author: Mubdook:

text:
    Harry D. Kremer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50359.
    Promulgated November 12, 1934.

      Harry J). Kremer, Esq., pro se.

      TI. D. Thomas, Esq., for the respondent.
   OPINION.

Mubdook:

The petitioner’s services to the state, county, and city were rendered in connection with the exercise by each of an essential governmental function peculiar to sovereignty. The Commissioner does not contend to the contrary. There was no statutory provision for the employment of an attorney by the revenue agents. The petitioner, on his part, has conceded that he was not an officer of the state or any political subdivision thereof. Cf. J. F. Roberts, 13 B. T. A. 438; affd., 44 Fed. (2d) 168; Lucas v. Reed, 281 U. S. 699, in effect affirming 13 B. T. A. 513. The question presented and argued is whether the petitioner was an independent contractor with the state, county, and city, or whether he was an employee whose compensation could not be subjected to tax without imposing a burden upon his sovereign employer and interfering with the exercise of an essential function. No general rule has ever been laid down for the solution of such questions. Recourse must be had to the reason upon which the rule rests and the decision of each case must then be reached upon the facts in that particular case. Metcalf & Eddy v. Mitchell, 269 U. S. 514; Burnet v. Livezey, 48 Fed. (2d) 159. It will not be necessary in this case to enter into an extended discussion of underlying principles or to review the many cases on the subject. The Commissioner has held that this petitioner’s income from these three sources was subject to tax. The petitioner has offered proof for the purpose, not only of overcoming the presumption of correctness attaching to the Commissioner’s determination, but of showing further that he was in each instance an employee rather than an independent contractor.

It seems pretty clear that the petitioner was not an employee of Kenton County or of the city of Louisville and that the compensation received by him from these two political subdivisions was properly subjected to tax by the Commissioner. He entered into two contracts with the county. His services were sought in each instance for the purpose of accomplishing a particular result. Louisville, Evansville, & St. Louis R. R. Co. v. Wilson, 138 U. S. 501; Haight v. Commissioner, 52 Fed. (2d) 779. He was engaged only temporarily and, apparently, because of some special knowledge which he had relating to a certain group of taxpayers. Cf. B. F. Martin, 12 B. T. A. 267. He was required to use his judgment and professional skill to bring about a desired result. Metcalf & Eddy v. Mitchell, supra. The same was true of his relations with the city of Louisville. Fie did not devote all or even the principal part of his time to the work of the county or city and neither had first call upon his services. Cf. Underwood v. Commissioner, 56 Fed. (2d) 67. He maintained his own office, employed his own office force, and paid his own expenses. Cf. Underwood v. Commissioner, supra. He chose the time and manner in which the work was performed, and the control to which he was subject was not inconsistent with the relation of attorney and client. The facts of record indicate that the petitioner was an independent contractor with Kenton County and the city of Louisville. Cf. R. E. L. Johnson, 25 B. T. A. 359; J. F. Roberts, supra; Lucas v. Reed, supra.

The question of the taxability of the amounts which he received from the revenue agent for services performed for the state is somewhat closer. The state had first call upon his services, and the larger •part of his time was devoted to state work. He was required to give bond. He was engaged for a definite period and could only be removed during1 that period by the revenue agent for cause. His work has been continuous. He was not engaged to handle an isolated case or group of cases. He was not left entirely to his own devices to accomplish a desired result. Cf. Matthews v. Commissioner, 29 Fed. (2d) 892. Instead, he was required to submit his work at times for approval by the revenue agent and the state tax commission. He testified that the revenue agent and the state tax commission supervised, directed, and controlled his work. But the extent of this supervision, direction, and control was not explained as fully as it might have been. Cf. Haight v. Commissioner, supra. However, his general statement was not contradicted. The above facts and other facts which might have some tendency to show that he was an employee of the state have not been overlooked. Nevertheless the evidence as a whole tends to support the Commissioner’s determination. There was no statutory provision authorizing the revenue agent at large to employ an attorney. Yet he needed attorneys and he entered into a contract with the petitioner. Thus the terms under which the petitioner was engaged to render services were fixed by contract and not by law. Cf. Edward M. Lynch, 30 B. T. A. 727. The revenue agent engaged him and paid him. His compensation for each case which he handled successfully was computed separately. He received nothing for work which did not result in the collection of taxes. The petitioner maintained his own office, employed his own office force, and paid his own expenses. Cf. Underwood v. Commissioner, supra. He usually selected the work which he was to do and chose his own time for doing it. His training, skill, and judgment determined the way in which the work was done. The revenue agents were not attorneys. It does not appear that the state tax commissioners were attorneys, neither does it appear that the supervision, direction, and control exercised by these agencies over the petitioner was inconsistent with the relationship of attorney and client.

The petitioner also argued that his income from these three sources would not be taxable because in each instance he acted as an agency of a political subdivision of a state through which it exercised an essential governmental function and to tax his income would impose a burden upon the state. His case, however, is no stronger on this contention than was the case of Lucas v. Reed, supra. The evidence does not show that the imposition of this tax would impair in any substantial manner the taxpayer’s ability to discharge his obligations to the political subdivisions or the ability of the latter to procure the aid of private services. Metcalf & Eddy v. Mitchell, supra.

The petitioner is liable for the penalty computed upon his income subject to tax, since he filed no return reporting this income. It does not matter why he failed to file a return. Section 3176, Revised Statutes as amended by section 1008, Kevenue Act of 1924, and section 1103, Revenue Act of 1926. John B. Nordholt, 4 B. T. A. 509; John T. Sline, 9 B. T. A. 1222; E. M. Green, 11 B. T. A. 185; Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; Robert E. McGrath, 30 B. T. A. 562.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Murdock : Smith,

license: Public Domain

text:
    Theodore P. Grosvenor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60381.
    Promulgated November 12, 1934.

      E. Sheldon Stewart, Esq., for the petitioner.

      Frank Thompson, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $4,455.44 in the petitioner’s income tax for 1929. The facts have been stipulated or admitted. The petitioner assigns as error the action of the Commissioner in adding to income as reported the income of two trusts created for the benefit of two minor daughters. Each trust was to terminate when the child named as beneficiary became 21 years of age or at her death if she died a minor. The property was then to go to the petitioner or his estate. During the continuation of each trust the income was to be paid to the petitioner’s wife and was “ to be expended by her for the support, maintenance, and education ” of one of the minor daughters. The Commissioner argues that “ in effect they [the trusts] accomplish nothing more than a setting aside of future income to take care of personal, living, or family expenses ’ without a complete and unqualified transfer of the property producing that income ”; the petitioner was the real beneficiary; and the income of the trusts is taxable to him either under section 162 (b) or under section 167 of the Revenue Act of 1928. He has cited no case in point. See, however, Edmund O. Schweitzer, 30 B. T. A. 155.

Personal, living, or family expenses are not deductible. Section 24 (a) (1). However, the petitioner is not claiming a deduction. The question is whether or not the income of these trusts is taxable as a part of his income under the Revenue Act of 1928. These trusts were valid trusts. The income of trusts is taxable to the trustees except as provided in sections 166 and 167. See section 161 (b). The Commissioner does not contend that section 166 applies. Cf. Mabel A. Ashforth et al., Executors, 26 B. T. A. 1188; Langley v. Commissioner, 61 Fed. (2d) 796. No part of the income of these trusts for 1929 could have been distributed to the grantor, accumulated for future distribution to him, or applied to the payment of insurance premiums. Thus section 167 does not apply. Francis J. Stokes, 28 B. T. A. 1243. Section 162 (b) allows the trustees a deduction of the amount currently distributable to the “ beneficiaries ” and requires that a like amount be included in computing the net income of the beneficiaries.” There is no reason to believe that this term was intended to have a broader meaning than it ordinarily has in the law of trusts. This petitioner was not a beneficiary of these trusts within the ordinary and usual meaning of that word as used in relation to trusts. Supplement E of the act relating to estates and trusts contains specific provisions taxing the income of certain trusts to the grantor. The fact, conceded by the respondent, that it contains no specific provision to cover a case like this is significant. The Commissioner should address his argument to Congress, for it may well be that Congress could have taxed this income to this petitioner had it chosen to insert language appropriate for that purpose in the act. Cf. Langley v. Commissioner, supra; Burnet v. Wells, 289 U. S. 670.

The only difference between this case and the recent case of Edmund O. Schweitzer, supra, is that there the income was payable to the husband, while here it is payable to the wife. This difference seems immaterial. The Schweitzer case is contrary to the earlier case of Francis J. Stokes, supra, and to the reasoning of other cases wherein the income of trusts created by a parent for the support, maintenance, and education of his or her children was held not taxable to the grantor. Irene (PI). Ferrer, 20 B. T. A. 811; S. A. Lynch, 23 B. T. A. 435; Lilian K. Blake, 23 B. T. A. 554; John H. Stevens, 24 B. T. A. 52. Cf. C. B. III, p. 116; Frank P. Welch, 12 B. T. A. 800; Sidney R. Bliss, 26 B. T. A. 962; Edson v. Lucas, 40 Fed. (2d) 398; William Ernest Seatree, 25 B. T. A. 396; affd., 72 Fed. (2d) 67. See also the recent case of Franklin Miller Handly, 30 B. T. A. 1271. The Schweitzer case will not be followed in the future. The case of Willcuts v. Douglas, 73 Fed. (2d) 130, may be distinguishable, but if it is not, then we must respectfully disagree with the court which decided that case. There the court apparently failed to appreciate the fact that in the Wells case there was specific statutory authority for including in the income of the grantor the amounts applicable to the payment of the insurance premiums.

