author: McMahon:

text:
    American Founders Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Founders General Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. American Founders Office Building, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. American Founders Corporation (Transferees), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50266-59268, 61048.
    Promulgated July 24, 1934.

      Henry J. Richardson, Esq., for the petitioners.

      J. A. Lyons, Esq., for the respondent.
   OPINION.

McMahon:

The question presented for determination is whether the consolidated taxable income of the petitioners, affiliated corporations, for the fiscal year ended November 30, 1928, shotfid include any amount as profit derived by the General Corporation and the Office Building Corporation, from the sale by them in that year of preferred and common stock in the Founders Trust, which was the predecessor of the Founders Corporation as the parent of the affiliated group. The sale by the subsidiaries of stock of the parent had no effect upon the affiliation.

The petitioners contend that the affiliated group should be treated as a single taxpayer or a single “ income computing unit ” and that no income resulted from the dealings by the General Corporation and the Office Building Corporation in the stock of the Founders Trust. Petitioners claim that this is particularly true with regard to that portion of the stock which was acquired by the subsidiary from the parent corporation at issuance. With regard to such stock the petitioners’ position is that the acquisition was an intercompany transaction which should be ignored, that it should be treated as if it had never happened, and that the sale by the subsidiary of the stock must be considered as having been a sale by the parent issuing company directly to the public.

In view of more recent decisions of the courts and the Board we are unable to accede to the views of the petitioners.

In Commissioner v. Van Camp Packing Co., 67 Fed. (2d) 596, a subsidiary of the Van Camp Packing Co. purchased shares of stock of the Van Camp Packing Co. in 1924 and sold them in 1926 at an amount above their cost. Both the purchase and the sale were with parties outside of the affiliation. In that case the United States Circuit Court of Appeals for the Seventh Circuit reversed the decision of the Board in Van Camp Packing Co., 26 B.T.A. 256, and held that upon the sale of the stock taxable gain was realized. The court there stated in part:

Section 240 did not require affiliated corporations to make consolidated return, but it was optional with them. The returns might be separate or consolidated, as the greater advantage of the group might suggest. But, had there been no consolidated return, and had each of the group made separate return, the gain on this stock transaction would have been taxable to Van Camp Tank Car Company.
Section 240 (a) of the Revenue Act of 1926 does not purport to alter any subject-matter of taxation. It does not make taxable that which without it would not be taxed, nor withdraw from taxation that which would otherwise have been taxable. While it authorizes the single return for the affiliated group, this has to do, not with the specific items of taxation or deduction, but only with the manner o£ the return and the grouping of gains and losses, so that deductible losses accruing to one or more of the affiliates may be deducted from the total gains of all the affiliates. If this course is advantageous to the group', it may make consolidated return accordingly.
In our judgment, the question in no manner depends on whether the consolidated return may be denominated the return of a “ single taxpayer.” In a certain sense, the one making such return may be so designated, but only in the sense of making a single return for the affiliates to enable them to take the advantages which the statute accords to such affiliates. But for all other purposes they remain as they were — individual taxpayers.
In Woolford Realty Co. v. Rose, Collector, 286 U.S. 319 (52 S.Ct. 568, 570, 76 L. Ed. 1128), the court said: “The fact is not to be ignored that each of two or more corporations joining (under section 240) in a consolidated return is none the less a taxpayer. Commissioner v. Ginsburg Co., 54 F. (2d) 238, 239. By the express terms of the statute (section 240 (b)) the tax when computed is to be assessed, in the absence of agreement to the contrary, upon the respective affiliated corporations ‘ on the basis of the net income properly assignable to each.’ ‘ The term “ taxpayer ” means any person subject to a tax imposed by this Act.’ * * * A corporation does not cease to be such a person by affiliating with another.”
* * * * # # #
If this gain would have been, but for the consolidated return, taxable to Van Camp Tank Car Company, its taxability remained unaffected by the maldng of a consolidated return. [Emphasis supplied.]

The case of Commissioner v. Van Camp Packing Co., supra, is directly in point in the instant proceeding as to most of the stock which was dealt in, namely, that which was both purchased from and sold to parties outside of the affiliated group, and supports the conclusion which we have reached. To the same effect is James McCutcheon, 30 B.T.A. 1177. These cases are also, in our opinion, governing in principle as to the remainder of the transactions, namely, those in which the subsidiary, the General Corporation, acquired stock from the parent, the Founders Trust, at issuance, and sold it to parties outside the affiliated group. We see no reason for a differentiation in this respect.

Commissioner v. Van Camp Packing Co., supra, is, we believe, in accord with the weight of authority. The following cases, while not directly in point, indicate the disposition of the courts and the Board, when dealing with income and deductions, to recognize the separate entity of affiliated corporations for all purposes except for the purposes of the computation of tax, when the transactions are not purely intercompany transactions. Woolford Realty Co. v. Rose, 286 U.S. 319; Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544; Commissioner v. Ginsburg Co., 54 Fed. (2d) 238; Delaware & Hudson Co., 26 B.T.A. 520; aff'd., 65 Fed. (2d) 292; certiorari denied, 290 U.S. 670; Seiberling Rubber Co., 70 Fed. (2d) 651; Walker Products Corp., 30 B.T.A. 636; Remco Steamship Co., 30 B.T.A. 579; and New York Ontario & Western Ry. Co., 30 B.T.A. 408.

Ilfeld Co. v. Hernandez, 292 U.S. 62, is not in point here, since, as stated in Walker Products Corp., supra, it “ relates to the loss on the liquidation of subsidiaries in 1929 ” and it involved the construction of the Commissioner’s Regulations 75, which have no application prior to the year 1929. Cf. Niagara Shares Corp., 30 B.T.A. 668.

In these proceedings the transactions were not purely internal so as to render them purely intercompany transactions which are ignored for income tax purposes. Cf. Helvering v. Gulf, Mobile & Northern R.R. Co., 71 Fed. (2d) 953, and Worcester Salt Co., 29 B.T.A. 526. In the latter case we stated in part:.

* * * The Group, after the transfer of assets and issuance of bonds, was still in the same situation as before — that is, the group still owned the assets and merely held its own bonds. The exchange was an innocuous internal event. * * *

In the alternative the petitioners contend that the basis for determining the gain derived by the General Corporation upon the disposition of the shares of preferred and common stock which it acquired from the Founders Trust as a part of the original issue should be the market value of such stock at the time of acquisition rather than the amount which the General Corporation paid for the stock. The General Corporation paid $50 per share for the preferred and $86 per share for the common. At that time the bid and asked prices of the preferred stock were $44 and $49, respectively, and the bid and asked prices of the common stock were $106 and $113, respectively. In our opinion this contention of the petitioners must also fail. The basis for the determination of gain or loss upon the sale or other disposition of property is its cost. Sec. 113 (a), Revenue Act of 1928.

On brief counsel for respondent states as follows:

Article 603 of Regulations 74 [see footnote no. ] provides that the basis for determining gain or loss by a corporation from the sale or other disposition of property acquired by it during the period of affiliation from a corporation with which it was affiliated shall be the same as it would be in the hands of the corporation from which it was acquired, and that this is true whether the property was sold or disposed of during or after the period of affiliation. The Regulation does not specifically apply to capital stock as Article 34 of Regulations 75 does but the result necessarily would be the same if the Regulation is held to apply.
*******
* * * So, in the present case, the stock sold by the parent corporation to the subsidiary is deemed to have been equal in value to the cash paid therefor and the stock in the hands of tthe Founders General Corporation has a basis equal to the amount paid therefor by it. It follows that by no method of reasoning could a cost basis for said stock to the Founders General Corporation different from the amount of cash paid therefor be upheld. The above statements are predicated upon the assumption that the stock transferred to Founders General Corporation was stock then issued by American Founders Trust for the first time. If the petitioners claim a basis different from that determined by respondent, the burden is upon them to prove what the basis of the stock in the hands of the parent was, and the record is silent as to whether this stock constituted an original issue or was stock acquired by the parent by dealing in its own stock.

We agree that the result as to the basis would be the same in the instant proceeding if article 603 were applicable; but we deem it unnecessary to here decide whether article 603 is applicable.

