author: Smith:

text:
    Jacob Grossman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph B. Grossman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Reuben A. Grossman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57472-57474.
    Promulgated January 23, 1934.

      Herbert U. Smith, Esq., for the petitioners.

      O. A. Ray, Esq., for the respondent.
   opinion.

Smith:

The respondent has determined deficiencies in the petitioners’ income taxes for the calendar year 1928 in the following amounts:

Each of the petitioners alleges that the respondent erred in determining that the partnership known as L. Grossman & Sons was dissolved on April 2, 1928, instead of on December 31, 1928, thereby erroneously increasing the share of partnership profits distributable to them. The pertinent facts were stipulated.

The petitioners and their father, Louis Grossman, were equal partners in the partnership of L. Grossman & Sons, which partnership was engaged in the business of buying and selling junk and trading in mill and building supplies. Prior to 1928 each of the four partners was entitled to one fourth of the partnership profits, regardless of the amount of capital invested by each. Early in 1928 the father, Louis Grossman, then over 60 years of age and a widower, decided to remarry. Oil February 20, 1928, Louis Grossman entered into an agreement with the petitioners which reads in part as follows:

Whereas the said parties have for some years past carried on the business conducted under the firm name and style of L. Grossman & Sons at Quincy, Massachusetts, said firm being a partnership consisting of Louis Grossman, Reuben A. Grossman, Jacob Grossman and Joseph B. Grossman, and
Whereas no account and valuation has been taken and made by the said partners of the said business, the assets and good will thereof, and the share therein owned by the said Louis Grossman, in consideration of the sum of One Hundred & Twenty-Five Thousand Dollars ($125,000) paid by the continuing partners to the said Louis Grossman in the form of a note secured by a mortgage covering the real estate situated on Granite St., Quincy, and in consideration of the agreement by the continuing partners hereinafter described, whereby said Louis Grossman is to benefit in the profits earned by the partnership during the year 1928, the said Louis Grossman hereby agrees to assign, transfer and set over unto the said Reuben A. Grossman, Jacob Grossman and Joseph B. Grossman, their heirs, executors, administrators and assigns, all the part or share and interest of whatsoever nature owned by the said Louis Grossman in all and singular the real estate mortgages and premises hereinbefore mentioned or referred to, and all and singular the automobiles, trucks, machinery, whether affixed or movable, plant, stock in trade, accounts receivable, and other debts, credits, contracts, assets, effects, profits, business and good will of the said partnership; to hold all the said premises unto the said continuing partners, their heirs, executors, administrators and assigns absolutely.
For personal reasons, particularly referring to the marriage by the said Louis Grossman to Mrs. Hellman, and referring to provisions the said Louis Grossman desires to make for all his children, it is agreed and understood that the payment of One Hundred & Twenty-Five Thousand Dollars ($125,000) by note and mortgage as aforesaid, shall be made as of April 2, 1928. In addition, the said Louis Grossman shall be entitled to benefit equally with the remaining three partners in all profits earned by the partnership during the calendar year 1928. An accounting shall then be taken of the business as of December 31, 1928, and an adjustment made with the said Louis Grossman, with the understanding that if he is entitled to more than the sum of One Hundred & Twenty-Five Thousand Dollars ($125,000), as aforesaid, he shall be paid the excess, but in the event that he is entitled to less than that sum, he shall make refund to the continuing partners. However, it is specifically agreed, by all the parties hereto, that the said Louis Grossman shall cease to have a voice in the control of the partnership after April 1, 1928, and shall benefit only insofar as the profits are concerned up to December 31, 1928.
It is specifically agreed that the continuing partners shall have the right to use the name “ Louis Grossman ”, or the present firm name, or any firm name including “ Louis Grossman ”, so long as they desire.

In their income tax returns for the calendar year 1928 the petitioners each reported one fourth of the income of the partnership for the entire taxable year 1928. In his audit of the petitioners’ returns the respondent included in the income of each of the petitioners one third of the partnership income for the period April 2 to December 31, 1928. This adjustment was based upon the respondent’s determination that there was a sale by Louis Grossman of his interest in the partnership to the petitioners as of April 2, 1928, as evidenced by the above agreement of February 20, 1928, which sale resulted in a dissolution of the partnership and the formation of a new partnership composed of the three petitioners; that the consideration for such sale was the $125,000 note and mortgage referred to in the agreement plus one fourth of the partnership profits for the remainder of that year, or from April 2 to December 81, 1928, inclusive, and that all the partnership income for that period is therefore taxable to the three petitioners.

In our opinion the respondent correctly determined that there was a sale by Louis Grossman of his interest in the partnership assets and business effective as of April 2, 1928. This is certainly a reasonable construction to place on the agreement of February 20, 1928. The admitted purpose of that agreement was to place the assets belonging to the partnership in a position where they would not be affected by Louis Grossman’s marriage. This the parties undertook to do through the sale by Louis Grossman of his interest in the assets of the partnership to the other partners under the terms of the agreement of February 20, 1928. There is nothing in the evidence to indicate that the agreement was not strictly carried out. An accounting was made of the partnership business as of December 31, 1928, and on February 1, 1929, Louis Grossman and the petitioners entered into another and final agreement under the terms of which the petitioners assumed all the obligations of the partnership and agreed to pay all state and Federal taxes that might be levied against the partnership or against Louis Grossman as a result of an investigation then being made of the tax liabilities of all parties for the year 1928. Louis Grossman agreed to accept the note for $125,000 already received as full payment for his interest in the partnership assets. The agreement further provided that:

Notwithstanding the fact that said Lotos Grossman has ceased to have any interest in the above-mentioned business enterprises, the parties hereto agree that he may continue to devote such time as he desires to the business, performing such duties as may be helpful to said business. * * *

The petitioners contend that the agreement of February 20, 1928, was an executory contract and did not effect a dissolution of the partnership as of April 2, 1928; that the actual date of dissolution of the partnership was February 1, 1929, when the final agreement was entered into. Their position, we think, is untenable. To give any effect of consequence to the agreement of February 20, 1928, and certainly to give the effect intended by the parties it must be construed as evidencing a sale by Louis Grossman of his entire interest in the assets of the partnership as of April 2, 1928. The provision of the agreement that “the said Louis Grossman shall be entitled to benefit equally with the remaining three partners in all profits earned by the partnership during the calendar year 1928 ” (italics supplied), indicates that the parties contemplated a dissolution of the partnership, or at any rate the retirement of Louis Grossman from the partnership as of April 2, 1928. Unless there was intended to be a change in the partnership there was no need for the provision for the division of the profits, since the profits were then being divided on that basis. The agreement further states that “it is specifically agreed, by all the parties hereto, that the said Louis Gkossman shall cease to have a voice in the control of the partnership after April 1, 1928.” The evidence does not show that Louis Grossman took any part whatever in the business of the partnership after that date.