The Commissioner amended his answer to claim an increased deficiency because of his alleged error in failing' to include, in computing the net income of this petitioner, the income of a third trust created for the benefit of the petitioner’s wife. The petitioner had created a trust for the benefit of his wife in 1927. A trust company was named trustee. The trustee was to hold, manage, invest, and reinvest the corpus and pay the net income to the wife for life. The grantor retained no control over the trust property except the right during his life, after notice of 13 months, to revoke or amend the trust deed. He gave no such notice which would affect the taxable year here involved. Clearly the income of that trust is not taxable to the petitioner under either provision of the act relied upon by the respondent.

Eeviewed by the Board.

Decision will be entered) under Rule 50.

AeuNDELL concurs in the result.

Smith,

dissenting: The respondent has held that the petitioner was the real beneficiary of the trusts which he created. I think that he was. The income of the trusts was used to discharge, in part at least, the petitioner’s obligation to support his minor daughters. I can not subscribe to a view that a taxpayer may escape income tax liability in respect of income from his property by creating a trust and having the income of the trust paid to his wife to be used by her for the support, maintenance, and education of his minor children. I do not think that by this device the petitioner successfully avoided liability for income tax. Cf. Bromley v. Commissioner, 66 Fed. (2d) 552, affirming 26 B. T. A. 878; and Reinecke v. Smith, 289 U. S. 172.

But even if the result reached by the Board in this case is correct, I can see no occasion for overruling Edmund O. Schweitzer, 30 B. T. A. 155, now pending on appeal before the Circuit Court of Appeals for the Seventh Circuit. That case is distinguishable from the present case upon its facts. Schweitzer created certain trusts, the income of which was made payable to himself for the support, maintenance, and education of his three minor children and “ for no other purpose whatsoever.” From such source Schweitzer received $16,856.95 in 1928 and $16,170.81 in 1929. The Board held properly, I think, that Schweitzer was liable for income tax upon the income thus received. If not, the door for the “ facile evasion ” of income tax is wide open. Cf. Reinecke v. Smith, supra. There are other facts also which differentiate the Schweitzer case from the present one. Schweitzer provided that the trusts could be revoked at any time by the grantor with the consent of the grantor’s wife, who was, at most, a contingent beneficiary. In his income tax returns he claimed personal exemption for the three minor children.

Van Fossan, Seawell, and Adams agree with this dissent.


author: Adams:

text:
    Garrett J. Donnelly et al., Executors, Estate of Mrs. Catherine Donnelly, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56443.
    Promulgated November 12, 1934.

      Joe F. Orr, Esq., for the petitioner.

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

Adams:

This proceeding involves a proposed deficiency for the year 1928 in the amount of $10,058.01. The sole question presented is whether a certain dividend in the amount of $54,849.83 paid to Catherine Donnelly on May 1, 1928, was taxable income to her or to the estate of her deceased husband, A. M. Donnelly.

The deficiency here in question resulted from inclusion by the Commissioner of interest in the amount of $989.83 received by Catherine Donnelly, but not reported in her return, and also the inclusion as taxable income to her of dividends in the amount of $54,-849.83, included in the return filed by her as executrix of the estate of her deceased husband, A. M. Donnelly.

Petitioner admits that the respondent’s action in adding to income interest received in the amount of $989.83 is correct.

A. M. Donnelly died testate June 15, 1927. Under the terms of his will, which is included herein by reference, his widow, Catherine Donnelly, was appointed sole independent executrix without bond.

Paragraph 4 of the will provides as follows:

It is my will that no other action shall be had in the County Court in the administration of my estate than to prove and record this will and to return an inventory and appraisement of my estate and list of claims.

The estate consisted entirely of community property and Catherine Donnelly was the sole legatee. The inventory and appraisement of the estate was filed on July 6, 1927, from which .it appeared that the estate included 5,373% shares of the stock of the Eastland Oil Co., one half of which belonged to Catherine Donnelly as her community interest in same. There was, among other assets, cash in bank in the amount of $463.63, which was the only available cash for the use of the executrix. After the decease of A. M. Donnelly, the treasurer of the Eastland Oil Co. was instructed to advance Mrs. Donnelly anything she wanted or to pay any bills she wanted paid.

At the time of his death A. M. Donnelly was surety on the note of F. A. Best for $1,500, which was overdue and remained unpaid on July 6, 1927, when the inventory and appraisement of the estate was filed. This note was paid by the Eastland Oil Co. August 22, 1928.

On March 6, 1928, a summons was issued against Catherine Don-nelly, as sole independent executrix of the will and estate of A. M. Donnelly, to answer to the amended original petition of T. M. Dees in a suit for $15,000 brought against A. M. Donnelly in his lifetime. This suit was transferred to the District Court of Tarrant County, Texas, September 25,1928, and was dismissed September 3, 1930.

The Federal estate tax return of the estate of A. M. Donnelly was filed on or about July 15, 1928.

At the time of the death of A. M. Donnelly all the outstanding-stock of the Eastland Oil Co. was held as follows:

A. M. Donnelly- 5,373% shares
G. A. Donnelly- 5,373% shares
G. J. Donnelly- 5,373% shares
Earl Hyde- 400 shares

On August 15, 1927, said 5,373% shares standing in the name of A. M. Donnelly were reissued by the Eastland Oil Co. as follows:

Catherine Donnelly- 2, 686% shares
Catherine Donnelly, Executrix of the estate of A. M. Donnelly, deceased-2, 6S6% shares

and on the same date the 400 shares standing in the name of Earl Hyde were transferred to Catherine Donnelly. These 400 shares were not included in the inventory appraisement of the A. M. Don-nelly estate.

On May 1, 1928, the Eastland Oil Co. declared a dividend on its capital stock and on that date delivered to Catherine Donnelly its check for $109,699.66, representing the portion of the dividend attributable to the 5,773% shares of stock standing in her name and represented by tbe three certificates issued to her on August 15, 1927, as set out above.

The respondent contends that on May_3j_192§, when the dividend was paid to Catherine Donnelly, the estate of A. M. Donnelly had been closed and the entire amount thus received by her was taxable income to her. He contends in the alternative that even though the estate of A. M. Donnelly had not been closed on May 1, 1928, the dividend is taxable to Catherine Donnelly, in accordance with section 162(c) of the Eevenue Act of 1928, one half being an amount distributed to her by the estate as beneficiary, and the other one half being her community property.

Petitioner contends that administration on the estate of A. M. Donnelly had not been closed on May 1, 1928; that Catherine Don-nelly received the dividends attributable to 2,686% shares of the stock as executrix of the estate of A. M. Donnelly and that it was returnable by her as such. We agree with the petitioner. While it is true that, under the laws of Texas, any person capable of making a will may provide that “ no other action shall be had in a county court in relation to the settlement of his estate than the probating and recording of his will and the return of an inventory, appraisement and lists of claims of his estate ” (art. 3436, Rev. Stat. Texas), the administration nevertheless proceeds according to law and Catherine Donnelly became agent of the County Court of Tarrant County, Texas, which probated the will and appointed her independent executrix thereunder, Faulkner v. Reed (Tex. Com. App.), 241 S. W. 1002. As independent executrix, the property of the estate passed into her possession in trust to be disposed of according to law, and at all times during administration the rights of creditors were paramount to her rights as legatee under the will. Roberts v. Carlisle (Tex. Civ. App.), 4 S. W. 144.

Under the facts in the record wTe think that administration on the estate was not closed in the taxable year 1928, and that the dividends received by Catherine Donnelly on 2,686% shares of the capital stock of the Eastland Oil Co. were received and held by her as executrix under the will of A. M. Donnelly.

Nor are we impressed with the respondent’s alternative contention. Clearly, it is based on the fact that Catherine Donnelly was both executrix and sole legatee and not on any actual distribution to her as beneficiary under the will. It confuses her possession as executrix with her possession as a distributee or beneficiary. This we may not do. The mere fact that one who is a beneficiary has possession of funds that belong to the executor does not make such funds a part of the taxable income of such, beneficiary. Cf. Freuler v. Helvering, 291 U. S. 35.

We hold that the amount received by Catherine Donnelly and attributable to dividends on the 2,686% shares of Eastland Oil Co. stock held by her as executrix was not taxable income to her.

Decision will be entered under Bule 50.


author:
Stjernhagen :
      Leech,

text:
    D. J. Gay, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. C. Gay, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. H. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. E. Beasley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58787-9, 60061.
    Promulgated November 14, 1934.

      John J. Finnorn, Esq., for the petitioners.

      Frank B. Bchlosser, Esq., for the respondent.
   OPINION.

Stjernhagen :

The respondent determined a liability of each petitioner, as transferee of the assets of the Louisiana Naval Stores, Inc., for a deficiency of $11,273.12 of that corporation in income and profits tax for 1920. Petitioners, who are all the former shareholders, urge that the statute of limitations barred the determination as to the corporation, and contest the effectiveness of an alleged waiver of the corporation brought forward by respondent.