The petitioners cite Pennsylvania Indemnity Co., 30 B.T.A. 413. That case is not here governing. There a corporation purchased from a wholly owned subsidiary, securities at a price greatly in excess of the market price and immediately sold them at a price to net less than the market price when acquired. We there held that the parent corporation was entitled to deduct from gross income the difference between the fair market value of the securities at the date acquired and the price at which sold, but was not entitled to deduct a loss based upon the price paid to the subsidiary. We there stated in part:

* * * we are 0f opinion, however, that the statute which permits a corporation to deduct from its gross income losses sustained upon the sales of property contemplates normal business transactions. Where a corporation for one reason or another purchases property at an amount in excess of the fair market value or in excess of the market price the transaction is not a normal business transaction.
* * * The petitioner paid for the securities acquired from its subsidiaries an amount in excess of their fair market value for the purpose of bettering the financial condition of its subsidiaries. The substance of the transaction was a transfer by the petitioner to the subsidiaries of the excess of the price paid over the market value. That amount did not represent a part of the cost of the secwities. [Emphasis supplied.]

In the instant proceeding the cost of the stock to the subsidiaries is clearly shown and we must use such cost as the basis for the determination of the gain. From the evidence we can not say that the transactions in question were not normal business transactions.

It follows that the respondent’s determination must be approved.

Reviewed by the Board.

Decision will be entered for the respondent.

      Akt. 603. Basis of property acquired during affiliation. — The basis for determining gain or loss by a corporation from the sale or other disposition of property acquired by it during a period of affiliation from a corporation with which it was affiliated shall be the same as it would be in the hands of the corporation from which acquired. This is true whether the property was sold or disposed of during or after the period of affiliation. For the purpose of this article, the term “ period of affiliation ” means the period during which such corporations were affiliated (determined in accordance with the law applicable thereto) but does oot include any taxable year beginning on or after January 1, 1922, unless a consolidated return was made, nor any taxable year after the taxable year 1928.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Consumers Natural Gas Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66870.
    Promulgated July 24, 1934.

      Joseph 0. White, Esq., for the petitioner.

      J. E. Marshall, Esq., Frank B. Sehlosser, Esq., and E. G. Sievers, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $886.16 for the calendar year 1929. The facts in this proceeding have been stipulated and may be summarized as follows:

The petitioner owned and operated an interest in a gas-producing property on the outskirts of Watkins Glen, New York. It also owned pipe lines and other necessary equipment with which it transported the gas produced by it from this property to consumers. The book values of its mains, pipes, and meters used in transporting and selling the gas were as follows at the end of 1929:

Gas mains_$44, 993.28
Service pipes_ 5, 200.89
Meters- 14. 283. 78

The distances which the gas was transported varied from less than one mile to more than five miles. The petitioner was engaged solely in the business of producing, transporting, and selling natural gas. During 1929 it sold to consumers 88,568,000 cubic feet of gas, which it had produced and transported to them, and received for this gas $63,104.40. Expenses incurred and depreciation sustained by the petitioner in-1929 in producing, transporting, and selling this gas amounted to $32,217.60. It claimed on its return a deduction of $13,793.01 for depletion. The Commissioner allowed a deduction for depletion of $6,623.93, being 50 percent of $13,247.87, the net income from the property before deducting depletion (gross income of $31,832.22 less deductions of $18,584.35). He followed article 221 («) of Regulation 74.

The petitioner here contends that it is entitled to deduct $15,443.40 for depletion for 1929, being 50 percent of its net income before deducting any depletion. The figure used to represent net income is the difference between the total income of the corporation received from consumers and all deductions to which it is entitled except that for depletion. The Commissioner contends, however, that income and deductions not directly related to producing gas must be eliminated in computing the deduction for depletion.

Section 23 of the Eevenue Act of 1928 provides that in computing net income certain deductions shall be allowed including, in the case of gas wells, a reasonable allowance for depletion to be made under rules and regulations of the Commissioner. Sec. 23 (1). It also provides that the basis for depletion shall be as provided in section 114. Sec. 23 (m). Subsection (b) of section 114 is headed “Basis for depletion.” It contains paragraph (3), which is in part as follows:

Percentage depletion for on. and gas wells. — In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property * * *.

Article 221 of Regulations 74 provides that:

* * * If the oil and gas are not sold on the property but are manufactured or converted into a refined product or are transported from the property prior to sale, then the gross income shall be assumed to be equivalent to the market or field price of the oil and gas before conversion or transportation. * * * In cases where the taxpayer, in addition to producing oil and gas, engages in additional activities such as operating refineries and transportation lines, depreciation, taxes and such expenses as overhead which can not be directly attributed to any specific activity, shall be allocated to the production of oil and gas on the basis of the ratio which the operating expenses and development expenses (if the taxpayer has elected to deduct development expenses) directly attributable to the production of oil and gas bear to the taxpayer’s total operating expenses and development expenses.

This particular taxpayer was engaged not only in producing gas, but also in transporting and selling that gas. It had assets used exclusively in transporting and measuring the gas for sale to consumers. Depreciation on those assets has been allowed, but they are not subject to depletion. The Commissioner has apparently allocated to the transportation and sales part of the business of this taxpayer a part of its income and a part of its deductions, and has computed the deduction for depletion using only income and deductions directly related or properly allocable to the production part of the business. The petitioner does not attack the method of allocation or the figures used by the Commissioner, but contends that “gross income ” means all of the income received by it from the sale of its natural gas and, therefore, no segregation is proper.

The deduction allowed by the statute is based upon income from the yroyerty. It is 27% percent of the gross, provided it does not exceed 50 percent of the net before deducting depletion. The words “ the property ” clearly refer to the particular property which is being depleted, and income from the property means only income derived from the operation which is depleting that property. Darby-Lynde Co. v. Alexander, 44 Fed. (2d) 186; aff'd., 51 Fed. (2d) 56; certiorari denied, 284 U.S. 666; Vinton Petroleum Co. of Texas v. Commissioner, 71 Fed. (2d) 420, affirming’ 28 B.T.A. 549; Macon Oil & Gas Co., 23 B.T.A. 54. This percentage allowance is an arbitrary one and mighty have been based upon a taxpayer’s income from all sources. Instead it is to be computed upon income from the property subject to depletion. Consequently, all income and deductions from or properly allocable to other sources must be eliminated in computing the deduction, for depletion. Brea Canon Oil Co., 29 B.T.A. 1134; Signal Gasoline Corp., 30 B.T.A. 568. Since this taxpayer had other assets and other parts of its business which it operated profitably, the Commissioner should have eliminated the income and deductions properly allocable thereto. He allowed a deduction for depreciation on the assets used in transporting and selling the gas and there was no reason to. allow another deduction based upon income from the use of those assets, particularly where the deduction would be for depletion and those assets were not being depleted. Congress must have intended the deduction to, be as uniform as possible, yet the interpretation contended for by the petitioner would permit a producer to increase his deduction over that of his neighbor by using the gas to engage in some related business whereby he obtained additional income. Examples might be multiplied to show the unreasonableness of such an interpretation. The income of this taxpayer in excess of the value of the gas at the well was not income from the property within the meaning of section 114 (b)(3).

Decision will be entered under Rule 50.


author: Aeundell :

text:
    Charles A. Shea, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61936, 63962.
    Promulgated July 24, 1934.

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

      Chester A. Gwinn, Esq., and Charles E. Lowery, Esq., for the respondent.
   OPINION.

Aeundell :

There appears to be no dispute as to petitioner’s salary from the partnership of J. F. Shea Co. This was divided between husband and wife in their returns and has not been changed by respondent. At the hearing counsel for petitioner conceded that the one ninth of the 40 percent interest in the partnership inherited by petitioner was his separate property; consequently the income attributable to such share is taxable to petitioner in whole.

The controversy here is with reference to the proper treatment of the partnership income allocable to the 40 percent interest acquired by petitioner by purchase in 1920 when domiciled in the State of Oregon. The respondent’s position is that petitioner’s interest in the partnership was his separate property by reason of his acquisition of it in Oregon, but even if it were community property by virtue of the California domicile, its acquisition prior to July 29,1927, prevents the wife from having any vested interest, hence under either theory the income is all taxable to the husband.