The respondent has determined that the partnership was dissolved as of April 2, 1928. There is nothing in the so-called final agreement of February 1, 1929, to refute the respondent’s determination. It makes no new provision for the dissolution of the partnership or for the sale by Louis Grossman of his interest in the partnership. Apparently its chief purpose was to agree on the final settlement based on the partnership accounting as of December 31, 1928, which was provided for in the prior agreement. The above quoted provision of the latter agreement that “notwithstanding the fact that said Louis Giíossman has ceased to have any interest in the above mentioned business enterprises ” supports the respondent’s determination that he, Louis Grossman, had previously withdrawn from the partnership. Cf. Willard C. Hill, 14 B.T.A. 572; affd., 38 Fed. (2d) 165.

In the absence of any evidence of error on the part of the respondent, his determination of the deficiencies asserted is sustained.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: TeaMmell : Seawell,

license: Public Domain

text:
    Ruphane B. Iverson, Petitioner, v. Commissioner of Internal Revenue, Respondent. I. C. Iverson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48837, 48838.
    Promulgated January 23, 1934.

      IIany Ballinger, Esq., for the petitioners.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

TeaMmell :

The only assignment of error contained in the petitions is as f ollo-ws:

Tlie Commissioner has erroneously included in gross income — as dividends received from a domestic corporation — moneys paid to one William W. Wood for tbe purchase by the said corporation of stock owned by the said William W. Wood.

In support of their position the petitioners contend that it was the intention of Wood and Iverson in entering into the agreement of May 19,1925, to liquidate one half of all the property of the corporation and to make payment of the value thereof to Wood. They also urge that the resolution of the board of trustees providing for the corporation’s taking over of the agreement from Iverson and his assignment of bis interest thereunder to the coi’poration was intended to make it more apparent that no profit had accrued or would accrue to Iverson under the agreement. The respondent contends that the payments made by the corporation and applied on the purchase price of Wood’s stock were not made in liquidation of the corporation’s assets; that the attempted assignment from Iverson to the corporation of his agreement with Wood respecting the purchasing of the stock was illegal, invalid, and ineffective for Federal income tax purposes ; and that the payments made by the corporation and applied on the purchase price of Wood’s stock were constructive dividends to Iverson.

In 1925 the relations between Iverson and Wood became so strained that it was necessary for one of them to terminate his connection with the corporation. After negotiations between them the agreement of May 19, 1925, was entered into, whereby Iverson purchased Wood’s one half of the capital stock of the corporation for $560,000, or an amount equal to one half of the estimated value of the corporation’s total assets at that time. Neither Iverson nor the corporation had available any large amount of money; consequently, the agreement, after providing for an initial cash payment of about one tenth of the purchase price, provided for monthly payments to be measured at certain amounts per thousand feet of the corporation’s timber sawed and cut or sold. Belying on this situation and the provision for monthly payments in the agreement, together with other portions thereof, the petitioners insist that the intent of the agreement was merely to liquidate one half of the corporation’s assets and to turn the value thereof over to Wood.

We are unable to accept this contention of the petitioners. The agreement of May 19, 1925, took the form of and was a purchase and sale. The amount to be paid for the stock was definitely fixed at $560,000 and was not subject to re'vision either upwards or downwards, irrespective of an increase or decrease in the price of the corporation’s products. The stock was actually delivered to Iverson and transferred to his name on the books of the corporation. With the exception of the possession of the certificate of the stock, he exercised practically all the rights of ownership therein, including the voting of it. Although the stock was placed in escrow pending the performance of the terms of the agreement of May 19, 1925, Iverson could, at any time he paid the balance due on the purchase price, take the stock out of escrow and do what he pleased with it. Nowhere in the record is there anything to indicate that the parties intended to liquidate the affairs of the corporation or in any wise reduce its capitalization as would be consistent with the contention advanced here by the petitioners. While the. agreement placed certain restraints upon Iverson with respect to the disposition of the receipts of the corporation, such restraints apparently were intended to prevent Iverson, as sole stockholder and manager of the corporation, from squandering or diverting its assets into other channels prior to the time he had completed payment for the stock. These restraints are in no wise inconsistent with the view of a purchase and sale of the stock. So far as we are able' to determine from the record the agreement of May 19, 1925, was one whereby Wood sold his stock to Iverson, and not one whereby the parties sought to effect a partial liquidation of the corporation. There is nothing to indicate but that all payments made upon the purchase price of the stock, either in 1925 or 1926, were made out of earnings of the corporation for the current years.

Having reached the conclusion that the agreement of May 19, 1925, was a sale by Wood of his stock to Iverson, we will consider the effect of the resolution of the trustees of the corporation of January 3, 1926, respecting the acquisition by the corporation of Iverson’s rights thereunder and of his purported assignment of that date of his rights under the contract. While the statutes of Washington permit a corporation to own shares of stock in another corporation (par. 3810, Remington’s Compiled Statutes of Washington, 1922), we do not find nor has the petitioner called our attention to anything contained therein authorizing a corporation to purchase or deal in shares of its own stock. In fact the decisions of the Supreme Court of Washington are to the contrary. In State ex rel. Howland v. Olympia Veneer Co. (1926), 138 Wash. 144; 244 Pac. 261, it was contended that the bylaws of a corporation, as well as the agreement between it and a certain stockholder, gave the corporation the right to purchase the stock from the stockholder. The court said:

Viewing these by-law and contract provisions as assuming to give to the company the right to purchase the stock for itself, as their termfe plainly indicate, they are void, because a corporation organized under the laws of this state has no right or power to purchase its own stock. It was squarely so held by this court in Kom v. Detective Agency, 136 P. 1155, 76 Wash. 540, 50 L.R.A. (N.S.) 1073, in which decision the subject was exhaustively reviewed.