The corporation filed its return for 1920 on March 15, 1921, and without an effective waiver the deficiency lapsed after March 15, 1926. Sec. 277 (a) (2), Revenue Act of 1924, and sec. 277 (a) (3), Revenue Act of 1926. In the meantime, on August 31, 1921, after it had transferred its assets to the Gay-Hamill Co. in exchange for the issuance by Gay-Hamill of its shares to these petitioners as its shareholders, the corporation filed its consent to dissolution under Louisiana Laws 1914, Act 267, sec. 28. Whether a certificate of dissolution was actually issued by the secretary of state, as it apparently should have been, does not appear. There was at that time no intimation of unpaid debts, unrealized claims, or outstanding taxes, and no liquidators were elected by the former shareholders. There was, therefore, at that time no one authorized to act for the corporation. On January 22, 1926, D. J. Gay signed, as president of the corporation, the alleged waiver purporting to extend the assessment period to December 31, 1926. But, so far as the record shows, he was not president, since the corporation was dissolved, and was not a liquidator or otherwise authorized to speak for the former corporation. The alleged waiver must, therefore, upon this record, be held ineffective to extend the period; since the doubts as to its effectiveness must be resolved against the respondent. Farmers Feed Co., 10 B. T. A. 1069; Bonwit Teller & Co., 10 B. T. A. 1300; Carnation Milk Products Co., 15 B. T. A. 556; Southwestern Investment Co., 19 B. T. A. 30.

The Commissioner, on May 14, 1926, determined the deficiency and sent a notice of deficiency directly to the corporation. Gay filed a petition with the Board, as president. In 1929 Williams was appointed liquidator, and he intervened and the Board dismissed the proceeding for want of jurisdiction because Gay appeared to be without authority to file the petition. Louisiana Naval Stores, Inc., 18 B. T. A. 533. While this is not res judicata as to the merits of the transferor’s tax liability, Wayne Body Corporation, 22 B. T. A. 401; Stanley Co., of America, 26 B. T. A. 705, or as to Gay’s authority to sign a binding waiver in January 1926, there is no more evidence in the record of his authority to sign a waiver in January 1926, than there was in that record of his authority to verify and file a petition in July 1926.

We hold, therefore, upon the merits, that the statutory period of limitations applicable to the transferor corporation expired on March 15,1926, before the deficiency was determined or assessed; that there was no effective extension in writing of such period; and that none of the petitioners is liable as a transferee for any deficiency of Louisiana Naval Stores, Inc., for income or profits tax for 1920. Sanborn Brothers, Successors, etc., 14 B. T. A. 1059; S. Hirsch Distilling Co., 14 B. T. A. 1073; Consolidated Companies, Inc., 15 B. T. A. 645; Iberville Wholesale Grocery Co., Ltd., 17 B. T. A. 235; Southwestern Investment Co., 19 B. T. A. 30; First Bond & Mortgage Co., 21 B. T. A. 1; Herbert Brash Mfg. Co., 22 B. T. A. 646.

Beviewed by the Board.

Judgment will be entered for the petitioners.

McMahoN concurs in the result.

Seaweul and Adams dissent.

Leech,

dissenting: Apparently, upon the pleadings, respondent had the burden of proving an effective waiver to defeat petitioners’ plea of the statute of limitations. Farmers Feed Co., 10 B. T. A. 1069; Bonwit Teller & Co., 10 B. T. A. 1300. In my opinion this burden was sustained by their introduction in evidence of the paper, regular on its face and purporting to be a valid waiver. Petitioners, thereupon, had the burden of establishing the invalidity of that purported waiver. Whether this burden was sustained depends entirely upon the proof of the fact of dissolution of Louisiana Naval Stores, Inc., before the execution of the alleged waiver. It may well be that the statutory publication of notice of dissolution was merely administrative and not essential to dissolution, as was held by this Board in Southwestern Investment Co., 19 B. T. A. 30, but I cannot agree with the similar conclusion reached there as to the certificate of dissolution.

That certificate, absent in the present record, was the only means by which the State of Louisiana could consent to the dissolution. Act No. 267 of the General Assembly of the State of Louisiana, 1914, sec. 28. Cf. Ellett v. Morefield, 159 La. 295; 105 So. 348.

Since the charter of a corporation is, in a sense, a contract between the corporation and the state, this contract cannot be terminated any more than any other contract, by one of the parties thereto, without the consent of the other. Trustees of Dartmouth College v. Woodward, 17 U. S. 517; Fletcher Cyc. Corps., vol. 8, sec. 5449, and cases cited therein.

Petitioners, having failed to show consent to such dissolution by a certificate or otherwise, did not sustain their burden of proof of the invalidity of the purported waiver, and its validity follows on this record. Cf. Carnation Milk Products Co., 15 B. T. A. 556.

Accordingly, I dissent.

Smith agrees with this dissent.


author: Sternhagen:

text:
    Acme Land & Fur Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50630, 62886.
    Promulgated November 14, 1934.

      John J. Finnorn, Esq., for the petitioner.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Sternhagen:

The respondent determined deficiencies in petitioner’s income tax of $3,302.12, $112,846.66, and $19,476.49, for the fiscal years ended November 30, 1927, 1928, and 1929. Several matters have been settled, and two items are left in controversy. The respondent included in petitioner’s income amounts received for damage to its property resulting from flood control, and disallowed part of the deduction taken for salaries.

1. Leaving aside the history antedating the formation of petitioner on January 19, 1927, the facts upon the first point are these. Petitioner, on February 19, 1927, bought 110,000 acres of marsh land in the parishes of St. Bernard and Plaquemines, Louisiana, for which it paid $800,000. The land was valuable only as trapping ground for muskrats and other wild fur-bearing animals. Petitioner was not engaged in trapping, but its business was the sale of the land in smaller parcels to trappers on time contracts and their notes, frequently taking the skins in payment. It immediately adopted the sale contracts of its predecessor for the sale of parcels of its land, and in 1927, before the flood in April, it had contracts covering the sale of, or had sold, 8,450.6 acres for $324,450. Thereafter (apparently within the same year, although the stipulation as to this is ambiguous), it sold 18,226 acres for $771,453.70. Later sales were at a lower figure.

The Mississippi flood of April 1927 threatened the city of New Orleans and, exercising the police power, the state cut a crevasse through the levee below the city and completely inundated petitioner’s land for 108 days. Both wild animal life and the grass which normally sustained it were seriously harmed, although not entirely destroyed. The grass soon returned, and later began to die. The extent of destruction of muskrats caused petitioner to prohibit trapping for two seasons. It was resumed in the season of 1929-1930, when 900,000 muskrats were taken; 1,000,000 were taken in 1930-1931, 500,000 in 1931-1932, 300,000 in 1932-1933, and 175,000 in 1933-1934. It is now thought that the muskrats are migrating to other lands.

Although by statute in Louisiana wild life belongs to the state until capture, Dart’s Louisiana Statutes (1932), sec. 2926; Nev. Civ. Code, art. 3415; LaCoste v. Department of Conservation, 263 U. S. 545, the necessary legislation was adopted and an appropriation was made of $1,500,000 for distribution among the owners of the inundated lands in recognition of damage sustained by them resulting from the “ effects of the Caernarvon artificial crevasse upon wild animal life.” Of this, $1,300,000 was immediately made available, and in the fiscal year ended November 30, 1928, petitioner received $938,575.90. In the fiscal year 1929 it received $158,220.63 out of the remaining $200,000. Petitioner also received $30,000 in settlement of its claim for $323,611.10 as damage to its land and buildings, but this, it is stipulated, is not now in controversy.

The petitioner did not include any part of the $938,575.90 or the $158,220.63 in its income tax return. The respondent determined that the 1928 income included both the $938,575.90 and the $200,000, and for 1929 he also added the $158,220.63. It is conceded now that the $200,000 should not have been included for 1928.

Petitioner justifies its omission on two grounds. First, since there was no obligation of the state to pay for the destruction of wild life in the exercise of the police power, Commonwealth v. Plymouth, 232 U. S. 531; Jackson v. United States, 230 U. S. 1; C. B. & Q. Railway v. People, 200 U. S. 561; Hulen v. City of Corsicana, 65 Fed. (2d) 969; Ruch v. New Orleans, 43 La. Ann. 275, 284, the amount was not income but a nontaxable gift, and, second, it was constitutionally immune from Federal tax because it was received from the state,. citing Indian Motocycle Co. v. United States, 283 U. S. 570. In our opinion, both contentions must fail. Clearly the amount was not a gift and did not purport to be. It was only paid in recognition of the damage which had resulted from the state’s act under the police power. If legal consideration were necessary to give validity to the payment, this would suffice. But the absence of a legal obligation or legal consideration does not establish a gift. The gift provision of the statute (Bevenue Act 1928, sec. 22 (b) (3)) is not a catchall for exemption. A gift must be affirmatively established by evidence. Intention to make a gift must appear, Fisher v. Commissioner, 59 Fed. (2d) 192; Mulqueen v. Commissioner, 65 Fed. (2d) 365, and this proof must be strong enough to outweigh the duty against waste or plunder, Noel v. Parrott, 15 Fed. (2d) 669; Fisher v. Commissioner, supra, and stronger than countervailing evidence of past service, moral suasion or any other nondonative motive. Congress or a state legislature may often appropriate after the event, in recognition of a past circumstance, but no one would regard the amount as a gift. This is such a case, the impulse being one of justice and duty rather than generosity, however it may have turned out in effect.