Oregon being a noncommunity propérty state, there is no doubt that petitioner’s interest in the partnership was his separate property when acquired. It is a generally observed rule that separate property of either husband or wife does not lose its character as such upon a change of domicile. See Wharton, Conflict of Laws, § 197; McKay, Community Property, § 623. This was the settled rule in California for many years prior to the amendment of the Civil Code hereinafter discussed. It is clearly expressed in In re Arms’ Estate, 186 Cal. 554; 199 Pac. 1050, as follows:

It has long been the established law of this state that where a husband brings into this state money or property acquired by him during coverture in another state, by whose laws it was his separate property, it remains his separate property after it reaches this state, and that any property acquired therewith in this state, either by purchase or exchange, is also the separate property of the husband. Kraemer v. Kraemer, 52 Cal. 302; Shumway v. Leakey, 67 Cal. 460, 8 Pac. 12; Estate of Niccolls, 164 Cal. 372, 129 Pa. 278; Estate of Warner, 167 Cal. 686, 140 Pac. 583.

Sections 162 and 163 of the Civil Code of California define the separate property of spouses and section 164 defines community property. Prior to July 27, 1917, section 164, as far as material here, provided that “ all other property [i.e. other than separate property under section 162 and 163] acquired after marriage by either husband or wife, or both, is community property.” As so worded, section 164 did not purport to apply to property acquired in another jurisdiction and taken into California, and the rule respecting such property was that quoted above from In re Arms’ Estate. By an amendment effective July 27, 1917, section 164 was made to read as follows:

All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state, is community property.

Several cases involving this section thereafter reached the Supreme Court of California involving property acquired in common law states and taken into California prior to 1917. In such cases the court uniformly held that the amendment of 1917 could not be interpreted to act retroactively so as to affect rights which had become vested under the laws of California. In re Arms’ Estate, supra; Estate of Frees, 187 Cal. 150; 201 Pac. 112; Estate of Drishaus, 199 Cal. 369; 249 Pac. 515. In 1923 section 164 was again amended by inserting the words “ heretofore or hereafter ” before the words “ acquired while domiciled elsewhere.” We have no question of retroactive construction in this case and the matters set forth, in this paragraph are given merely as historical background and as an aid in following through the views of California, as expressed in legislative enactments, respecting property brought in from other states.

Petitioner’s view in this case is that under section 164, as amended, his interest in the partnership became community property when he established his domicile in California. If so, the character of the property being established as community after July 29, 1927, the income therefrom was property divided between the spouses in their income tax returns. United States v. Malcolm, 282 U.S. 792. Petitioner takes his stand squarely on the decision in In re Thornton’s Estate, (Cal.) 19 Pac. (2d) 778. In that case, Thornton, while he and his wife were domiciled in Montana, acquired personal property which under the laws of that state was his separate property. The Thornton domicile was established in California in 1919 and the personal property acquired in Montana was taken into California at that time. Upon the death of Thornton his widow sought a decree of distribution in the California courts based on the claim that the entire estate of the decedent was community property. The State Supreme Court sustained her claim, holding the statute, as amended, valid in so far as it pertained to property brought into the state after 1917. However, a rehearing in the case was granted and, in an opinion handed down May 17, 1934, 33 Pac. (2d) 1, the court reversed its prior views and held that the amendments to section 164 violate the Fourteenth Amendment to the Constitution of the United States, hence are “unconstitutional and void.” The opinion on rehearing reads in part as follows:

So long as we are bound by the bolding that to limit the right of one spouse by increasing the right of the other in property acquired by their united labors, is the disturbance of a vested right, we entertain no doubt of the application of at least two provisions of the 14th amendment to the Constitution of the United States. If the right of a husband, a citizen of California, as to his separate property, is a vested one and may not be impaired or taken by California law, then to disturb in the same manner the same property right of a citizen of another state, who chances to transfer his domicile to this state, bringing his property with him, is clearly to abridge the privileges and immunities of the citizen. Again, to take the property of A and transfer it to B because of his citzenship and domicile, is also to take his property without due process of law. This is true regardless of the place of acquisition or the state of his residence.
(2) The doctrine that a change of domicile to this state, accompanied by an importation of the personalty is an implied consent to a submission to requirements of this statute, cannot be sustained, for to do so would be to give effect to a restriction prohibited by the Constitution. (Frost v. Railroad Commission, 197 Cal. 230; Hartford Acc. etc. Co. v. Delta & Pine Land Co., decided by Supreme Court of the United States, April 9, 1934.)
(3) Neither can we hurdle these barriers by holding the Amendments in question to be part of our succession laws and hence valid as a statute of succession. For we are met with plain holdings of our own court that such is not the effect of said statute. (Estate of Frees, supra; Estate of Drishaus, supra.)

The result is that the rule in California is now the same as it was prior to the amendments to section 164, and property acquired in another state by whose laws it was the separate property of the husband remains his separate property when taken into California, In re Arms’ Estate, supra, and under section 163 the “ rents, issues, and profits thereof ” are his separate property.

Under the California decisions, profits from a partnership in which the husband has invested separate property are not necessarily his separate income, and where it appears that some of the profits are due to his energy and ability, an apportionment will be made and such part as is due to his personal efforts is treated as community income and the part that accrues from the use of capital is his separate income. Periera v. Periera, 156 Cal. 1; 103 Pac. 488; In re Gold’s Estate, 179 Cal. 621; 151 Pac. 12; In re McCarthy’s Estate, (Cal. App.) 15 Pac. (2d) 223. As we view the present case, the application of that rule is not involved here. The petitioner received a salary from the partnership which presumably was compensation for his personal services and which has been treated by petitioner and his wife and also by the respondent as community income. Cf. Barton T. Bean, 29 B.T.A. 1261. At any rate we have not sufficient facts upon which an apportionment could be made.

We accordingly sustain the respondent in treating as separate income of the petitioner his distributive share of partnership income.

Decision will he entered under Rule 50.


author: SteRnhagen:

text:
    Briarcliff Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71188.
    Promulgated July 24, 1934.

      Byron P. Harris, C.P.A., for the petitioner.

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

SteRnhagen:

The Commissioner determined a deficiency of $577.68 in petitioner’s income tax for 1930. The attack is on the disallowance of a deduction of brokerage commissions paid in two real estate transactions. The facts were stipulated.

The petitioner, a Georgia corporation, was, during 1930, “ engaged in the real estate business.” Its books were on the cash and not an accrual basis. It acquired the Robert Fulton Hotel property for $654,323.33, being cash $100,266.08, liabilities assumed $479,057.25, and Union Stock Yards $75,000. To a broker petitioner paid “a commission of $3,000 for services rendered in connection with the transaction, which services consisted largely of inducing the owner of the hotel to accept the stockyards property as part payment.” Petitioner also acquired the Pallas Apartment property for $225,000, paid by $40,000 cash, $160,000 liabilities assumed, and the Griffin Farm $25,000. A commission of $2,500 was paid to a broker for services “ consisting largely of inducing the apartment owner to accept the Griffin Farm as part payment to the extent of $25,000 on the purchase price.” The petitioner on its 1930 return deducted the $3,000 and $2,500 as expenses and the Commissioner disallowed the deduction.

In the notice of deficiency the respondent predicated his disal-lowance of the deduction upon the holding that the two transactions in real estate were exchanges of property held for investment for other property of like kind or use, and therefore gain or loss thereon could not be recognized, Revenue Act 1928, sec. 112 (b) (1). The petitioner contends that nevertheless the commissions paid are deductible under section 23 (a) as ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Since the facts stipulated are limited to those which have just been set forth, it appears only that one “ engaged in the real estate business ” exchanged two investment properties for two other investment properties, paying cash and the assumption of liabilities in addition to the properties given up. There is nothing further to indicate that these transactions were other than special investments. That the petitioner is stipulated to be “ engaged in the real estate business ” is not sufficient to characterize every commission as an ordinary expense of carrying on its business. This is particularly true where, as here, there is reason from the stipulation to believe that the taxpayer’s business consists of investments. If the petitioner be engaged in trading, there is no evidence in this record to indicate it.