In the light of the decisions of the Supreme Court of Washington, the instrument of January 3, 1926, executed by Iverson and the corporation by which he purported to assign to the corporation the right to acquire the 50,000 shares of its stock then in escrow was void, since the corporation was without power to acquire its own stock. As a consequence Iverson did not transfer anything to the corporation by the assignment and it never received anything from him as a result thereof.

During 1926 the corporation did not formally declare any dividends ; however, it issued checks totaling $73,187.89 which were applied either directly by it or through Iverson on the purchase price of the stock Iverson had purchased from Wood. The respondent has determined that $45,900.22 of that amount constituted dividends paid to Iverson. Why he did not determine that the full amount was dividends is not disclosed by the record. But be that as it may, we are called upon to pass upon his action as to the amount determined to be dividends.

Of the amount in controversy $41,502.18 represents checks issued and payable to Iverson, while the remainder of the checks were issued by the corporation and were payable to the bank which was holding the stock. The amount in controversy represents the. payments made by the corporation to its sole stockholder and payments made by it in his behalf. While these payments were not made pursuant to formal declarations of dividends, as were the payments made in 1925, we think, however, that under the circumstances here presented they were none the less dividends in so far as Iverson was concerned. Iverson was the recipient of part of them from the corporation and was the sole beneficiary of the others. It is clear that they were not intended as loans to him. In our opinion they fall within the same class as withdrawals made by a sole or dominant stockholder, which have been held to be taxable as. dividends. L. J. Christopher, 13 B.T.A. 729; affd., 55 Fed. (2d) 527; Daniel Hunt, Sr., 6 B.T.A. 558; Max M. Barken Drug Co., 3 B.T.A. 277. In view of the foregoing and inasmuch as there is nothing to indicate that the amount in controversy was not paid from earnings subsequent to March 1, 1913, the action of the respondent in determining that such amount constituted dividends to Iverson is approved.

On the question of fraud, it is our opinion that the. evidence is not sufficient to warrant the imposition of the penalty.

Reviewed by the Board.

Decision for the respondent for the aonount of the deficiencies %oithout penalty will he entered.

Seawell,

dissenting: I find myself unable to agree with the majority opinion. I think a closer scrutiny of the case will show nothing more than an awkward attempt between two honest but uninformed men, acting under poor advice, to sever the joint ownership of property which their toil had built up, in a way to leave each in possession and ownership of his own part. A superficial view of the case shows only the method used by them; a deeper view discloses the true intent and purpose to do that which no statute ever intended or attempted to tax.

The stock of the corporation was beld in equal moieties by Wood and Iverson. Personal differences between the two stockholders made their separation advisable. But separation of the property, principally standing trees, was not a simple matter like- dividing personal property between two individuals. Standing timber is real estate and is partitioned like land. Value for sawmill purposes of a tract of timber may be materially lessened by a division; and a quick sale for partition of such a large holding, estimated at two hundred million feet, could not reasonably have been made without much sacrifice of value. Trees severed from the land and manufactured into lumber become personal property. Considering the situation as the evidence pictures it to me, the natural thing for the two men, in their perplexity, to have done was to convert enough of their assets into liquid form to compensate one of them for his interest, leaving the other to proceed with the remaining assets as he might see fit. This is what I understand the two men undertook to do. Wood’s interest in the corporate property was adjudged between them to be one half the book value of the assets, or $560,000. If he received that much out of the assets, he should no longer claim an interest in the corporation or its property. Iverson had no money with which to buy Wood’s stock and in that way retain the whole property for himself, and he never agreed to undertake to do so, as will appear when the contract is held and considered by its four corners. Iverson was willing to and did agree to cause the corporation to convert timber into lumber and it into money to be distributed through him to Wood until Wood’s interest should be thereby wholly withdrawn from the corporation and Iverson should be, in the process, left the owner, through his stock in the corporation, of its remaining assets. Iverson further agreed that he would forego all dividends or distributions to himself by the corporation till Wood was paid for his interest in the property. The installment payments were by the contract to be measured by, and contingent upon, the amount of timber cut and sold from the corporation’s holdings. Incidentally, $3 per thousand feet for the stumpage of two hundred million feet of timber held by the corporation would approximate Wood’s interest' as calculated. If, however, it was intended, as the majority opinion seems to hold, that Iverson, under the contract, was to receive one half of the assets of the corporation thus converted into lumber by way of dividends to himself, and with the cash derived from the sale thereof purchase Wood’s stock in the corporation, in the end Iverson would have had twice as many shares of stock in the corporation, but the corporation would have had only one half as much assets and Iverson’s 100,000 shares of stock would have been of a value no greater than his 50,000 before the deal.

The Board had a very similar case before it in George Youell, 18 B.T.A. 599. There Youell and Garretson were the sole stockholders, each owning 500 shares, of the Pacific Fruit & Produce Co. Personal differences arose between the stockholders and they desired to separate. Neither had the money with which to buy out the other. Some employees were willing to buy Garretson’s stock on terms that he would not accept. Youell relied on the employees to purchase the stock later, and entered into a contract with Garretson wherein he agreed to purchase from Garretson, and Garretson agreed to sell to Youell, Garretson’s stock at the price of $272,168.32. Garretson endorsed his stock and placed it in escrow with a bank. The Pacific Fruit & Produce Co. declared a dividend out of surplus accumulated after March 1, 1913, of cash and property to Garretson and Youell in equal amounts; and under the direction of Youell his dividend of more than $65,000 was delivered toi Gar-retson as part payment for the stock. Youell then gave Garretson his promissory note for the balance of the purchase money for the stock. The notes were later paid and the stock released from the escrow. In an opinion reviewed by the Board, without a dissent, we held Youell was not taxable on his dividend. This result was arrived at solely by looking through the taxable form of the transaction to the true intent and purpose of the parties.