The petitioner suggests, rather than argues, that because the amount came to it from a subdivision of the state it is constitutionally immune from Federal tax. Immunity does not attach to all receipts from a state or municipality. The gains in condemnation awards, for example, are recognized as per se taxable, Bandes v. Commissioner, 69 Fed. (2d) 812, although they are expressly relieved when immediately reinvested as the statute provides; and if the award includes severance damages, the excess over proportionate cost of the damaged property is taxed, I.T. 2599, X-2 C.B. 170. Pay received for services performed for a state may be taxable, Metcalf & Eddy v. Mitchell, 269 U.S. 514, although when received by an officer or employee of the state it may be immune if Federal taxation operates to interfere with the sovereign functions of the state. There is here no evidence that the Federal tax imposed upon petitioner by reason of its receipt of the amount in question in any way affects the state and we are referred to no authority requiring recognition of it a priori or by judicial notice. When the crevasse was cut there was no liability of the state for damage, and there is no reason to believe that the amount of the award subsequently made was influenced by the possibility that as to each claimant it would become part of the gross income involved in the computation of his' Federal tax. We can not say that the tax was either directly or indirectly upon the “ instrumentalities, means and operations whereby the states exert the government powers belonging to them.” Indian Motocycle Co. v. United States, supra. That case, furthermore, involved not an income tax but an excise tax on sales and was predicated upon an economic incidence of such a tax upon the state as buyer, a consideration which can not easily be identified with an award for damage made voluntarily after the event.

Of the 110,000 acres originally owned by petitioner, it had disposed of 26,676 acres, about one fourth, for more than the cost of the whole, and it still owned the remaining 83,324 acres, the proportionate cost of which was approximately $605,765. Judging from the amount received for the acreage already sold, the value of the remaining land was, at the time of the crevasse, far in excess of the petitioner’s investment. There is nothing in the record to indicate that after the subsidence of the water the petitioner’s remaining land represented less than the $605,765 that petitioner had invested in it. The evidence shows that there were some sales (the extent of which is not disclosed) after the crevasse at prices which were less than the sale prices antedating the crevasse. This does not go so far as to say that such later prices were less than cost. The state biologist was optimistic and every one interested seemed to believe sufficiently in the trapping prospects to agree upon a temporary cessation of activities. Judging by the value of the land at the time of cutting the crevasse, it was not unlikely that the reparation award was in recognition not of complete destruction, but of only partial damage to the valué of the taxpayer’s ’ property. Apparently it still had lands worth more than their proportionate cost, although they may have been worth less than their pre-crevasse sale value. Even this reduction in value was not by reason of a taking by the state of anything which the petitioner held as owner, but only a recognition that petitioner’s hoped for future profits would be impaired by the state’s destruction of wild life. The net result to this petitioner, so far as the evidence shows, was to leave it with no impairment of its original investment, since it still held all of its land with the probability of sale at a profit and in addition thereto it had the cash award of $938,375.90 in the fiscal year 1928 and $158,220.63 in 1929. This, we think, must be treated as clear gain in those years and included within the taxpayer’s income. The Commissioner’s determination is sustained.

2. The petitioner’s two officers owned 80 percent of its shares in equal proportion. The corporation, for its fiscal year 1927, deducted $65,000 as salaries paid to these officers of $32,500 each, and deducted $75,000 for 1928 and $75,000 for 1929, representing $37,500 to each. The Commissioner determined that a reasonable deduction was $20,000 per year, or $10,000 for each officer, and disallowed the deduction of the rest. This throws the burden squarely on the corporation to prove affirmatively that the amount claimed, or any amount above the Commissioner’s, represents no more than a reasonable allowance, Botany Worsted Mills v. United States, 278 U. S. 282. The fact, as is shown, that the amounts paid for 1927 and 1928 were authorized by corporate resolution does not demonstrate their reasonableness as compensation for the services performed, and when the recipient officers are at the same time the principal shareholders there is for that reason a question whether the amounts may not be corporate distributions, McMillan Metal Co., 2 B. T. A. 797; Brown & Haley, 21 B. T. A. 752; Fifteenth & Chestnut Realty Co., 29 B. T. A. 1030.

The evidence shows that the president performed substantial service, including the procuring of the damage award, and that the vice president, who was thoroughly familiar with the property, the trappers, and the problems inherent in petitioner’s business, also gave substantial time and attention to its rehabilitation after the flood. But the Commissioner, apparently knowing these facts, has held that $10,000 each was a reasonable annual allowance for these services. We can not say the evidence proves the allowance to be inadequate or otherwise not reasonable. The Commissioner’s determination is therefore sustained.

3. The issues which have been settled by stipulation will be taken into consideration in the necessary recomputation of the deficiencies.

Reviewed by the Board.

. Judgment will he entered wider Rude 50.


author: SterNhagen :

text:
    H. H. Champlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22486.
    Promulgated November 14, 1934.

      Harry 0. Qlasser, Esq., for the petitioner.

      Philip M. Ciarle, Esq., for the respondent.
   SECOND OPINION.

SterNhagen :

From the Board’s decision in this proceeding, following the opinion of June 6,1933, 28 B. T. A. 264, the petitioner filed a petition for review. The Board’s decision was reversed, April 11, 1934, Champlin v. Commissioner, 71 Fed. (2d) 23, and the proceeding was remanded “ for further proceedings not inconsistent with the opinion of this court.” Thereupon the respondent moved for such further proceedings, and more particularly for a consideration and decision upon the issue as to depletion, affirmatively presented in an amended answer filed before the trial. This issue had been raised by the respondent only as an alternative, and as to it the Board, in its earlier opinion, said:

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

The respondent’s position now is that, while there was no occasion for him to press for a decision upon this issue so long as his determination as to the fair market value of the petitioner’s interest in the Beggs lease and of the Champlin Co. shares which he received in exchange therefor was sustained, this situation has been entirely changed by the opinion and decision of the court, and it now for the first time becomes important that the discovery valuation of the Beggs lease shall be considered as the basis for depletion deductions for the years in question. The petitioner first challenges the power of the Board to give consideration to this issue at this time, arguing that the doctrine of the law of the case prevents further consideration and requires the entry of a judgment which will embody, (1) the recognition of the partnership, and (2) the exchange of the oil properties for corporate shares having no fair market value.

In our opinion, the petitioner’s view can not be sustained. The issue as to whether petitioner has received excessive depletion deductions by reason of an excessive discovery valuation has not been heretofore considered or decided by the Board, and there is nothing in the opinion of the Circuit Court of Appeals which leads us to believe that the court, either expressly or tacitly, disposed of it. If this issue had been before the court, the Board’s duty would be clear — it could not intermeddle with the court’s disposition of the issue, and its sole function would be to perfect a judgment in complete accord with the law as announced by the court. This would be the law of the case, which would permit of no further consideration by the Board as to the decision that there was a partnership between the petitioner and his wife, and that there was no fair market value of the corporate shares when received by the petitioner in 1920. It is, so far as this Board is concerned, final. We think, however, that the court’s opinion and its mandate go no further than to require consistency with the court’s opinion in everything that remains to be done in the proceeding. Foster on Federal Practice, vol. 4, sec. 712, tersely says that, pursuant to such a mandate the court of first instance “ has plenary authority to allow amendments, consolidation with another case, and further proof, except in so far as the opinion or mandate specifically forbids.” In re Sanford Fork & Tool Co., 160 U. S. 247, holds:

When a case has once been decided by this court on appeal, and remanded to the Circuit Court, whatever was before this court, and disposed of by its decree, is considered as finally settled. * * * That court can not * * * intermeddle with it, further than to settle so much as have been remanded * * *. But the Circuit Court may consider and decide any matters left open by the mandate of this Court; * * *

See also Rio Grande Dam & Irrigation Co. v. United States, 215 U. S. 266; Northern Pacific Ry. v. Concannon, 239 U. S. 382; Pierce v. United States, 255 U. S. 398; Hawkins v. Cleveland, O., C. & St. L. Ry. Co., 99 Fed. 322; Collin County National Bank v. Hughes, 155 Fed. 389; Chicago Railway Equipment Co., 13 B. T. A. 471. If Swenson v. Commissioner, 69 Fed. (2d) 280, has any importance in this connection, it seems to indicate that the Board, acting under the present mandate, must now consider the merits of the reserved question. We take up, then, the petitioner’s depletion allowance.