Earlier decisions have held that a commission paid as an incident to an investment transaction is not deductible as an ordinary and necessary expense and in In N. Burman, 23 B.T.A. 639, this rule was applied to one who was engaged in the real estate business, as this petitioner is stipulated to have been. There have, however, been tacit reservations as to commissions paid regularly by a real estate dealer in respect of his regular trading operations. While it is quite conceivable that commissions may be deducted by a dealer under such circumstances, it is sufficient in this case to say that the facts do not call for the consideration of that question. We say only that, consistently with prior decisions, the deductibility of a real estate commission as an ordinary and necessary expense of carrying on a trade or business is not established by the ambiguous stipulation that the taxpayer is “ engaged in the real estate business ”, and that the commissions were paid in connection with two transactions' which, so far as appears, were mere changes of investment.

Judgment will he entered for the respondent.

        Hutton v. Commissioner, 39 Fed. (2d) 459 (securities); Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, 384; Tonningsen v. Commissioner, 61 Fed. (2d) 199 (long term leases); E. A. Giffin, 19 B.T.A. 1243 (real estate commissions); cf. Odorono Co., 26 B.T.A. 1355 (attorney fees).

         E. A. Giffin, 19 B.T.A. 1243; Florence G. Baldwin, 23 B.T.A. 512; cf. J. A. Dart 29 B.T.A. 125.


author: StekNiiageN : Muedock,

text:
    Franklin Miller Handly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66810, 67671, 74406.
    Promulgated July 24, 1934.

      J. Harry Price, Esq., and W. T. Kennerly, Esq., for the petitioner.

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

StekNiiageN :

The respondent has treated the trust income as taxable to the settlor under Kevenue Act of 1928, section 167. It is, however, hard to see this without confusing the mother and the children. She was not a beneficiary of the trust during any of the years before us, nor, during those years, could any part of the trust income be legally distributed to her individually, nor could it be held or accumulated for future distribution to her. It could only be and was only distributed to Oscar Handly for the named beneficiaries. The fact that they were minors under guardianship is consistent with their being separate individual taxpayers, Commissioner v. Van Wart, 69 Fed. (2d) 299.

While, as respondent says, the settlor, being the mother of the beneficiaries, is with the father a joint natural guardian and jointly charged with their care and education (Tennessee Laws of 1923, ch. 41), it is at least doubtful whether her obligation imposes on her a burden as prompt or as absolute as on the father, Owen v. Watson, 157 Tenn. 352; 8 S.W. (2d) 484, and hence whether, short of necessity, the trust operated to relieve her of any natural onus. We think this falls far short of being a substantial economic benefit to her, comparable with that in Burnet v. Wells, 289 U.S. 670; cf. Edmund O. Schweitzer, 30 B.T.A. 155. Whatever power Congress may have, as supported by that decision, to tax such income to the settlor, the language of section 167 does not purport to exercise it.

It is also plain that the settlor had not, during the taxable years in question, the power to revest in herself any part of the corpus, and hence, that section 166 is not applicable. Langley v. Commissioner, 61 Fed. (2d) 796.

Reviewed by the Board.

Judgment will be entered tender Rule BO.

Seawell, Adams, and TuRNER dissent.

Muedock,

concurring: I fully approve of the above opinion except for the reference to the case of Edmund O. Schweitzer, 30 B.T.A. 155. The present case and dissenting opinion in the Schweitzer case demonstrate that the latter case was incorrectly decided. The reasoning in the Schweitzer case was contrary to the Commissioner’s rulings and regulations (C.B. 3, p. 116, S.O. 14), and to prior decisions of the Board. Irene O'D. 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; Francis J. Stokes, 28 B.T.A. 1243. Cf. Frank P. Welch, 12 B.T.A. 800; Sidney R. Bliss, 26 B.T.A. 962; Edson v. Lucas, 40 Fed. (2d) 398. Where the statute provides that the income of a trust is taxable to the “ beneficiaries ” the word was intended to have the meaning which it always has in the law of trusts. It does not include one only indirectly benefited from income distributed for the benefit of those named in the trust instrument. The latter are the “beneficiaries.” Cf. concurring opinion Iola Wise Stetson, 27 B.T.A. 173. The only exceptions to this rule are by specific legislative provisions. Burnet v. Wells, 289 U.S. 670; Langley v. Commissioner, 61 Fed. (2d) 796; Mabel A. Ashforth et al., Executors, 26 B.T.A. 1188. I think the Schweitzer case should be overruled.

Leech agrees with this concurring opinion.

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or ill 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, or where any part of the income of a trust is .or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction), such part of the income of ti' t trust shall be included in computing the net income of the grantor.

       SEC. ICO. REVOCABLE TRUSTS.
      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.


author: Sternhagen :

text:
    J. H. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63827.
    Promulgated July 24, 1934.

      W. T. Kennerly, Esq., and J. Marry Price, Esq., for the petitioner.

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

Sternhagen :

1. In Franklin Miller Handly, 30 B.T.A. 1271, just decided, it was held that the settlor of a trust essentially similar to this petitioner’s trust was not required to treat the trust income as his own. In this case, since the beneficiary child ivas an adult, there is no guardianship relation and no question as to the father’s freedom from duty to educate. The respondent’s determination as to trust income is reversed.

2. The respondent has included in petitioners’ income for 1929 the income of the estate of which he was administrator and sole successor to the personalty. This is because respondent thinks that petitioner unduly prolonged the administration of the estate instead of winding it up promptly and receiving in his own right the income. His alleged freedom thus to receive is treated as a sort of constructive receipt.

We cannot find enough support for this view to adopt it. There may be cases imaginable where the failure to close the estate is so unnecessary as to be merely capricious and the estate a mere form— a subterfuge for spreading taxes out thinner. But there is enough reason here for carrying on the estate through 1929 to compel recognition of it as a separate taxpayer under the statute. Cf. Kuldell v. Commissioner, 69 Fed. (2d) 739. There were substantial debts and a reasonable possibility of others outside the State — enough -to constrain a conservative administrator from a hasty distribution. Cf. American Surety Co. v. Grace, 151 Tenn. 577. The law is full of litigation brought about by an unexpected turn of events, and we should be slow to say that the delay through 1929 was specious and to disregard the date of the final accounting, the official discharge, and the adherence to the statutory system of the State, Shannon’s Tennessee Code, secs. 4007, 4008, 4012, 4064.

The respondent’s determination is reversed.

Judgment will be entered under Rule 50.


author: Smith :

text:
    Union & Peoples National Bank of Jackson, a National Banking Association, and E. B. Roberts, Administrators (with Will Annexed) of the Estate of Edith M. Dancer, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70456.
    Promulgated July 25, 1934.

      Hoiuard F. Burns, Esq., Justin B. Whiting, Esq., and WilUam H. Aubrey, Esq., for the petitioners.

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

Smith :

The issue before us in this proceeding is whether the value of the property held by the John B. Crouse trust passed under a general power of appointment exercised by the decedent in her will and is therefore taxable in the decedent’s estate under the following provisions of the Revenue Act of 1926:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
* * * * * * *
. (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *.

The decedent by her will attempted to exercise the power of appointment in respect of the property by directing that it be transferred to the trust which she herself had created, but the Court of Common Pleas of Cuyahoga County, Ohio, which had jurisdiction of the property, has decreed that the attempted exercise of the power of appointment in the decedent’s will failed and that the property in question passed in accordance with the terms of the John B. Crouse trust agreement. The property was actually distributed pursuant to the court’s decree and the time for appeal has since expired. The Supreme Court held, in Freuler v. Helvering, 291 U.S. 35; reversing 62 Fed. (2d) 733, and affirming 22 B.T.A. 118, that the decision of the state court, until reversed or overruled, establishes the law of that state respecting the distribution of trust property within its jurisdiction. The Court there said:

* a * We understand tbe respondent to concede the binding force of a state statute, or a settled rule of property, followed by state courts, and, as well, an antecedent order of the court having jurisdiction of the trust, pursuant to which payments were made. But, if the order of the state court does in fact govern the distribution, it is difficult to see why, whether it antedated actual payment or was subsequent to that event, it should not be effective to fix the amount of the taxable income of the beneficiaries. We think the order of the state court was the order governing the distribution within the meaning of the Act.
Moreover, the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying section 219 of the Act of 1921.