Arundell and McMahon agree with this dissent.


author: Sternhaoen:

text:
    Frederick S. Peck, Petitioner, v. Commissioner of Internal Revenue, Respondent.

    Docket No. 63389.
    Promulgated January 23, 1934.

      L. G. Sutherland, G.P.A., for the petitioner.

      Broohs Fullerton, Esq., for the respondent.

        This opinion was recalled in conformity wiflj Avery v. Commissioner, — U.S. — (April 30, 1934).

   opinion.

Sternhaoen:

The respondent determined a deficiency of $819.82 in petitioner’s income tax for 1929. The only item which the petitioner assails is the inclusion in his 1929 income of dividends declared, payable, and mailed to him in that year but not actually received by him until 1930. The facts are stipulated, but need not be repeated. One dividend was declared November 5, 1929, as follows:

Toted that a dividend of 3½% be paid December 31, 1929, to the preferred stockholders of record on December 31, 1929.

The check therefor was mailed December 31, 1929, and received by petitioner January 1,1930. The other dividend was declared “ prior to Dec. 31, 1929,” as follows:

Voted that a dividend of $2.00 per share upon the common stock of the corporation payable from the net profits or surplus be declared forthwith. Said dividend to be paid December 31, 1929, to stockholders of record December 30, 1929.

The check for this dividend was also mailed December 31, 1929, and was received by petitioner January 2, 1930.

The petitioner contends that since his income generally was returnable only when actually received, these dividends are properly part of his 1930 income. The contention is against the weight of authority, Avery v. Commissioner (C.C.A., 7th Cir.), 67 Fed. (2d) 310; Shearman v. Commissioner (C.C.A. 2d Cir.), 66 Fed. (2d) 256; Commissioner v. Bingham, (C.C.A., 6th Cir.), 35 Fed. (2d) 503; and see also Mary Miller Braxton, 22 B.T.A. 128, setting forth the legislative history.

The petitioner relies upon Commissioner v. Adams, 54 Fed. (2d) 228; affirming 20 B.T.A. 243, a decision in the First Circuit, where, because of petitioner’s residence, this proceeding would probably be reviewed. We may leave aside the difficulty and confusion which would result if, upon the same national tax question arising from similar facts, this Board were upon the merits to uphold the taxpayer who resides in one judicial circuit and refuse the taxpayer who resides in another, especially when either might elect with the Commissioner to file his petition for review in the District of Columbia. That anomalous problem need not confront us in this case, because the Adams case is on its facts distinguishable, as this Board said in the opinion (20 B.T.A. 243) which the Circuit Court of Appeals affirmed, and as the Circuit Court of Appeals for the Second Circuit more recently said in Shearman v. Commissioner, supra. Here there was no restriction to prevent the petitioner from getting the declared dividend in 1929. The method of check and mail was not mandatory, as it was in the Adams case, and the petitioner had only to demand on the date payable. This was constructive receipt as that doctrine is conventionally applied in income tax law, and as Congress manifestly intended in cases like this it should be applied.

The Commissioner’s determination is correct.

Reviewed by the Board.

Judgment will he entered voider Rule 50.

LaNsdoN and Smith dissent.


author: Black :

text:
    Charles P. Leininger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42819, 45140, 51037, 63341.
    Promulgated January 23, 1934.

      Irwin N. Loeser, Esq., and George B. Beneman, Esq., for the petitioner.

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

Black :

These proceedings, duly consolidated, are for the redeter-mination of deficiencies in income tax for the calendar years 1924 to 1929, inclusive, in the respective amounts of $2,030.19, $1,617.08, $2,110.92, $990.99, $1,162.69, and $558.01.

Petitioner contends that, under section 218 (a) of the Revenue Acts of 1924 and 1926 and sections 184 and 182 (a) of the Revenue Act of 1928, there should be included in computing his net income for each of the years 1924 to 1929, inclusive, only 25 percent of the net income of a certain partnership operating in Cleveland, Ohio, under the name of “ The Eagle Laundry Company ”, whereas the respondent has determined that 50 percent of the net income of such partnership should be included in computing petitioner’s net income for these years.

In prior proceedings before this Board, which were also consolidated, petitioner made the same contention to the effect that only 25 percent of the profits of the Eagle Laundry Co. were taxable to him during the years 1920 to 1923 under section 218 (a) of the Revenue Acts of 1918 and 1921. The Board held against petitioner (19 B.T.A. 621), but was reversed by the United States Circuit Court of Appeals for the Sixth Circuit. Leininger v. Commissioner, 51 Fed. (2d) 7. The United States Supreme Court granted a writ of cer-tiorari and reversed the decree of the Circuit Court and affirmed the decision of the Board. Burnet v. Leininger, 285 U.S. 136.

At the opening of the hearing in the instant proceedings counsel for the respondent moved for judgment on the ground that the decision of the Board in Charles P. Leininger, 19 B.T.A. 621, affirmed by the Supreme Court in Burnet v. Leininger, supra, was res judicata. The motion at first was overruled, but during the course of the hearing the order overruling the motion was withdrawn and the question taken under advisement. The hearing then proceeded on the understanding that the Board would hear all of the evidence and after the briefs were filed the first law issue to be decided would be whether the final decision in the earlier proceedings is res judicata in the instant proceedings. If it is, then our decision in the present proceedings must be for the respondent; and, if it is not, then we must consider petitioner’s contention de novo on the basis of all of the evidence in the record.

At the outset, it is of vital importance to note that in the application of the doctrine of res judicata the first inquiry should be whether the proceedings now before us are upon the same cause of action as was litigated in the former proceedings, or upon a different cause of action. This essential distinction is clearly stated by the Supreme Court in the early case of Cromwell v. County of Sac, 94 U.S. 351, 352.

Since the instant proceedings involve taxes for the years 1924 to 1929, and the earlier proceedings involved taxes for the years 1920 to 1923, the case at bar is for a different cause of action. Tait v. Western Maryland Ry. Co., 289 U.S. 620.