Both parties agree that the record printed for use in the Circuit Court of Appeals contains all of the evidence upon which they rely and they have no further evidence upon this point. The respondent acknowledges that as the depletion issue was first raised in his amended answer, the burden of proof in respect of that issue is upon him. Briefly stated, his contention is that the petitioner’s deductions for depletion in respect of the Beggs lease prior to its transfer in 1920 to the corporation must be based on cost, and that he may not receive a depletion deduction based upon a greater discovery value because his interest at the time of discovery had no fair market value. The statute governing is section 214 (a) (10), Revenue Act of 1918. It requires that “ the depletion allowance shall be based upon the fair market value of the property at the date of the discovery or within thirty days thereafter ”, and it is upon the determination of such fair market value that the issue turns. Before the deficiency was determined, the Commissioner had allowed depletion, and the facts in respect of this allowance are stipulated by the parties as follows:

(a) That, heretofore, on or about October 23rd, 1926, the Respondent did allow the petitioner, in conformity with the provisions of Section 214 (a) (10) of the Revenue Act of 1918, upon the leasehold property in controversy; Discovery Values for Depletion Allowance upon several oil-producing sands, discovered by petitioner upon said leasehold, which Discovery Values were allowed in each instance as of a period within thirty (30) days after each of said respective discoveries; and as allowed by the Respondent and accepted by the petitioner, together with the number of each discovery well; the dates of such discoveries and the amount of such discovery value for depletion allowance in each instance, being as follows, to-wit:
Well #1, Dec. 23, 1916- $386, 942. 40
Well #10, Aug. 1, 1917_ 339, 025. 70
Well #14, Apr. 17, 1918_ 476, 521.99
Well #15, June 21, 1918_ 298, 774. 56
Well #19, Aug. 13, 1918_ 181, 788.80
Well #22, Dec. 15, 1918_ 343, 493. 85
Well #24, Jan. 15, 1919_ 177, 781. 20
Well #27, Apr. 4, 1919_ 91, 269.10
Total-$2,295,597.60
That the total oí saicl discovery values for depletion allowance as so allowed by the respondent and by the petitioner so accepted is reflected in the total figures $2,295,597.60 and was so allowed by the respondent correctly, accurately and in conformity with the law upon the assumption by the respondent that petitioner was possessed, at the respective discovery dates, or within tMrty (30) days thereafter, of a merchantable title to- said leasehold property; that is the respondent in determining such values did not consider that any title hazard existed.
(b) That respondent, in computing the net income of petitioner for the years 1918, 1919 and 1920, did allow and petitioner did accept, depletion for the year 3918 in the amount of $266,275.74, for the year 1919', in the amount of $369,-809.26, and for the period of January 1st, 1920, to March 31st, 1920, in the amount of $67,841.89, a total of $703,926.89.
That of the foregoing allowance, a total sum of $3,683.14 was allowed as depletion upon the cost of the lease, and the balance of said allowances so made by the respondent and accepted by the petitioner, in the net sum of $700,243.75, is attributed to and was allowed as depletion upon the discovery values, as hereinbefore set forth;
(c) That the respondent, on October 23, 1926, did correctly determine the fair market value of a merchantable title to the Beggs Lease as of April 1, 1920— upon which discovery values for depletion allowance had been made, as herein-before more fully set forth — to be $1,530,000.00;
(d) That after determining said fair market value, the respondent applied a deduction of 25% thereon for the purpose of absorbing a title hazard in the petitioner by reason of litigation upon said leasehold, evidenced in the record in this cause by exhibits identified as a part of the direct testimony in the deposition of the witness H. G. McKeever, which deduction when so applied reduced the respondent’s determination of fair market value of merchantable title to said lease to the figures $1,147,500.00, which amount as so determined was used by the respondent for the calculation of an alleged profit of $869,198.05 to the taxpayer in the conversion of petitioner’s title thereto into organization stock in the Ohamplin Refining Company, which action upon the respondent’s part, in so calculating such alleged profit, constitutes one of the principal controversies in this action;
*******
(f) That for the organization of the Ohamplin Refining Company, the petitioner did convey to said corporation record title to the Beggs leasehold, described as the S. W. % of Sec. 24, Twp. 22, North, Range 4 W. I. M., Garfield County, Oklahoma, by assignment thereof as of April 18th, 1920, together with the conveyance of like date of all record right, title and interest in the refining and marketing business owned by H. H. Ohamplin, or by H. H. Ohamplin and A. D. N. Ohamplin, his wife, as the evidence may so warrant and this Honorable Board may find;
*******
(h) That in determining the “net profit on sale of lease” in the alleged sum of $869,198.05 (page 40, Petition) now in controversy in this action, the respondent found the “ fair market value ” of said lease as of April 1, 1920, in the manner set forth in paragraphs (c) and (d) herein to be_ $1,147, 500. 00 from which he deducted:
Depreciated cost of casing and pipe_$194,205. 20
Depleted cost of Lease_ 6,578.27
Depreciated value of buildings_ 8,196. 63
Depreciated value of tanks_ 28, 721. 85
Rigs, Machinery and boilers, etc_ 40,600. 00
- 278, 301.95
resulting in the alleged profit of_ $869,198. 05
upon which sum, so computed, the respondent seeks to require the petitioner to pay income tas calculated in the manner provided by the laws of the United States then in force and effect, and it is agreed that the respective items so deducted are correctly valued for such deduction, if such computation be warranted in the law;
(i) That whatever hazard was existent in the title of H. H. Champlin (or H. H. Champlin and A. D. N. Champlin, as the evidence may warrant and this Honorable Board may find) upon the Beggs Lease, as of April 17th, 1920, such hazard in title has been constant from the 30th day of August, 1916, the date of the acquisition of said lease by the said H. H. Champlin, and that suit to quiet title thereto was instituted by petitioner on November 4th, 1916, as evidenced by Exhibits identified as a part of the testimony in the deposition of the witness H. G. McKeever;
s»« % # # # s-c

The issue arises from the alleged inconsistency between an assumed fair market value of the Beggs lease as the basis for discovery depletion and its lack of fair market value as decided by the court. The Government argues that since both the fair market value of the shares of the corporation for the purpose of section 202, Eevenue Act of 1918, and the basis for depletion for the purpose of section 214 (a) (10) of the same statute are determinable from the fair market value of the Beggs lease, and since it has been decided that the lease was without fair market value upon evidence which shows a constancy of condition from November 4, 1916, until the transfer to the corporation in 1920, there can be no statutory basis for discovery depletion. The depletion allowance would thus be based upon the petitioner’s cost, which is stipulated at $12,000.

The evidence of the fair market value of the Beggs lease within thirty days after discovery is found in the testimony of the same witnesses as testified as to such fair market value in 1920. It is uniformly to the effect that the title hazard, which existed in 1916 before the discovery of the first well and continued throughout the litigation, impaired the marketability of the petitioner’s interest in the lease at all times, and that the lease was without fair market value constantly during the period of litigation. Although the parties have stipulated the fair market value of a “ merchantable title ” to the Beggs lease ”, “ the leasehold property ”, or the lease ”, the evidence shows that this does not reflect the fair market value of the litigated interest owned by petitioner, but that petitioner’s “ top lease ” was not salable during tbe pendency of tbe litigation. If, therefore, a definitive finding of fact must now be made, we find that the'Beggs lease and tbe petitioner’s interest therein were without fair market value at the stipulated dates of discovery or within thirty days thereafter. We are, however, in doubt, from the opinion of the court, whether1 such a determination is to be treated as one of fact or of law. If it is to be treated as a legal inference, the application to the evidence of the legal concept of fair market value which we are required by the court’s opinion to use, leads to the same conclusion. In other words, the law of this case is that a property interest which can not be sold at a “ fair ” price or at a price fairly approximating the figure which it would bring if it were marketable has no fair market value; and the evidence clearly fulfills the concept.

It is argued for petitioner that this view will frustrate the intendment of the allowance for discovery depletion, which it is said is an allowance in rem, measured by the value of the well, and granted to encourage exploration. The Board must, of course, take the law as it finds it, applying the statutory language as judicially interpreted. It is only when the language lacks clarity and there has been no authoritative interpretation that we seek for a purpose which will enlighten our understanding of the statutory law.

The statute (sec. 214 (a) (10)) expressly'provides that the depletion allowance in case of discovery is to be based on “ the fair market value of the property ”, H. O. Miller, 10 B. T. A. 450; Dunn & Baker, Inc., 30 B. T. A. 663, and then only when such fair market value is materially disproportionate to the cost, H. E. and M. C. Sadler, 4 B. T. A. 1014. These words we must follow. We may not ignore or modify the words “ fair market value ” because their judicial meaning now gives a particular taxpayer something different from what he thought he was entitled to under an incorrect meaning of the statutory term. The fact that the special method of measuring the deduction was granted, together with a special rate of tax on gains (sec. 211 (b)), as a stimulant for prospecting and exploration (Senate Finance Committee Report, Revenue Bill of 1918, Rept. No. 617, 65th Cong., 3d sess., pages 6 & 8), does not authorize a distortion of the language used in the law. Indeed, its recognition as a special provision for a special purpose would limit its use to situations clearly within its terms.

The fact that the statutory fair market value to be used is of the property neither requires nor permits a basis for the deduction which is greater than the particular taxpayer’s interest. The function of the deduction is to preserve the taxpayer’s interest immune from tax before taxing his gain or profit. He may not preserve more than he has. It is the fair market value of his interest not only at the-time of his investment but also at the time of discovery or within thirty days thereafter that shall be preserved to him by means of the depletion deduction, J. S. J. Lyell, 29 B. T. A. 133. Whatever his interest may be, it constitutes his depletable property and as, in Lynch v. Alworth Stevens Co., 267 U. S. 364, his depletion shall not be based on less, we think it may likewise not be based on more. See Palmer v. Bender, 287 U. S. 551; Pugh v. Commissioner, 49 Fed. (2d) 76; Commissioner v. Molter, 60 Fed. (2d) 498; San Martinez Oil Co., 25 B. T. A. 218; Ed Peterson, 25 B. T. A. 1364, 1369. The fact that Congress expanded the base by using a discovery value in lieu of an actual cost gives no warrant for a base essentially different from the taxpayer’s property interest. Palmer v. Bender, supra; Pugh v. Commissioner, supra. It has been consistently held that each interested taxpayer may have depletion according to his property interest. Palmer v. Bender, supra. While this has usually arisen only in measuring the quantum of each taxpayer’s property in the whole, it is, we think, equally true that other factors may serve to measure the depletion besides. If the share is so affected by imponderables that its value is negligible, the depletion deduction of such taxpayer should not be based upon more than the fair market value of what he has, his economic interest. Otherwise every oil well would carry an impersonal aggregate annual depletion deduction applicable to some one or more taxpayers by a method of mathematical division. Congress, however, has said as to depletion, as it has as to depreciation, that each taxpayer shall measure his depletion not with regard to the whole, but with regard to his own property. United States v. Ludey, 274 U. S. 295. The only exception is that expressly provided in the last sentence of the subdivision for an equitable apportionment between lessor and lessee; and that is not here in question. It may not, however, be ignored that petitioner’s interest is in the lease and not in the fee. Furthermore, the deduction for discovery depletion is only available to the discoverer, Melville G. Thompson, 10 B. T. A. 25, and lapses when the discoverer transfers his interest, Darby-Lynde Co., 51 Fed. (2d) 32.