In Grinnell v. Commissioner, 70 Fed. (2d) 705, it was held that the gross estate of a decedent did not include a trust fund over which the decedent had a power of appointment by will where the trust estate did not pass under the power of appointment for the reason that the appointees under the decedent’s will elected to renounce their bequests thereunder and to take as remaindermen under the will of the creator of the trust; that under the New York law the attempt to execute the power was not effective because it did nothing.

The statute here involved, section 302 (f) above, includes in the gross estate the value of the property “ passing under a general power of appointment exercised by the decedent.” The state court of proper jurisdiction has determined that the trust property in question did not pass under a power of appointment exercised by the decedent. In the circumstances of this case it would be necessary, in order to sustain the respondent’s position, to reach a conclusion contrary to that reached by the Ohio court as well as those of the State of Michigan, namely, that, as a matter of fact and of law, the property in the John B. Crouse trust did actually pass by a general power of appointment exercised by the decedent in her will. In our opinion we are precluded from making such a determination. Even if we were in doubt as to the correctness of the ruling reached by the state courts as to whether the property passed by the attempted exercise of the power of appointment, we would be disposed to follow them. We therefore hold that the value of the property in the John B. Crouse trust is not includable in the decedent’s gross estate.

In respect of the further issue contained in the petition as amended, it was stipulated at the hearing that the amount of $10,969.20 was paid to the State of Michigan as an inheritance tax on the decedent’s estate. As provided in section 301 (b) of the Bevenue Act of 1926, such amount is allowable as a credit in computing the Federal estate tax due on the decedent’s estate.

Beviewed by the Board.

Judgment will be entered under Bule 50.


author: Sea well:

text:
    George Z. Medalie, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54704.
    Promulgated July 26, 1934.

      George Sylvester, Esq., for the petitioner.

      Frederick K. Blanker, Esq., for the respondent.
   OPINION.

Sea well:

Petitioner contends and insists that the compensation paid to him was for services rendered as an officer of the State of New York, which office he held by appointment under the Executive Law of that state. An examination of the Executive Law referred to discloses that section 60 thereof provides for the continuance of a department of law in the state government, of which the attorney-general shall be the head; by section 61, the attorney general is empowered to “ appoint such assistant attorneys general, deputy assistant attorneys general and attorneys as he may deem necessary and fix their compensation, within amounts appropriated therefor by legislature”; by section 62, the governor of tlie state is empowered to require the attorney-general personally or through a deputy to attend any term of the Supreme Court and supersede the district attorney in the management of any specified criminal actions or proceedings therein, it being further provided in section 62 that the expenses under such circumstances, “ including the salary or other compensation of all deputies employed shall be a county charge.”

In searching this law for the source of authority for petitioner’s appointment we disregard as immaterial the fact that he was designated, instead of appointed by the attorney-general. The fact that he is named in the letter of appointment a “Special Assistant Attorney-General ”, a term not used in the statute, may indicate that he was not one of those appointees mentioned in section 61. Appointees under that section would appear to be the permanent aids to the attorney-general belonging to his regular staff and payable by the state out of appropriations made by the legislature for the purpose. Petitioner claimed on the trial that he was appointed under section 62. In some sense this might appear to bo borne out by the fact that he was paid not out of the funds of the state, but by the County of Albany as provided in section 62, but under that section there is no authority given for the appointment of a “ Special Assistant Attorney-General ” or any other aid to the attorney-general. The governor’s letter to the attorney-general does not suggest the appointment of a new or special deputy or assistant, but rather the reverse, for the letter requires the attorney-general to “ attend in person, or by one of your asisstants or deputies,” apparently signifying a deputy already in existence.

Section 65 of the Executive Law provides that “ The Governor or Attorney-General may designate and employ such additional attorneys or counsel as may be necessary to assist in the transaction of any of the legal business mentioned in section sixty-two of this chapter and such attorneys or counsel shall be paid a reasonable fee upon the certificate of the Governor and Attorney-General.” Intentionally or otherwise, the letter of the attorney-general to petitioner uses the language of this section in designating him for the position he held. He was not “ additional counsel ” in the sense of being subordinate to other attorneys in the case. His outstanding ability and reputation as a lawyer throughout the county would assign him to no such position in any litigation in which he might be employed, and his position in the litigation in question was that of chief counsel, subject only to the attorney-general, but this does not negative the power of his appointment under section 65. His compensation — the reasonable fee — provided for, was agreed to in consultation between the governor and the attorney-general and paid as provided in section 62, bnt not contrary to the provisions of section 65. If petitioner was appointed under section 65, as it appears he was, it is further evidence that his services were not continuous or permanent or other than temporary and for the single piece of litigation. The petitioner does not contend, as we understand him, that he was a member of the attorney-general’s regular staff and regularly attached to the department of law in the state government; but that he was a “Special Assistant Attorney-General”, his tenure being conterminous with that of the attorney-general. Our understanding of the law, and the situation as it existed, forbids us to accept this contention of petitioner. He was employed to manage and prosecute one piece of litigation only, that is, for offenses growing out of the certain state census. When this litigation was completed, his employment was at an end. Before it was concluded he was at liberty to engage in other litigation. He could have appeared against the state at the same term of court at which Mrs. Knapp was convicted, for other defendants charged with offenses not growing out of the census. A member of the attorney-general’s staff appointed under section 61 of the Executive Law could not have done so.

One employed as petitioner was in this case is not a state officer. As often quoted the Supreme Court has said:

The terms “ officers ” and “ employees,” both, alike, refer to those in regular and continued service. Within the ordinary acceptation of the terms, one who is engaged to render service in a particular transaction is neither an officer nor an employee. They imply continuity of service, and exclude those employed for a special and single transaction. An attorney of an individual retained for a single suit, is not his employee. It is true, he has engaged to render services; but his engagement is rather that of a contractor than that of an employee. [Louisville, etc., R.R. Co. v. Wilson, 138 U.S. 501.]

And again:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. [Metcalf & Eddy v. Mitchell, 269 U.S. 514, 520.]

Also, Regulations 74, article 648, defines an officer:

An officer is a person who occupies a position in the service of the State or political subdivision, the tenure of which is continuous and not temporary and the duties of which are established by law or regulations and not by agreement.

"What has been said above would seem sufficient to dispose of this case, but the Board in Rosalie G. Rand, Executrix, 27 B.T.A. 182, a case involving the identical situation here presented, held that compensation to a lawyer appointed by the attorney-general of New York under this same Executive Law of the state, and the direction of the governor thereunder, for duties similar to those performed by petitioner in this case, was exempt from Federal income tax because the appointee was an officer of the state. Following the Band, case, and expressly relying on it for authority, the Board rendered another decision to the same effect in the unreported memorandum opinion in Charles F. Mwrphy, promulgated January 20, 1933. These cases were relied on by petitioner in this proceeding, and in his brief he said that there was “no essential distinction between the present case and the Rand and Murphy cases.” Since the hearing in the instant case the Circuit Court of Appeals for the Second Circuit has reversed the Board’s decision in the Murphy case, and pro tanto the Rand decision as well. In the opinion in Commissioner v. Murphy, 10 Fed. (2d) 790, the court said:

Tie principles which must govern our decision are expounded in Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 70 L. Ed. 384. If the respondent [Murphy] was an officer or employee of the state, his pay as such was Immune from federal taxation; but if he was merely employed as legal counsel in a special case, the compensation paid for his services must be included in taxable income. Lucas v. Reed, 281 U.S. 699, 50 S.Ct. 352, 74 L. Ed. 1125; Lucas v. Howard, 280 U.S. 526, 50 S.Ct. 87, 74 L. Ed. 593. * * *

Applying the principles announced in these cases and referring to article 88 of Regulations 69 (same as Regulations 74, article 643, promulgated under the Revenue Act of 1928), the court stated further:

* * * He [Murphy] had no position of permanent or continuous tenure, was free to carry on concurrently his general law practice, and was employed for a single litigation. * * * *

In the Murphy case it is reported that he used his own employees to assist him in the preparation and presentation of the state’s case “ just as he would have done in any other ordinary piece of litigation ”; but while this fact is used in the court’s decision as added weight to sustain the opinion, it is not understood in any way to control or be essential to the conclusion reached by the court that Murphy was not an officer or employee of the state. Counsel for petitioner in the instant case, in a new supplemental brief, undertakes to point out other matters of difference between the Murphy case and that of petitioner, all of which we have considered, but find to be immaterial and not controlling. Under the Murphy case and others above referred to we hold that petitioner was not an officer of the state and that his compensation paid by Albany County was not exempt from Federal income tax.