Where the second case between the same parties or their privies is for a different cause of action, as is the situation in the instant proceedings, the earlier judgment is conclusive only as to the precise facts, rights, questions or issues adjudicated in the earlier case that are again the facts, rights, questions or issues presented for adjudication in the second case. Cromwell v. County of Sac, supra; Russell v. Place, 94 U.S. 606; New Orleans v. Citizen's Bank, 167 U.S. 371, 398; Southern Pacific R.R. Co. v. United States, 168 U.S. 1, 48; Tait v. Western Maryland Ry. Co., supra; Mary Haller, 26 B.T.A. 395.

In Southern Pacific R.R. Co. v. United States, supra, the Supreme Court said:

The general principle announced in numerous cases is that a right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question or fact once so determined must, as between the same parties or their privies, be taken as conclusively established, so long as the judgment in the first suit remains unmodified.

And again, in New Orleans v. Citizen's Bank, supra, the Supreme Court said in the majority opinion:

The second question, then, is this: Were the final judgments which held that there was no power to levy the taxes on the Citizen’s Bank for the years 1886 and 1887 based upon tbe identical claim of exemption now asserted by tbe bank in order to defeat tbe taxes here in question? * * * The estoppel resulting from tbe thing adjudged * * * exists * ⅜ ⅞ when tbe question upon which tbe recovery of tbe second demand depends has under identical circumstances and conditions been previously concluded by a judgment between tbe parties or their privies * s *. It follows that tbe mere fact that tbe demand in this case is for a tax for one year, and tbe demands in tbe adjudged cases were for taxes for other years, does not prevent tbe operation of tbe thing adjudged, if in the prior cases tbe question of exemption was necessarily presented and determined upon identically the same facts upon which the right of exemption is now claimed.

Thus, it being clear that we have here in the instant proceedings different causes of action between the same parties from those which we had before us in C. P. Leininger, 19 B.T.A. 621, the issue we now have to decide is whether the question upon which the recovery of the demands now before- us depends has, under identical circumstances and conditions, been previously concluded by a judgment between the same parties or their privies.

It will therefore be necessary to determine what issue and facts were before us in the former proceedings and what issue and facts are now before us in the present proceedings. An inspection of the pleadings in the former proceedings shows:

A. Pocket No. 16295.

(1) Years 1920 and 1921.

(2) The error assigned for 1920 was as follows:

Tbe Commissioner of Internal Revenue is in error-I-in tbe correcting of taxpayer’s income for tbe year 1920 from tbe Eagle Laundry Company by an addition of $8,230.12 to tbe taxpayer’s reported income from same source of $16,460.27, making a corrected total of $24,690.39.

The error assigned for 1921 was the same as for 1920, except for the amounts and the year involved.

(3) Paragraph (e) of the petition is in part as follows:

Tbe taxpayer bases his appeal from this additional assessment on the following statement of facts: 1 - that tbe partnership owning and operating tbe Eagle Laundry Company while appearing on tbe books of record as C. P. Leininger and M. T. Monaghan, in reality consists of Charles P. Leininger and Mrs. Charles P. Leininger under a joint ownership agreement and * * *.

(4) Paragraph (e) 1 of the Commissioner’s answer is in part as follows:

Admits that the partners owning and operating tbe Eagle Laundry Company in 1920 and 1921 appear on tbe books and records of tbe said Company to be C. P. Leininger and M. T. Monaghan. Denies that any other person or persons were members of said partnership at any time during the years 1920 or 1921.

B. Docket No. 23917.

(1) Years 1922 and 1923.

(2) Same situation existed here as stated in subparagraphs (2), (3), and (4) of paragraph A above.

The Board in its opinion in C. P. Leininger, supra, at page 623, stated:

The principal question for determination in these cases is whether petitioner is liable for tax on all of the profits of a one-half interest in a partnership or whether, under the facts his wife may return for taxation one-half of such profits.

In the opinion of the Supreme Court affirming our decision, Mr. Chief Justice Hughes says:

The question related to the income earned on respondent’s share in a partnership, known as the Eagle Laundry Company, doing business in Cleveland, Ohio. By virtue of an agreement made with his wife, respondent insisted that she was a full equal partner with him in his interest in the partnership and that each should return and pay tax upon one-half of the income attributable to that interest.

An inspection of the pleadings in the proceedings now before us shows issues raised as follows:

A. Docket No. 1$819.

(1) Years 1924, 1925, and 1926.

(2) Assignment of error paragraphs in the petition are as follows:

The determination of tax set forth in said notice of deficiency is based upon the following errors:
(a) The determination of the Commissioner that one-half of the Petitioner’s share of the income from the partnership known as “ Eagle Laundry Company ” was erroneously omitted by the Petitioner from his income and included in the income of his wife, Mrs. Mary E. Leininger, for said year.
(b) The determination of the Commissioner that no partnership agreement existed between the Petitioner and his said wife with reference to the interest of the Petitioner in said partnership.
(c) The determination of the Commissioner that the entire interest of the Petitioner in said partnership was income to the Petitioner and not subject to a subpartnership agreement existing between the Petitioner and his said wife with reference to the interest of the Petitioner in said partnership.

(3) The petition was amended August 17, 1932, to strike out the above paragraphs (b) and (c) and substitute for the same the following:

(b) The determination of the Commissioner that petitioner’s wife was not a member of the partnership known as Eagle Laundry Company and entitled to return one-fourth of the net income of said partnership as her own income.

B. Docket Nos. 15110, 51037, and 6331¡.l.

(1) Years 1927, 1928, and 1929, respectively.

(2) Original petition as amended substantially the same as in Docket No. 42819.

Thus it will be seen from the foregoing that in both proceedings, the one before us in Charles P. Leininger, supra, affirmed by the Supreme Court in Burnet v. Leininger, supra, and in the present proceeding, the Commissioner has determined in all the taxable years involved that the interest of Charles P. Leininger in the Eagle Laundry Co. partnership was 50 percent and that he must therefore return 50 percent of the profits of the partnership as his own taxable income.