Petitioner urges that because he is taxed on the income from the lease he is entitled to the deduction for its depletion. But these are controlled by the statute and do not depend on each other. The petitioner received the income under a claim of right and is therefore taxed upon it, Burnet v. North American Oil Consolidated, 286 U. S. 417. His deduction is, however, limited to the statutory allowance, Burnet v. Thompson Oil & Gas Co., 283 U. S. 301; Darby-Lynde Co. v. Commissioner, supra, which is measured, not by his taxable income from the lease (as in the'1926 Act and later acts), but by the fair market value of his capital property in the discovery period. There is no such relation between the depletion deduction and the income from production as there is in the statute itself between fair market value as a base for depletion and fair market value as a base for determining gain or loss from sale or exchange. Darby-Lynde Co. v. Commissioner, supra.

Since the fair market value of the petitioner’s property in the Beggs lease during the years before us must be taken as nil, there is no discovery basis for any deduction for depletion, and the basis to be used is, therefore, the cost to the petitioner. As to this, the parties are not in dispute.

Reviewed by the Board.

Judgment will be entered wnder Bule SO.

       Sec. 214. (a) That in computing net income there shall he allowed as deductions:
      *******
      (10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Providedj That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase iof a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or vithin thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.

       GAINS DERIVED EROM PROSPECTING, EXPLORATION, OR DISCOVERT.
      The prospector for mines or oil and gas frequently expends many years and much money in fruitless search. when be does locate a productive property and comes to settle it seems unwise and unfair that his profit be taxed at tbe maximum rate as if it vrere ordinary income attributable to tbe normal activities of a single year. To stimulate prospecting and exploration, tbe committee has limited the surtax bo 20 percent of tbe selling price in tbe case of a bona fide sale of mines, oil or gas wells where the principal value was demonstrated by prospecting, exploring, or discovery work done by the taxpayer (sec. 211b, p. 18). A similar limitation has been imposed by the war excess-profits tax applicable to gains derived by a corporation from the bona fide sale of such mines, oil or gas wells (see. 337, p. 107). Special provision is also made for increased depletion allowance in the case of such properties (sec. 214 (10), p. 28; and sec. 234 (9), p. 58).
      DEPLETION
      Eor the purpose of depletion allowance in the case of properties acquired prior to March 1, 1913, the provision of the present law, omitted in the House hill, has been restored by the committee, so that in the case of such properties the basis for the depletion allowance shall be the March 1, 1913, valuation; but a proviso has been added that where mines or oil and gas wells have been discovered by the taxpayer on or after March 1, 1913, and not acquired as a result of the purchase of a proven tract or lease, and where the fair market value is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of discovery or within 12 months thereafter (sec. 214a 19, and sec. 234a, 9).


author: Smith :

text:
    Robert B. Bowler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53242, 64125.
    Promulgated November 14, 1934.

      Spotsu/ood D. Bowiers, Esq., for the petitioner.

      Franlc M. Thompson, Esq., for the respondent.
   OPINION.

Smith :

These proceedings, consolidated for hearing, involve deficiencies in income tax for the years 1926 to 1929, inclusive, as follows:

In his determination of the deficiencies the respondent has held ;hat the income from four certain trusts created by the petitioner for the benefit of his wife and three minor children is taxable to the petitioner because of the revocability of the trusts under the provisions of each of the trust instruments. The sole issue for our present determination is whether during the taxable years under consideration the income of the several trusts is taxable to the petitioner under section 219 (g) and (h) of the Eevenue Act of 1926 and sections 166 and 167 of the Eevenue Act of 1928.

Section 219 of the Eevenue Act of 1926 provides, so far as material, as follows:

(g) Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
(h) Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor.

Sections 166 and 167 of tbe Eevenue Act of 1928 are substantially the same as the above quoted provisions of the 1926 Act.

The petitioner created four trusts by separate similar trust instruments, all under date of December 25, 1925, naming as the respective beneficiaries:

Trust No. 1, his wife, Gladys Stout Bowler;
Trust No. 2, his son, Robert Bonner Bowler, Jr., age 19;
Trust No. 3, his daughter, Katherine Wise Bowler, age 17;
Trust No. 4, his daughter, Anne Fairchild Pendleton Bowler, age 7.

The beneficiaries named were to receive all of the income of their respective trusts. In each of the first three of the above trusts the trustor, the petitioner herein, and the respective beneficiaries were named trustees and in the fourth the trustor and his wife, Gladys Stout Bowler, were named trustees. There is no question raised with respect to the duties and powers of the trustees of any of the trusts. However, in addition to the above mentioned provisions, each of the trust instruments contains a further provision designated “ Clause Eighth ”, naming a “ committee ” of three persons who are given the power to alter or amend the respective trusts in certain respects as specifically set forth. This provision, as contained in the Gladys Stout Bowler Trust — and except for the persons therein named it is practically the same in each trust instrument — is as follows:

Clause Eighth : I hereby create in James N. Stout of said New York, said Richard W. Hale, and Stanley Clarke of said New York, herein referred to as the Committee, a joint power exercisable at any time or from time to time by any two of said persons by instrument or instruments in writing signed by said two and delivered to any trustee hereunder who may be one of themselves, or in case there be no trustee then in office to a person designated by them to accept such delivery.
A. To remove any trustee hereunder.
B. To appoint a successor to any trustee who dies, resigns, or is removed except in the cases provided for by Clause Seventh paragraph O hereof.
C. To change and alter any of or all the trusts herein set forth and declare new trusts of the property in any way or manner whatsoever; also to terminate or modify the beneficial interest of any person or class of persons and to name or appoint any other persons or classes of persons as beneficiaries whether by way of addition or substitution; also to determine and alter the number of, the power of and the succession among the committee.
D. No exercise of this power shall exhaust it. It may, however, be released, extinguished or restricted by a like instrument so signed by any two< of the committee and delivered to the trustees as aforesaid.
E. Any of the persons in whom this joint power is vested may resign at any time by a signed instrument in writing. In case the number of the foregoing committee in whom this joint power is vested should at any time be less than three then a new person or persons shall be appointed a member or members of this committee by a writing signed by the remaining member or members of the committee and with the same effect as if he or they had been originally named. A majority of the committee may also increase the committee to five and name the additional members, in which case the same provisions for the appointment of successors shall govern and the power shall be executed by three or more of the committee. No personal liability shall attach to any member of the committee for any act or omission to act whatsoever.
E. A certificate signed by a majority of the committee certifying to a change in the trustees or committee or any other fact affecting either the trust fund or the duties of the trustees shall be conclusive evidence in favor of any person or corporation which acts relying upon such certificate.
G. The power given to the committee has priority over the powers herein given to the trustees but shall not in any case take effect so as to prejudice third parties who take property or otherwise change position in good faith relying upon the exercise or purported exercise of any power by the trustees.
H. No exercise of said power shall be valid while I am alive and competent to act uptil and unless I shall have in writing signified that I have no objection thereto. No exercise shall be valid if such instrument exercising said power has been delivered less than five days before the death of any member of the committee. No exercise affecting the first of said equal shares for my said wife and then for my daughter Katherine Wise Bowler after both are dead; no exercise affecting the second of said equal shares held for my said wife and then for my daughter Anne Fairchild Pendleton Bowler after both are dead, and no exercise affecting the third of said equal shares held for my said wife and then for my said son shall be valid after both are dead.