Reviewed by the Board.

Judgment will he entered for the respondent.

VaN FossaN dissents.


author: Seawell :

text:
    Charles B. Behr, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gore Brothers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Adolph Ramish, Petitioner, v. Commissioner of Internal Revenue, Respondent. Adolph Ramish, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39534, 39538, 39568, 39569.
    Promulgated July 27, 1934.

      Oscar Moss, O.P.A., for the petitioners in Docket Nos. 39538, 39568, and 39569.

      J. R. Johnston, Esq., and A. F. Stillwell, Esq., for the respondent.
   OPINION.

Seawell :

These proceedings, which were consolidated for hearing and report, involve the liability of the petitioners as transferees for unpaid income tax of the Lou Anger Oil Syndicate for the fiscal year ended June 30, 1924. The liability being asserted against each petitioner is $8,336.13, the amount of tax determined to be due from the Syndicate.

The petitions filed by Adolph Ramish and Adolph Ramish, Inc., allege as error the failure of the respondent to find that the trans-feror was taxable as a trust, and, in the alternative, failure to allow the Syndicate certain amounts as deductions for depreciation and depletion, and to apportion the tax among the holders of certificates of beneficial interest in the Syndicate. Gore Brothers, Inc., alleges in its petition that the respondent erred in determining that the Syndicate was taxable as a corporation and that it made any profit from its investment in the Syndicate, and that the respondent incorrectly computed the net income of the Syndicate. The petitions of Adolph Eamisb and Adolph Ramish, Inc., contain allegations that the Syndicate disposed of its property in July 1926, and that during August 1926 it distributed the proceeds of the sale ratably among its certificate holders, Adolph Ramish receiving $46,032.17 and Adolph Ramish, Inc., $20,000. These allegations of fact the respondent admitted in his answers. The petition filed by Gore Brothers, Inc., contains no like allegations of fact, but in his answer the respondent alleged that subsequent to June 30, 1924, the Syndicate disposed of its assets and distributed the proceeds thereof ratably among its members, the petitioner receiving an amount in excess of the tax due from the Syndicate. The petitions filed by Adolph Ramish and Adolph Ramish, Inc., contain a prayer asking the Board to find that there is no liability at law or in equity on the part of the petitioner for any deficiency in tax of the Syndicate. The petition filed by Gore Brothers, Inc., contains a prayer asking the Board to “ herein redetermine the deficiency herein complained of.”

At the conclusion o.f the hearing counsel for the petitioners moved to amend the petitions to conform to the proof, and at a date set therefor amendments to the petitions were received over objection by the respondent. Each of the amendments alleges as error the respondent’s determination that the petitioner is a transferee of the Syndicate under section 280 of the Revenue Act of 1926, “ for the reason that at all times material to the issue the said Syndicate was solvent and had sufficient assets to meet all alleged assessments for proposed deficiencies against the taxpayer,” and that the respondent had not exhausted his remedies against the Syndicate for the collection o,f the tax alleged to be due. Each amendment contains a prayer asking the Board to determine that the petitioner is not liable at law or in equity for any deficiency in tax of the Syndicate. The amendment made to the petition filed in the case of Adolph Ramish also alleges as an additional error the respondent’s finding that the petitioner received any distribution from the Syndicate.

The respondent has moved to strike the several amendments to the petitions, claiming that their effect is to shift to him the burden of the proof as to questions not theretofore in issue. In other words, he says that at the time proof was received the petitions raised no question as to the liability of the petitioners as transferees.

Section 602 of the Revenue Act of 1928, under which the hearings were had, places on the respondent the burden of proof that a petitioner is liable as a transferee of property of a taxpayer.

We have heretofore held that where a petitioner admits the receipt of assets in liquidation of a corporation, the amount of tax alleged to be due from the petitioner’s transferor may not be asserted against him in the absence of proof by the Commissioner of the value of the assets received. Ludwig Vogelstein, 16 B.T.A. 947; Willard H. Ashton, 28 B.T.A. 582. The statute also places on the Commissioner the burden of proving that the assets transferred to the transferee rendered the transferor insolvent. Samuel Keller, 21 B.T.A. 84; aff'd., 59 Fed. (2d) 499; Mrs. J. F. Alexander, 27 B.T.A. 1210; Willard H. Ashton, supra.

In the stipulation of facts filed at the hearing the parties agree that the Syndicate is taxable as a corporation, and that certain distributions, as set forth therein, were made in 1926 to the holders of certificates of beneficial interest in the Syndicate. The pleadings and stipulation both show that Adolph Famish, Inc., received a distribution of $20,000. The pleadings show that Adolph Famish received $46,032.17, but the stipulation contains no agreement as to a distribution to him in his individual capacity. In the case of Gore Brothers, Inc., the pleadings contain no admission of a distribution, whereas the stipulation shows that it received $34,767.50. There are no allegations and admissions in the pleadings or agreements in the stipulation that the distributions resulted in insolvency of the Syndicate.

That the respondent recognized the burden placed upon him by the statute to prove transferee liability of the petitioners seems clear from the record. In addition to the facts respecting distributions, the stipulation sets forth the net amount received by the Syndicate from the sale of its working interest in a certain oil and gas lease, including the improvements on the leased property; the balance sheet of the Syndicate as of June 30, 1926, and the condition of its accounts on September 2, 1926; the time when the Syndicate ceased drilling operations and operation of oil wells; the issuance of a distraint warrant for the collection of the tax alleged to be due from the Syndicate; and the holders of certificates of beneficial interest in the Syndicate as of May 1, 1926, and at all times thereafter important to the question, and the distributions received by them in June, August, and September 1926. The stipulation of facts would not have been necessary had there been no issue as to the liability of the petitioners as transferees of the Syndicate, and the extent of that liability.

The opening statement of counsel for the petitioners shows that the claims of the respondent were being resisted on the grounds, among others affecting the tax liability of the Syndicate, that the Syndicate was solvent after the distributions were made, and that the respondent had not exhausted his remedies against the transferor for the collection of the tax. Counsel for the respondent did not challenge this statement of the issues, and in his opening statement said that, “As to question of transferee liability, I expect to show that this syndicate sold .its oil lease and property used in connection therewith, to the Julian Petroleum Corporation, in the year 1926, and that soon thereafter th.e proceeds of this sale were distributed to the unit holders.” All of the facts necessary to redetermine the tax liability of the Syndicate were stipulated, and all of the testimony taken and documents received in evidence at the hearing related to the liability of petitioners as transferees. The respondent subpoenaed four former trustees of the Syndicate to testify in his behalf and was the moving party at the hearing. He examined his own witnesses and cross-examined the petitioner’s witnesses at considerable length respecting the life of the Syndicate, its financial condition at various times, including the value of certain assets of the Syndicate, the ownership of the certificates set forth in the stipulation of facts under the name of Adolph Kamish, trustee, and certain other matters peculiar to cases involving transferee liability. This was done in the face of a statement made by counsel for the petitioners during the forepart of the respondent’s examination of his own witness that he proposed to amend the pleadings to conform to the facts proved at the hearing.

The amendments did not alter the cause of action or have the effect of shifting the burden of proof, and in allowing them there was no abuse of discretion. The motions of the respondent to strike the amendments are denied. See International Banding Machine Co. v. Commissioner, 37 Fed. (2d) 660, reversing 12 B.T.A. 1062; Alameda Park Co. v. Lucas, 37 Fed. (2d) 805, reversing 10 B.T.A. 1115.

On brief the respondent, without any argument or citation of authority on the point, asks that his determination with respect to Charles B. Behr be sustained on the ground that the facts relating to the petitioner’s liability are not placed in issue by his petition. Behr’s petition contains the same assignments of error and allegations of fact respecting the sale of the Syndicate’s property and the distribution of the proceeds thereof, except as to the amount received, as the petitions filed by Adolph Bamish and Adolph Ramish, Inc., and concludes with a prayer that the tax proposed for assessment against him be “ vacated and cancelled and the petitioner discharged from payment thereof and from interest, cost and penalties.” The petition has not been amended.