The petitioner in his pleadings in the former proceedings contended that his wife owned a one-half interest in his interest and that this made her a partner with him in his share of the partnership earnings and therefore the earnings from his 50 percent share in the Eagle Laundry Co. partnership should be equally returned by him and his wife, Mary E. Leininger. This contention we denied, and in so holding we were affirmed by the Supreme Court. Now the petitioner desires to shift his ground somewhat and claim that only 25 percent of the earnings of the Eagle Laundry should be taxed to him because he was only an actual partner to the extent of a 25 percent interest and that his wife, Mary E. Leininger, was an actual partner in the Eagle Laundry Co. to the extent of a 25 percent interest. He claims the right to do this on the ground that it presents an entirely new issue on facts not involved in the former proceeding.

As we have already pointed out, the years before us in the former proceedings were 1920 tn 1923. The years now before us are 1924 to 1929. We have no doubt that if petitioner could prove that beginning with 1924 a new partnership agreement was entered into by which his wife became an actual partner in the Eagle Laundry Co. to the extent of a 25 percent interest and petitioner became a partner to the extent of only a 25 percent interest, he would be permitted to plead such an issue and offer proof in substantiation thereof and no doctrine of estoppel by judgment could prevent him from doing so. In such a case there would not only be a difference in the cause of action, in that the taxable years would be different, but there would be a new issue founded on different facts from those which existed in the prior years covered by the former proceedings. But petitioner does not contend that any new or different partnership agreement existed in the years 1924 to 1929 from that which existed in three of the years before us in the former proceedings, namely 1921, 1922, and 1923. He simply says that he did not raise any issue in the former proceedings as to his wife, Mary E. Leininger, being an actual partner in the partnership of the Eagle Laundry Co. during those years, but relied upon the defense that she was a subpartner in her husband’s interest, and that, having failed in this issue, he now desires to raise the issue that his wife was an actual partner in the Eagle Laundry Co.

The respondent introduced the entire record of the earlier proceedings as evidence in the instant case. Petitioner does not challenge the correctness of any of the facts found in the earlier proceedings. We therefore adopt our earlier findings as a part of the findings in the instant proceedings.

The evidence which petitioner introduced in the instant case was in substance as follows:

The Eagle Laundry Co. was organized as a partnership in 1898, with C. P. Leininger and M. G. Monaghan, father of Marcus Mona-ghan, as partners. In 1904 M. G. Monaghan died and Mary T. Monaghan, mother of Marcus, Gertrude and Jane Monaghan, succeeded to his interest in the partnership. The partnership between petitioner and Mary Monaghan continued until late in 1920, or early in 1921, when Mary T. Monaghan conveyed her interests to her children.

On January 17, 1921, petitioner wrote Marcus A. Monaghan as follows:

I wish to acknowledge your letter of Jan. 10th, in which you notified me that the partnership existing between Chas. P. Leininger and Mary T. Monag-han, under the name of The Eagle Laundry, had been terminated on Dee. 29th, 1920, by your Mother.
In view of this, I would say that I am not willing to accept Gertrude, Jane and yourself as partners, and think negotiations should be started to adjust matters. Enclosed find copy of letter I am sending your Mother.

Gertrude and Jane, referred to in the above letter, together with Marcus, were the children of Mary T. Monaghan, to whom the mother had transferred by bill of sale her interest in the partnership, on or about December 29, 1920, as set out in our findings in the earlier proceedings.

At the same time that petitioner wrote the above letter to Marcus A. Monaghan, he also wrote Mary T. Monaghan as follows:

I am in receipt of a formal letter from Marcus, under date of January 10th, in which he states that on December 29th, 1920, you transferred to himself, Gertrude and Jane, your one-half interest in our partnershp operating as The Eagle Laundry.
I am sorry that after all these years our partnership should have been terminated without' at least saying something to me about it. I feel that I have served faithfully; worked hard and efficiently, without a salary commensurate with the effort and results obtained. Of course, your action terminates our partnership, and I will not accept Marcus, Gertrude and Jane as partners, and I presume negotiations should be started at once to properly adjust this.

As a result of the two above mentioned letters, conferences were held to effect a new partnership agreement. Marcus A. Monaghan testified at the hearings and gave his version of these conferences to form a new partnership as follows:

Well, I can simply say that as a result of the conversations I had with Mr. Leininger, he agreed to carry on, stipulating however1, that the arrangement which we had previously made, as far as my mother and father were concerned, that they were partners with me, and I represented them, should be in effect, and that the other partners interested should have nothing to say. So, in trying to comply with, that situation, I took the matter up with my sisters, and they agreed to it, to the extent that I should act as agent for them, and I reiterated to Mr. Leininger the result of my conference with them, and then he, on his part, for himself and for his wife, he owning a one-quarter interest, and she owning a one-quarter interest in the laundry, agreed to accept as partners — actual partners — my sisters and myself, we combined also owning a half interest, and I, on my part, agreed to accept Mr. Leininger and his wife as actual partners in the business.

Petitioner testified with reference to these conferences substantially the same as the above testimony of Marcus A. Monaghan. No written notice of any partnership agreement was ever filed with the State of Ohio or the County of Cuyahoga. Mary T. Monaghan died in 1928, after she had severed all partnership connections with the Eagle Laundry Co.

The return filed by the Eagle Laundry Co. for the year 1924 sets forth the partnership interests to be owned as follows:

C. P. & Mrs. Leininger-50%
M. T. Monaghan-50%

The partnership returns filed for the years 1925 to 1929, inclusive, show the ownership to be as follows:

C. P. Leininger_25%
Mrs. C. P. Leininger-25%
M. T. Monaghan_50%

The individual income tax returns of the petitioner for the years 1924 and 1925 disclose the following with respect to partnership income:

Income from partnership, etc.:
O. P. and Mrs. Mary Leininger.

The individual returns of petitioner for the years 1926 to 1929 disclose the following:

Income from partnership, etc.:
The Eagle Laundry Company.

The individual income tax return filed by Mary Leininger for the year 1924 discloses the following with respect to partnership income:

Income from partnership, etc.:
C. P. and. Mrs. Mary Leininger.