The beneficiaries, the trustees, and the “ committees ” of the four trusts were as follows;

By reason of clause eighth of the trust instruments, did the grantor of the trusts, acting alone or in conjunction with any other person not a beneficiary of the trusts, have the power to revest in himself any of the corpus of the trusts or have distributed to himself any of the income of the trusts? In Reineoke v. Smith, 289 U.S. 172, the Supreme Court had under consideration a somewhat similar question arising under section 219 (g) of the Bevenue Act of 1924, which corresponds to the above quoted provisions of the 1926 Act. The Court held that the statute was not unconstitutional as applied to trusts created prior to its enactment and that a trust was revocable within the meaning of the statute when it could be revoked by the settlor acting in conjunction with a corporate trustee. In its opinion the Court said:

In approaching the decision of the question before us, it is to be borne in mind that the trustee is not a trustee of the power of revocation and owes no duty to the beneficiary to resist alteration or revocation of the trust. Of course he owes a duty to the beneficiary to protect the trust res, faithfully to administer it, and to distribute the income; but the very fact that he participates in the right of alteration or revocation negatives' any fiduciary duty to the beneficiary to refrain from exercising the power. The facts of this case illustrate the point; for it appears the trust in favor of the grantor’s wife was substantially modified, to her financial detriment, by the concurrent action of the grantor and the trustees. This case must be viewed, therefore, as if the reserved right of revocation had been vested jointly in the grantor and a stranger to the trust.
.Decisions of tills court declare that, where taxing acts are challenged, we look not to the refinements of title but to the actual command over the property taxed — the actual benefit for which the tax is paid. Corliss v. Bowers, supra, 281 U. S. at page 378, 50 S. Ct. 336, 74 L. Ed. 916; Tyler v. United States, 281 U. S. 497, 503, 50 S. Ct. 356, 74 L. Ed. 991, 69 A. L. R. 758; Burnet v. Guggenheim, supra. A settlor who at every moment retains the power to repossess the corpus and enjoy the income has such a measure of control as justifies the imposition of the tax upon him. Corliss v. Bowers, supra. We think Congress may with reason declare that, where one has placed his property in trust subject to a right of revocation in himself and another, not a beneficiary, he shall be deemed to be in control of the property. We cannot say that this enactment is so arbitrary and capricious as to amount to a deprivation of property without due process of law. As declared by the committee reporting the section in question, a revocable trust amounts, in its practical aspects, to no more than an assignment of income. This court has repeatedly said that such an assignment, where the assignor continued to own the corpus, does not immunize him from taxation upon the income. Burnet v. Leininger, 285 U. S. 136, 52 S. Ct. 345, 76 L. Ed. 665; Lucas v. Earl, 281 U. S. 111, 50 S. Ct. 241, 74 L. Ed. 731. It cannot therefore be successfully urged that, as the legal title was held by the trustees, the income necessarily must for income taxation be deemed to accrue from property of some one other than Douglas Smith. The case is plainly distinguishable from Hoeper v. Tax Commission, 284 U. S. 206, 52 S. Ct. 120, 76 L. Ed. 248, on which respondents rely, for there the attempt was to tax income arising from property always owned by one other than the taxpayer, who had never had title to or control over either the property or the income from it. The measure of control of corpus and income retained by the grantor was sufficient to justify the attribution of the income of the trust to him. The enactment does not violate the Fifth Amendment.
A contrary decision would make evasion of the tax a simple matter. There being no legally significant distinction between the trustee and a stranger to the trust as joint holder with the grantor of a power to revoke, if the contention of the respondents were accepted it would be easy to select a friend or relative as coholder of such a power and so place large amounts of principal and income accruing therefrom beyond the reach of taxation upon the grantor while he retained to all intents and purposes control of both. Congress had power, in order to make the system of income taxation complete and consistent and to prevent facile evasion of the law, to make provision by section 219 (g) for taxation of trust income to the grantor in the circumstances here disclosed. * * *

The power to revoke here rested in a committee, subject to the approval of the grantor, instead of in the regularly designated trustees' and the grantor acting together as in Reinecke v. Smith, supra. We think, however, that the facts in this respect are not materially different and that the reasoning of the Court in that case applies with equal force to the situation presented in the instant proceedings. The committees in whom the power to revoke was nominally lodged stood in no different relation to the settlor or to the beneficiaries of the trust than did the trustees who had the power in Reinecke v. Smith, supra. If the trustees there were under no duty to the beneficiaries to perpetuate the trusts, neither were the committees here. The committee members had no duties or powers in respect of the trusts except to alter or revoke them, and it is reasonable to suppose that in these matters they would have carried out the wishes of the grantor of the trusts by whom they were selected. The situation here appears to be almost identically that pointed out by the Court in Reinecke v. Smith, supra, as giving rise to an unlawful evasion of the tax. While in the instant case the grantor did not have the affirmative power to alter or revoke the trusts in conjunction with the members of the committees, he did have a veto power over their acts and they could do nothing without his written approval. The statute does not require that the grantor’s power to revest title in himself shall be a direct and independent power. On the other hand, it recognizes that the power may rest jointly in the grantor and another or others. See Bromley v. Commissioner, 66 Fed. (2d) 552; affirming 26 B.T.A. 878. Whether there is actually such a power reposing in the grantor is a matter to be determined from all of the circumstances surrounding the creation and operation of the trusts.

We believe that it would require too limited a construction of the statute and one inconsistent with its manifest purpose to say that the grantor must be at liberty to exercise the power by his own affirmative act rather than through the medium of other persons of his own choosing who may have no interest whatever in the trust other than to carry out his wishes. For all that the evidence shows this was the situation here. We know nothing of Bobert W. Hale and Stanley Clarke, who were the majority of each of the committees and who had the power to alter or revoke the trusts with the approval of the grantor.

It seems to us, too, that, since the committees could change the form of the trusts only with the consent of the grantor, the power might be said to have rested jointly in the committees and the grantor or that, in the language of the statute, the grantor had the powér “ in conjunction with ” the committees.

It is the plain inference to be gained from the above quoted language in the Reinecke v. Smith case that, since it was the intention of Congress' in enacting section 219 (g) “ to make the system of income taxation complete and consistent and to prevent facile evasion of the law ”, the court will look with disfavor upon a construction of the statute that “ would make evasion of the tax a simple matter.” Obviously, the instant case offers an example of just such an attempt at evasion.

Because of the peculiar facts presented in these proceedings we do not believe that anything would be gained by a discussion of the many prior cases involving the same sections of the statutes but materially dissimilar facts. Indeed, no case that we have been able to find bears a closer resemblance to the instant case, either in point of facts or principle involved, than Reinecke v. Smith, supra, and we think that the question here presented is controlled by the decision of the Court in that case. We therefore hold that the trusts were revocable by the grantor and that the income of all of the trusts is taxable to the grantor, the petitioner herein.

Reviewed by the Board.

Judgment will l)e entered under Rule 50.


author: Smith:

text:
    Francis M. Weld, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73526.
    Promulgated November 14, 1934.

      Ghartes G. Partin, Esq., for the petitioner.

      J. M. Leinenlmgel, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1930 in the amount of $21,148.32. The only question in issue is whether a profit of $239,864.50 realized by the petitioner in 1930 from the sale of 4,000 option warrants of the American & Foreign Power Co. is taxable as ordinary income, or as capital net gain under the provisions of section 101 of the Revenue Act of 1928.

The petitioner is, and for many years has been, a partner in White, Weld & Co., a brokerage firm in New York City. The firm of White, Weld & Co. conducts an ordinary brokerage business, buying and selling securities for customers, underwriting securities, and dealing in various investments. Some of its members are members of the New York Stock Exchange, the New York Curb Exchange, and other exchanges. The firm employs approximately 225 employees in its New York office.

The petitioner’s principal occupation in 1930 was supervising the various business activities of White, Weld & Co. He personally supervised most of the firm’s purchases of securities which were later sold to customers. He was also a director in several large corporations.

During 1930 and prior years the petitioner did a large amount of trading in securities on his personal account. He was a man of considerable means and held varied investments. All of his trading in securities was done through the firm of White, Weld & Co., with which he maintained a personal account. He had no other account with any brokerage firm. In his dealings with the firm the petitioner was treated as any other customer. He was charged the regular commission and received the same rate of interest on his credit balance as other customers. The petitioner maintained a credit balance with the firm at all times during the year 1930, and in accordance with the firm’s policy the securities which were bought or held for the petitioner’s account were segregated and not mingled with the firm’s securities. The petitioner made a practice of keeping his securities in a safe-deposit box of the Bankers Trust Co. When he desired to sell any of his securities he removed them from the safe-deposit box and delivered them to White, Weld & Co. for sale. No one else was authorized to buy or sell securities for the petitioner’s account and the profits or losses shown on the petitioner’s account were considered his personal profits or losses as distinguished from those of the firm of White, Weld & Co. None of the securities in his account were ever sold to customers except through a regular transaction conducted by White, Weld & Co.; he had no customers of his own to whom he sold securities. The petitioner devoted nearly all of his time to the firm’s business.

The petitioner’s account with White, Weld & Co. for 1930 shows the following transactions in the American & Foreign Power Co. option warrants:

Between December 19, 1927, and January 23, 1928, the petitioner purchased a total of 3,000' rights to subscribe to certain units, consisting of one share of preferred stock, series A, .and four perpetual option warrants to buy common stock at $25 per share, at a total cost of $12,870. The petitioner thereafter subscribed to 1,000 units, upon which total payments were made in the amount of $100,000. The total cost of the 1,000 units purchased was therefore $112,870, of which $25,283 is allocable to the 4,000 warrants first sold in 1930. There is no dispute as to these facts or as to the amount of the petitioner’s gain upon the sale of the 4,000 warrants in 1930, which was $239,864.50. The only question raised is whether the petitioner correctly reported the amount of gain as a capital net gain in his income tax return for 1930.

The certificates representing the petitioner’s warrants of American & Foreign Power Co. were kept in his safe-deposit box at the Bankers Trust Co. Between March and July 1930 the petitioner removed the certificates for the warrants from his safe-deposit box and turned them over to White, Weld & Co. for sale. A profit resulted to the petitioner from such sales in the amount of $239,-864.50, as above stated.