The effect of the respondent’s request is to ask for judgment on the basis of the pleadings. While this petitioner admitted in his petition the receipt of the sum of $973.49 in liquidation of the Syndicate, there is no admission in the pleadings or the stipulation that the distribution rendered the Syndicate insolvent. The burden of proving this point was on the respondent, as we have already pointed out. The respondent is not entitled to judgment against this petitioner on the basis of the pleadings.

The stipulation and evidence of record show that the amount of $41,830.12 distributed to petitioner Adolph Tarnish by the Syndicate was not paid to him as a holder of certificates of the Syndicate, but as a trustee for Charles B. Behr. Accordingly, we hold that Adolph Bamish is not a transferee of property of the Syndicate and is not liable at law or in equity for tax owing by the Syndicate for the fiscal year ended June 30, 1924. The evidence also proves that the distribution made to the other petitioners not only did not render the Syndicate insolvent, but that it was financially able to pay the tax in question for several years thereafter.

The Syndicate was organized under the laws of California. In 1925 it changed its name to Dell Oil Syndicate. As of May 1, 1926, the Syndicate sold its 70 percent working interest in a certain oil and gas lease, together with the improvements on the leased property, to the Julian Petroleum Corporation for a net consideration of $139,074, which was fully paid in August 1926.

The balance sheet of the Syndicate on June 30, 1926, as reflected by its books, was as follows:

Assets
Cash- $8, 574.19
Accounts receivable_ 76,171. 75
Balance due from Julian Petroleum Corporation on sale___ 99, 677. 59
Advance distributions to unit holders_ 2,500. 00
186,928. 53
Liabilities
Accrued pay roll- $380. 00
Note payable- 15, 000. 00
Reserve for income taxes fiscal years 1924, 1925, and 1926- 32, 023.31
Par value units-:_ 100, 000. 00
Surplus and undivided profits_ 39, 520. 22
186, 923. 53

The Syndicate had income of $337.24 from gas receipts and expenses of $4,711.38 between June 30 and September 2, 1926. These items of income and expenses reduced the credit balance in the Syndicate’s capital and surplus account to $135,146.08. In June and August and on September 2, 1926, the Syndicate made further distributions to its certificate holders in the aggregate amount of $106,276.42.

On the basis of its books the distributions made to the certificate holders on and prior to September 2, 1926, not only did not render the Syndicate insolvent, but left net assets of $28,869.66 in addition to the reserve of $82,023.31 to meet income taxes, including $8,336.13 for the fiscal year 1924. The balance of $99,677.59 due from the Julian Petroleum Corporation under-the sales -contract was fully liquidated in August 1926, leaving $76,171.75 of accounts receivable to be collected. The respondent did not prove that the accounts receivable were worthless on September 2, 1926, or that their value at that time was insufficient to meet the Syndicate’s outstanding liabilities. On the other hand, it was proved that of the accounts receivable about $46,000, due from the White Bear Consolidated Oil Co., was worth face value on September 2, 1926, and thereafter until the fall of 1929. It thus appears that the distributions to these petitioners and” other certificate holders did not have the effect of rendering the Syndicate insolvent, but that it had assets more than sufficient to liquidate the income tax liability being asserted against the petitioners here. The books of the Syndicate as of December 15, 1927, show that the Syndicate had assets of $60,539.15 and no liabilities. The evidence proves that two of the asset items at that time had a value of $47,573.85, an amount more than sufficient to liquidate the tax in question here.

On January 16, 1928, the collector of internal revenue at Los Angeles, California, issued a warrant of distraint for the collection of the tax of $8,336.13, plus interest, assessed against the Lou Anger Oil Syndicate. The deputy collector to whom the warrant was delivered for execution returned it on January 21, 1928, unsatisfied, with a letter from Charles B. Behr, one of the petitioners here, stating that the Lou Anger Oil Syndicate discontinued business and dissolved during the latter part of 1924 or the early part of 1925 and distributed its money among its certificate holders.

The respondent cites John Thomson, Jr., 20 B.T.A. 1, as authority that nothing further was required of him to show exhaustion of his remedies against the taxpayer. Investigations made by the deputy collector to whom the warrant was delivered in that case disclosed no assets out of which the tax due could be collected. Here, an examination of the status of the Syndicate would have shown that the taxpayer had not dissolved and had property sufficient to satisfy the respondent’s claim.

The respondent has failed to assume his burden of proof that the petitioners are liable at law or in equity as transferees of property of the Syndicate. In view of this conclusion it is not necessary for us to decide the issue bearing on the correct tax liability of the Syndicate.

Reviewed by the Board.

Decision will be entered for each 'petitioner.


author: Arundell:

text:
    James B. Lowell, Petitioner, v. Commissioner of Internal Revenue, Respondent. James Russell Lowell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68048, 68049.
    Promulgated July 27, 1934.

      Adrian G. Humphreys, Hsg., for the petitioners.

      George D. Brahson, Esg., for the respondent.
   OPINION.

Arundell:

Briefly restating the facts in the case of James B. Lowell, it appears that he was a specialist in three stocks on the New York Stock Exchange. He owned other securities, which were hypothecated as collateral for his marginal account. He inventoried both groups of securities at cost or market, whichever was lower. He entered a partnership in March of 1929 with the other petitioner and continued specializing in the same stocks as theretofore. The partnership had no opening inventory and its closing inventory consisted entirely of two of the stocks specialized in, which it inventoried at market in determining income for 1929. The respondent has denied to both the individual and the partnership the right to inventory their securitites for the purpose of determining income.

Petitioners claim the right to inventory securities on the ground that they were dealers therein within the meaning of article 105 of Regulations 74. That article, in so far as material here, provides as follows:

* * * For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * *

In Northeastern Surety Co., 29 B.T.A. 291, we approved the above article as being “ reasonable, and designed to carry out fairly the terms and intent of the statute.”

The securities here involved should, we think, be divided into two groups. First, those used by petitioner James. B. Lowell as collateral for his margin account, and, second, those in which the petitioner was a specialist. In the first group, according to the schedules in evidence, were about forty different securities at the beginning and also at the close of the year. There were some changes during the year, but in the main petitioner had the same securities at the beginning and at the end of the year. These, petitioner James B. Lowell testified he had accumulated over a period of years and were “ all stocks that were bought for investment.” An investor in securities is not a merchant and does not come within the definition of the regulations above quoted. See Adirondack Securities Corp., 23 B.T.A. 61; Northeastern Surety Co., supra; Donander Co., 29 B.T.A. 312; Oil Shares, Inc., 29 B.T.A. 664. In view of petitioner’s testimony as to the purpose for which he purchased the securities under consideration, it seems beyond serious question that as to them he cannot be classified as a dealer. Those securities constituted his capital, and capital may not be inventoried for purposes of determining income from sales.

The other group consists of those stocks dealt in as specialties. Some of the transactions in these stocks consisted of matching purchase orders against sales orders, the orders on both sides of the book being received from brokers, and for this service a commission was paid by the brokers. It is obvious that in such transactions no securities would need be carried in stock if the buy and sell orders matched up evenly each day. To what extent they were even is not shown, but the testimony of petitioner James B. Lowell is that he endeavored to come out as nearly even as possible. Transactions of this kind in our opinion cannot be classified as the “ purchase of securities and their resale to customers.” Art. 105, Regulations 14. The petitioner in such cases was not selling securities previously purchased, but was rather acting as a broker on a commission basis. A dealer or merchant gains or loses directly in proportion to fluctuations in the market price of the commodity in which he deals; not so with petitioners in their matching operations, for no matter how much the spread in prices their commission was the same on each 100-share lot cleared on their books.

The other transactions in the specialty stocks were not such as to come within the generally accepted understanding of the terms of merchant or dealer. They were purchases or sales, sometimes short sales, made when there were no. matching orders on the books. These transactions, according to the testimony, were for the purpose of creating or maintaining a market; they were speculative, as explained by the witness, in that he was betting on a rise or fall in the market according to whether he was long or short of the stock. An effort was made to even up on each transaction within the day though this was not always accomplished. These transactions were engaged in to maintain the market only for the day; they were engaged in on margin with Wrenn Brothers; no certificates were issued in the names of petitioners or the partnership; and neither the petitioners nor their partnership could deal directly with the public. These matters demonstrate the width of the gap between the petitioners and a dealer or merchant, who is generally understood to be one who carries a stock of his wares and stands ready to deal directly with all who wish to trade in that commodity. We are accordingly of the opinion, and so hold, that petitioners were not dealers in the stock in which they were specialists.