Mrs. Leininger’s return for 1925 is blank while her returns for 1926 to 1929, inclusive, disclose partnership income to be from the Eagle Laundry Co.

Thus it can be seen from the foregoing recital of facts that all the evidence as to who were the partners in the Eagle Laundry Co. was available to petitioner in the former proceedings. The issue as to whether petitioner owned a 50 percent interest in the Eagle Laundry Co. and therefore should be taxed on 50 percent of the profits, as respondent contended, necessarily involved the issue as to whether Mary E. Leininger was an actual partner in the Eagle Laundry Co. to the extent of a 25 percent interest, for if she was, then it is clear petitioner owned only a 25 percent interest therein and was taxable on only 25 percent of the profits. As we see it, notwithstanding there are some variations of terms and statement, the issue and facts in the former proceedings are substantially the same as those involved in the instant proceedings.

It seems to us that the situation we have before us is not unlike that in Tait v. Western Maryland Ry. Co., supra, in which the Supreme Court affirmed the Circuit Court of Appeals in Tait v. Western Maryland Ry. Co., 62 Fed. (2d) 933. In that case the Circuit Court, in affirming the District Court, said:

We are now asked to reexamine the evidence and reach a different conclusion, and tlie reasons given are that the evidence in the present case shows more clearly the gap between the present corporation and the one which originally issued the greater amount of the bonds; and also that this court did not fully appreciate the force of the facts in the former case which marked the difference between the present company and the one which immediately preceded it. We are not impressed by this argument, for if a question is actually and directly in issue and is judicially passed upon and determined in a suit, a party bound by the judgment cannot escape its effects by producing a new argument or new evidence in a subsequent action in support of the proposition decided against him. * * ¾ If the appellee in the pending case is now permitted to produce additional evidence (which it may be said in passing was available at the first trial), to prove the point which was then relied on, the settled rule would be disregarded and the purpose of the doctrine of res adjudicata to put an end to litigation and to protect a successful litigant from a second trial of a controversy would be defeated.

Under the authorities above cited, we hold that the judgment of the Supreme Court in the former proceedings is an estoppel against the contentions made by petitioner in these proceedings.

Reviewed by the Board.

Decision will be entered for respondent.

Smith dissents.


text:
    Portage Silica Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 21904, 25445, 33691, 40846, 45801, 49885, 66438.
    Promulgated January 23, 1934.

      William J. Dawley, Esq., Olive Payne Peering, Esq., and Osear I. Kolce, G.P.A., for the petitioner.

      H. A. Goa>, Esq., and T. A. Dils, Esq., for the respondent.
   OPINION.

Trammell: These are consolidated proceedings for the redeter-mination of a deficiency in income and profits taxes for the year 1920 and of deficiencies in income tax for the years 1922 to 1929, both inclusive, as follows:

The issues are (1) whether or not the determination by the Board, in a former proceeding, of the fair market value of the petitioner’s sand and gravel deposit at March 1, 1918, is res judicata and conclusive in respect of the same fact in the present proceedings, and, if not, then (2) what the fair market value as of March 1, 1913, of the petitioner’s deposit of sand and gravel was for the purpose of computing depletion deductions and profit or loss from sale.

The petitioner is an Ohio corporation, organized in 1908, with its principal office at Youngstown, and since about the year 1909 has been the owner of certain lands containing deposits of sand and gravel.

On August 4, 1925, the respondent mailed a notice to the petitioner asserting a deficiency in its income and profits taxes for the year 1918, and on October 3, 1925, the petitioner filed with this Board a petition contesting the proposed deficiency. The petition was docketed as No. 7744. On December 1 and 2, 1926, a hearing was had in the proceeding, at which evidence was submitted in behalf of both the petitioner and the Commissioner, and on April 19, 1928, the findings of, fact and opinion of the Board were duly promulgated and reported at 11 B.T.A. 700.

One of the issues raised on the pleadings and submitted at said hearing was the fair market value at March 1, 1913, of the petitioner’s sand and gravel deposit for the purpose of computing depletion allowances. In computing the depletion deduction for 1918 the Commissioner had allowed 5 cents per ton, based upon a recoverable content of 6,000,000 tons and a total value of $300,000 for the deposit, while the petitioner contended that its sand and gravel deposit had a value at the basic date of not less than $2,000,000. The Board found as a fact that the fair market value of petitioner’s deposit on March 1, 1913, did not exceed $300,000, and that a reasonable allowance for depletion of the deposit was 5 cents per ton. A decision sustaining the respondent’s determination was entered April 20, 1928.

The petitioner, thereafter, on October 19, 1928, filed a petition for review of the Board’s decision in Docket No. 7744, and the Circuit Court of Appeals for the Sixth Circuit in an opinion rendered January 9, 1931, reported at 49 Fed. (2d) 985, affirmed the decision of the Board. The petitioner then applied for a writ of certiorari to the Supreme Court of the United States, which was denied at 284 U.S. 667.

The respondent contends that the decision of the Board in a previous case between the same parties and involving the same issue of fact, namely, the fair market value of the petitioner’s mineral deposit as of March 1, 1913, is res judicata, and that the petitioner is thereby estopped from again raising in these proceedings the same issue that has once been formally determined against it. Ee-spondent’s position we think must be sustained.

The precise question presented here under the first issue was decided by the Supreme Court of the United States in Tait v. Western Maryland Ry. Co., 289 U.S. 620.

A brief history of that litigation will be helpful here. In Western Maryland Ry. Co., 12 B.T.A. 889, promulgated June 27, 1928, the Board sustained the Commissioner’s action in refusing to allow deductions from gross income for 1918 and 1919 on account of amortization of certain bond discount. The Circuit Court of Appeals for the Fourth Circuit reversed the Board’s decision. (July 1, 1929, 33 Fed. (2d) 695.) Subsequently the railroad company brought suit in the District Court against the collector for refund of alleged overpayments of tax for the years 1920 to 1925, both inclusive, on account of disallowance of deductions in those years for amortization of the same bond discount. The District Court held that no facts were presented which had not been before the Board in the litigation over the taxes for 1918 and 1919 and that the parties were concluded by such former decision, and rendered judgment for the railway company (53 Fed. (2d) 211), which judgment the Circuit Court of Appeals affirmed (62 Fed. (2d) 933).

