality as long as it may be fairly inferred from all of the circumstances in evidence that a community interest was intended by the parties. * * *
In the present case respondent contributed her separate property along with the separate property of the deceased to acquire and improve a place to be used as their home. It does not appear that they had previously given any thought to whether the property should be conveyed to the deceased or to respondent or to both of them. When confronted with making this decision deceaséd said nothing and respondent said it made no difference. Immediately thereafter deceased assured respondent that “It is just as much yours as it is mine; this is our home.” While the parties did not formally agree in precise words that the property should be community property, it is a fair inference from all the circumstances that such was their intention and understanding.

In Helvering v. Hickman, 70 Fed. (2d) 985, the Circuit Court of Appeals for the Ninth Circuit affirmed our decision that a husband and wife might orally agree that the earnings of each should be separate property so. that the earnings of the wife were not taxable to the husband.

In the present cases, the income from the property in question is divisible between decedent and Mrs. Dollar only if they agreed after July 29, 1927, that the property was owned by the community. Mrs. Dollar testified that throughout the period of their marriage she and her husband had considered all marital property to be owned by each equally. The testimony of both witnesses of petitioners convincingly demonstrates that decedent and Mrs. Dollar agreed that all property was owned by the community.

Respondent contends that petitioners have not shown any definite date of agreement after July 29, 1927. The evidence does not definitely fix the date upon which the decedent and his wife agreed concerning their property interests. It is clear, however, that they first made such an agreement at the time of their marriage. The agreement was reaffirmed at various times throughout the period of the marriage. Before sailing for China in 1929, they again agreed that all property was community property. Finally, the wills of 1981 and 1984 are written evidence of the oral agreement between Dollar and his wife that they had an equal interest in the property. Respondent points out that the wills are of no value because wills speak only as of the date of death of the testator. Here, however, the wills were not in evidence as testimentary dispositions but were offered in support of the oral agreement of the spouses. The wills are strong corroboration of the testimony of the witnesses. Although purported oral agreements should be given close scrutiny, the present facts withstand the most minute inspection.

Respondent urges that the acceptance by decedent and Mrs. Dollar of the revenue agent’s report on their 1930 returns indicates that they did not intend the property to be held by the community. This fact is not conclusive. Until the 1935 returns were filed no lawyer assisted in the preparation of the tax returns of decedent and his wife. The fact that Dollar included the entire income of certain stock in his income tax returns can not be taken as an admission that the property was not community property. At the most, it is merely an indication that deceased believed that the income was his income for Federal income tax purposes. Such action is consistent with the acceptance of the agent’s report.

Decedent and Mrs. Dollar, after July 29, 1927, reaffirmed a valid agreement which converted the separate property of each into community property. We hold, therefore, that the income from the property in question was divisible community income and one-half was includible in the gross income of each spouse during the years 1934 and 1935.

Decisions will be entered winder Bule 50.