Section 101 of the Bevenue Act of 1928 provides for the taxation of a capital net gain at a special rate of 12% per centum of such gain. Capital gain is defined as a gain from the sale or exchange of capital assets consummated after December 31, 1921. “ Capital assets ” are defined as:

* * * property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *

The respondent contends that the petitioner is not entitled to report its gain upon the sale of the American & Foreign Power Co. warrants at the net capital gain rate because the warrants were held by the petitioner “ primarily for sale in the course of its trade or business.” His argument is that the petitioner’s purchases and sales of securities on his own account amounted to a trade or business within the meaning of the taxing statute. In support of such contention he cites Jarvis v. Heiner, 39 Fed. (2d) 361; W. H. Ostenberg et al., Administrators, 17 B. T. A. 738; and Oscar E. Rehm, 21 B. T. A. 243. He submits that the exhibits filed in this proceeding disclose that during the taxable year the petitioner’s total volume in purchases and sales of securities exceeded one million dollars and that either purchases or sales were made by the petitioner “ most every day throughout the entire year.”

An analysis of the evidence does not fully bear out the contentions of the respondent. Although the total volume of purchases and sales of securities approximated one million dollars, the exhibits show a total of only 99 purchases and of 80 sales of stocks or other securities during the year. Many of these transactions were in the same shares or same class of securities. Several of the transactions resulted from a single purchase or sale order which the petitioner had placed with the brokerage firm. The petitioner testified that he devoted a very small fraction of his time to his own trading account and that there were many days when he did not spend any time on it and others when he spent only 15 minutes or half an hour.

Although it is undoubtedly true that the petitioner was ready to sell any of his investments when the market quotations would show him a satisfactory profit, the evidence does not show that these securities were held “ primarily for sale in the course of ” petitioner’s trade or business, or in fact that the petitioner individually had a trade or business of buying and selling securities. His purchases and sales were such as might be made by any investor or retired business man. Such a person would not ordinarily be regarded as engaged in a business of buying and selling securities. To regard the petitioner’s purchases and sales of securities as a trade or business within the contemplation of the statute does violence to the very language of the statute and to the purpose which Congress had in mind in providing for the taxing of gains from the sale of property held more than two years at the capital gain rate. That object was to facilitate sales of property which had been-held for a long period and which had greatly appreciated in value. See Ways and Means Committee Report (p. 10) and Finance Committee Report (p. 12) on Revenue Act of 1921. The statute therefore provided that the profit could be taxed at the capital gain rate whether or not the property sold was connected with the taxpayer’s trade or business, but specifically provided that property which would properly be included in the inventory was not to be so taxed, or where it was held primarily for sale in the course of the taxpayer’s trade or business. Thus, we held in John M. Welch, Sr., 19 B. T. A. 394; affirmed upon this point, 59 Fed. (2d) 1085, that real estate owned for more than two years by a dealer in real estate who was advertising it for sale and attempting to sell it was primarily held for sale in the course of his trade or business. Cf. Ignaz Schwinn, 9 B. T. A. 1304.

In Dalton v. Bowers, 287 U. S. 404, the question before the Supreme Court was whether Dalton, an inventor who had organized several corporations for the purpose of exploiting his inventions, and who endeavored to sell the corporate shares and thereby obtain a gain, was entitled to deduct from gross income a net loss of a prior year in connection with such dealing in the shares of corporate stock. The Court observed:

* * * Dalton was not regularly engaged in the business o£ buying and selling corporate stocks. He organized the manufacturing corporation, and took over all its shares with the intention of selling them at a profit. He treated it as something apart from his ordinary affairs, accepted credits for salaries as an officer, claimed loss to himself because of loans to it which had become worthless, and caused it to make returns for taxation distinct from his own. * * *

The Court therefore held that the loss was not a net loss within the contemplation of section 204 (a) of the Revenue Act of 1921.

We are of opinion that a professional man, such as a lawyer or a doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business. We think that the same observation applies to the petitioner at bar. He was not engaged as an individual in a trade or business of buying and selling securities; consequently, he could not be regarded as holding them primarily for sale in the course of his trade or business.

The petitioner is entitled to report his gain from the sale of the 4,000 warrants in the amount of $239,864.50 as a capital net gain.

Reviewed by the Board.

Judgment will be entered wider Bule 50.

Sternhagen, Trammell, Van Fossan, Goodrich, and Leech dissent.


text:
    Frank M. Arguimbau, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73614.
    Promulgated November 14, 1934.

      Allen G. Gartner, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Smith:

The respondent has determined a deficiency in the petitioner’s income tax for 1931 in the amount of $1,652.43. The petitioner alleges error on the part of the respondent in disallowing the deduction from gross income in a joint income tax return filed for 1931 of a loss of $7,828 sustained by the petitioner’s wife on the sale of 200 shares of the preferred capital stock of Cushman’s Sons Co.

During October and November 1927 the petitioner’s wife purchased 200 shares of Cushman’s Sons Co. preferred stock through her brokerage account with the firm of Campbell, Starring & Co., of New York City, at a total cost of $23,780. The shares of stock were purchased with her own separate funds. Both the petitioner and his wife had separate estates. The petitioner’s wife inherited her estate from her father, who died in 1902.

The 200 shares of Cushman’s Sons Co. stock purchased by the petitioner’s wife in 1927 were sold through the firm of Baker, Weeks & Harden, of New York City, on December 16, 1931, for $80 a share, or for a total consideration, after commissions, of $15,952. The brokerage firm’s check for that amount, dated December 21, 1931, and made payable to the petitioner’s wife, was deposited in her bank account. Thereafter, she never acquired any other shares of the Cushman’s Sons Co. stock.

On December 16, 1931, the petitioner bought 200 shares of Cush-man’s Sons Co. preferred stock through the brokerage firm of Baker, Weeks & Harden on his own brokerage account. Payment for these shares was made by his check dated December 21, 1931, payable to the brokerage firm. He held the shares in question for two or three months and then sold them. Also, on December 21, 1931, the petitioner’s wife sold for $29,988, and the petitioner purchased for $30,463, 300 shares of American Tobacco Co. preferred stock. The petitioner and his wife had separate brokerage accounts and did a large amount of trading in securities.

For several years prior to the taxable year 1931 the business affairs of the petitioner and his wife, particularly their dealings in stocks and securities, had been conducted by their son, who was associated with the brokerage firm of Baker, Weeks & Harden as a “ customer’s man.” He acted as agent for both his father and mother and handled the brokerage accounts of both of them. He was authorized to make purchases and sales for their accounts without their written consent. The sale of the Cushman’s Sons Co. stock was ordered by the petitioner’s wife, but the purchase was made by the son for the petitioner without any prior authorization from the petitioner for such purchase. The son knew of no agreement between his father and mother that his father would resell or give back the Cushman’s Sons Co. stock to his mother.

The bank account of the petitioner’s wife in the United States Trust Co., 45 Wall Street, New York City, shows a balance at December 21,1931, of $41,165.98 and a deposit on that date of $45,940. It also shows a check drawn on that date, payable to Frank M. Arguimbau, the petitioner, for $46,190, leaving a balance of $40,915.98.

The petitioner’s bank account in the National City Bank of New York as of December 21, 1931, shows a balance of $15,141.36 and the deposit of a check of Harriet L. Arguimbau, his wife, for $46,190, making a total of $61,931.36. It also shows a check dated December 21, 1931, drawn to the order of Baker, Weeks & Harden for $46,190, leaving a balance of $15,741.36.

In his deficiency notice the respondent stated that the deduction of the amount of $7,838 (sic) was disallowed for the reason that the transaction resulting in the alleged loss was not a bona fide sale. In his brief filed in this proceeding the respondent takes the position that the sale by the petitioner’s wife and the purchase by the petitioner of the shares in question were transactions between husband and wife which should be eliminated in computing the tax due upon the joint return filed by them. On brief, the respondent states that it is his contention that “ while a sale between husband and wife may constitute a bona fide transaction the ‘ income ’ or £ loss ’ resulting therefrom should be eliminated in computing income upon the basis of joint returns.”

Although the deficiency notice shows that the respondent disallowed the deduction of the claimed loss on the sale of 200 shares of Cushman’s Sons Co. preferred stock upon the ground that the transaction did not represent a bona fide sale, he has not in his brief filed in this proceeding made any such contention. The evidence of record does not prove that the sale was other than bona fide. It is true that there was a transfer from the petitioner’s wife’s bank account to the petitioner’s bank account of $46,190 on December 21, 1931, the reason for which is not explained. But this transfer may have been made as a loan to the petitioner, in settlement of a debt owed, or as a gift. We do not think that it is evidence that the sale was not bona fide. The evidence is uncontradicted that the wife was not the owner of the shares after December 16, 1931, but that they belonged to the petitioner and that he sold them two or three months thereafter. The loss sustained by the wife is a legal deduction from her gross income. See Benjamin T. Burton, 28 B. T. A 1242; Carl P. Bennett, 30 B. T. A. 49; Charles F. Fawsett, 31 B. T. A. 139.

In his brief the respondent submits that losses sustained on transactions between husband and wife are not deductible from the gross income reported on a joint return. We have held to the contrary, however, in Joseph E. Uihlein, 30 B. T. A. 399. In accordance therewith we hold that the loss of $7,828 is a legal deduction from the gross income reported on the joint return of the petitioner and his wife for 1931.

Reviewed by the Board.

Judgment will be entered under Bule 50.

GoodRICh concurs in the result.

Black, Seawell, Matthews, and Adams dissent.