These cases are distinguishable from that of Estate of Harry E. R. Hall, 29 B.T.A. 1255. In that case the petitioner’s decedent was a member of a partnership which had an established place of business at which it dealt in securities. The partnership specialized in the stock of one corporation, the New York Dock Co., and we found as a fact that the stock of that corporation was not purchased either for investment or speculation, but for future resale at a profit. The purchasers o,f the stock were mostly, but not entirely, members of the New York Stock Exchange, and on resales to them the partnership dealt with them as principals and customers. At the close of each year involved in that case the partnership had on hand substantial amounts of the stock. In the opinion in that case we distinguished it from Donander Co. and Oil, Shares, Inc., supra, in the following language, which also aptly points out some of the distinctions between it and the present case:

In each of the cited cases we found that the petitioner was not a dealer, but was engaged primarily in investing or speculating as opposed to merchandizing securities. An entirely different situation is presented in the case at bar. The partnership with which we are concerned here is clearly shown by the evidence to have dealt in the stocks involved primarily as a merchant. While it purchased through brokers who were members of the stock exchange and sold to brokers as principals or customers, it held itself out as a merchant of securities and the transactions were cleared through its own office, not those of the brokers. It also purchased from and sold to others than brokers. We know of no good reason why a broker, even though acting for an undisclosed client, should not properly be regarded as a customer in the making of repeated purchases of securities and held for resale by the partnership.

The remaining question is that of deductions claimed as expenses and disallowed by the respondent on the ground that they were capital expenditures. The evidence is uncontradicted that the amounts paid were levied by the exchange on its members and they were obligated to pay as a condition to doing business on the floor of the exchange. The assessments for the most part were for the purpose of meeting operating expenses and as such are clearly allowable as expense deductions. Respondent’s only serious objection to the claim is that part of the amount paid went to a gratuity fund out of which a certain sum was paid to the widow or children of deceased members. Payments going to this fund, the respondent argues, were in the nature of insurance premiums. The evidence as to the method of operation of the gratuity fund is rather unsatisfactory. We have nothing on this except the testimony of one of the petitioners who described the fund and the method of administration in general terms. Whether assessments were levied on living members and the whole sum paid out to the family of a deceased member, or whether a fund was accumulated so that the family of a deceased member benefited from payments made during his life, is not shown. It may be that the rules of the exchange describe the method of operation, but they were not placed in evidence. We accordingly hold that the amounts paid into the gratuity fund cannot be allowed as deductions on the showing made. The evidence is not entirely clear as to who claimed deductions for the payments made to the gratuity fund aggregating $135.33, but, as the payments were made by petitioners after formation of the partnership, we assume that the total was included in the deductions claimed by the partnership, and we hold that the respondent properly disallowed that much of the partnership deduction.

Decision will be entered v/nder Rule 50.


author: Trammell:

text:
    Grace W. Dick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74629.
    Promulgated July 27, 1934.

      Arthur G. Groninqer, Esq., for the petitioner.

      W. R. Tansford, Esq., for the respondent.
   OPINION.

Trammell:

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1931 in the amount of $4,585.39. The question involved is whether, in determining the profit from the sale of certain land owned by the petitioner, a full-blood Quapaw Indian, which land was owned on and prior to March 1, 1913, but was restricted as to alienation for 25 years, the value at the date of the removal of the restriction, or the fair market value on March 1, 1913, should be used as the basis for computing the gain derived in 1931 on the sale of the property. The facts were stipulated.

The petitioner, Grace W. Dick, is carried on the Quapaw census as a full-blood Quapaw Indian.

On September 17, 1900, one Huldah Quapaw White died, leaving the property described and under the conditions set out in a certain patent issued by the United States. This patent, dated September 26, 1896, contained the following provisions:

Now, Know Ye, That the United States of America in consideration of the provisions, and in conformity with the provisions in said Act of Congress approved March 2, 1895, the order and Schedule of allotments aforesaid, has given and granted and by these presents foes give and grant unto the said IItjldah Quapaw White and to her heirs, the said tract above described,; but with the stipulation and limitation contained in the aforesaid Act that the land embraced in this patent shall be inalienable for the period of Twenty-Five years, from and after the date hereof;
To Have and to Hold the same, together with all the rights, privileges, immunities, and appurtenances of whatsoever nature thereunto belonging, unto the said Huldah Quapah White and to her heirs forever;
Provided, as aforesaid that said tract shall be inalienable for the said period of Twenty-Five years.

In Case No. 387, Equity, U.S. Court, Miami, May term of 1905, it was duty decreed that George Red Eagle and Grace Sacto, now Grace W. Dick, were the sole heirs of Huida Quapaw White and that the land described in the patent should be partitioned equally between said heirs.

The land inherited by the petitioner and duly partitioned, and set off to her as her absolute property by the decree referred to above, consisted of 100 acres described as the NW. % of SE. % and W. % of SW. % of SE. % and the SE. % of SW. % of Section 21, Township 29 North, Range 23 West, now situated in Ottawa County, Oklahoma.

The land described in the preceding paragraph had a value of $5,000 on March 1, 1913.

Lead and zinc ores were discovered on the land on or about November 15,1915, and mining operations were thereafter carried on.

The petitioner sold this land in May 1931 for $50,000.

The value of the land, including surface and ore-bearing value, was as follows:

Value on September 26, 1921_$109,319.49 Less:
Depletion sustained from Sept. 26, 1921, to date of sale_ 60, 538.96
Basis for determining gain on sale in this proceeding in the event petitioner’s position is sustained_ 48, 780.58

It was agreed between the parties that if the Board should find that the petitioner is entitled to compute the profit in question on a “ cost value ” as of September 26, 1921, reduced by depletion sustained to May 1931, there is no deficiency due, but that if the gain on the sale in May 1931 is properly to be based on the agreed March 1, 1913, value, as held by the respondent, the correct deficiency is $4,585.39.

The Revenue Act of 1928 provides:

SEC. 113. BASIS EOR DETERMINING GAIN OR LOSS.

(a) Property acquired after February 28, ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913 shall be the cost of such property; except that—
(b) Property acquired before March 1, ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be:
(1) the cost of such property (or, in the case of such property as is described in subsection (a) (1), (4), (5), or (12) of this section, the basis as therein provided), or
(2) the fair market value of such property as of March 1, 1913, whichever is greater. * * *

It is clear that the property in this case was acquired by the petitioner before March 1, 1913. The gain from the property was derived when it was sold in 1931. There was a restriction on the alienation of this property for the period of 25 years from the 26th day of September 1896. It is contended by the petitioner that to use the March 1, 1913, value as a basis would be equivalent to imposing a tax upon the increased value of the property during the period of restriction on the sale. And it is contended that the basis for determining gain or loss should be the value of the property at the date of the removal of the restriction.

When this property was sold in 1931 any income derived from the sale was taxable to the petitioner in the same way as income would be taxable in the case of any other taxpayer. The quoted provisions of the statute make no provision as to the limitation upon any income which may be subject to tax if it is subject to tax at all in connection with the sale of property by full-blood Indians or any other persons. Admittedly in this case income was derived from the sale of the property. The only question is what is the basis to be used in determining the gain subject to tax. Since all of the gain derived in this case was from the sale of the property which occurred at the time when it was taxable, we see no provision of the statute which would permit the use of any other basis than the March 1, 1913, value, since it was owned prior to that date.

The March 1, 1913, value was stipulated. The statute provides without any exception that that value must be used under the circumstances where a sale is made subsequent to that date.

The taxpayer in this case did not acquire the property on the date of the removal of the restriction, but acquired it admittedly prior to March 1,1913.

We see no merit in the contention that to use the March 1, 1913, value would amount to subjecting to tax property not taxable. The mere increase in value of property is not gain derived or income, but income is derived from the sale of property, which occurred in 1931, when any income so derived is taxable. We therefore affirm the determination of the respondent.

Eeviewed by the Board.

Judgment will be entered for the respondent.