It will be noted that in the proceeding before the Board the parties were the railway company and the Commissioner, while in the litigation before the courts the parties were the railway company and the collector of internal revenue.

In affirming the judgment of the Circuit Court on certiorari, the Supreme Court held that the collector, being an official inferior in authority to the Commissioner, was in such privity with him that he was estopped by the judgment, and in its opinion further said:

The petitioner (Collector of Internal Revenue) seeks a reversal on the merits, asserting that a judgment in a suit concerning income tax for a given year cannot estop either of the parties in a later action touching liability for taxes for another year. He urges further, that, if this position is not well taken, he is not concluded by the former judgment because neither the proofs nor the parties are the same as in the prior proceeding.
1. The scope of the estoppel of a judgment depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand or upon a different claim or demand. In the former case a judgment upon the merits is an absolute bar to the subsequent action. In the latter the inquiry is whether the point or question to be determined in the later action is the same as that litigated and determined in the original action. Cromwell v. County of Sac, 94 U.S. 351, 352-353; Southern Pacific R.R. Co. v. United States, 168 U.S. 1, 48; United States v. Moser, 266 U.S. 236, 241. Since the claim in the first suit concerned taxes for 1918 and 1919 and the demands in the present actions embrace taxes for 1920-1925, the case at bar falls within the second class. The court below held the lawfulness of the respondent’s deduction of amortized discount on the bonds of the predecessor companies was adjudicated in the earlier suit. The petitioner ⅞ ⅜ * contends that as to both the decision of the court of appeals is erroneous, for the reason that the thing adjudged in a suit for one year’s tax can not affect the rights of the parties in an action for taxes of another year.
As petitioner says, the scheme of the Revenue Acts is an imposition of tax for annual periods, and the exaction for one year is distinct from that for any other. But it does not follow that Congress in adopting this system meant to deprive the government and the taxpayer of relief from redundant litigation of the identical question of the statute’s application to the taxpayer’s status.
This court has repeatedly applied the doctrine of res judicata in actions concerning state taxes, holding the parties concluded ifi a suit for one year’s tax as to the right or question adjudicated by a former judgment respecting the tax of an earlier year. * * * The public policy upon which the rule is founded has been said to apply with equal force to the sovereign’s demand and the claim of private citizens. * ⅜ * It can not be supposed that Congress was oblivious of the scope of the doctrine, and in the absence of a clear declaration of such purpose, we will not infer from the annual nature of the exaction an intent to abolish the rule in this class of cases.
These views render (unnecessary any consideration of the merits of the controversy.

See also Mary Haller, 26 B.T.A. 395 (and authorities therein cited), where we held that an earlier decision of the Board involving the same questions for previous tax years was conclusive as to the questions litigated for those years, and that the construction of the will of the petitioner’s decedent in the prior proceeding was conclusive as to the identical question in the later proceeding. And see also Charles P. Leininger, 29 B.T.A. 874.

The petitioner argues, however, that under the Revenue Act of 1924 it was not contemplated that the Board’s decision should become res judicata and conclusive in respect of any issue of fact, for the reason that the taxpayer had a right to pay the amount redetermined by the Board and institute suit in the District Court for refund, where the trial would be de novo, the Board’s findings of fact and opinion being merely prima facie correct, and that such right was not taken away by the Bevenue Act of 1926.

A sufficient answer to this contention, we think, is the fact that the petitioner did not elect to pursue such remedy, and obviously we are not required here to pass on that situation. Moreover, in both Western Maryland Ry. Co., supra, involving deficiencies for 1918 and 1919, and in Mary Haller, supra, involving a deficiency for 1924, the same state of facts on this point was presented. The contention, in our opinion, is expressly refuted by the language of the Supreme Court, above quoted, that in the absence of a clear declaration of such purpose by Congress an intent can not be inferred to abolish the rule “ in this class of cases.”

The petitioner further seeks to take these proceedings out of the doctrine of res judicata by allegations of gross error and fraud. In his brief, petitioner sets forth that:

The conclusion presented by our argument is that the respondent in the knowledge of the figures, documents and facts before him, made calculations which were grossly erroneous, findings which are unsound and illegal and representations which are false; that the irregularity of the respondent’s acts resulted in fraud and deprived the taxpayer of its constitutional right to a fair hearing.

The gross errors alleged by the petitioner relate generally to the method of calculation used by the respondent in estimating average annual production, present worth per ton, tons in the deposit, and other factors entering into the valuation of the petitioner’s mineral deposit. These matters constitute arguments which the petitioner properly might have presented in the original hearing, but in our opinion have no bearing on the question whether or not our former decision is conclusive in these proceedings.

A more serious allegation of the petitioner on this point is that the respondent in the prior proceeding was guilty of false representations and the suppression of evidence in his possession. This allegation seems to be directed to the fact that at the hearing in Docket No. 7144 the respondent offered in evidence as an admission against interest an original Form F, which consisted of a schedule of valuation of the petitioner’s sand and gravel deposit for the purpose of computing depletion deductions, which was executed under oath by the petitioner’s vice president and secretary on October 18, 1920, while at the same time respondent had in his possession a revised Form F executed and filed with him in April 1921.

The revised Form F was submitted to the Circuit Court of Appeals in connection with a petition for rehearing. In a per cwiam opinion denying that petition, the court said:

We can not treat Revised Form F as newly discovered. Mr. Kloos who signed the original Form F as Vice-President testified that he believed another report had been made. Mr. Farrell, Secretary of the petitioner, signed both reports. There is no sufficient evidence that he had forgotten the last one. Form F (Revised) is now before us, having been filed as Exhibit E to the petition to rehear. We have examined it in connection with the whole record and while it is corroborative of petitioner’s claim that the original per ton valuation of twenty-seven cents, as set out in the original Form F was as intended, we are not justified in granting a rehearing upon such corroborative evidence, even if it were newly discovered. The petition is therefore denied.

Tbe revised Form F was executed by petitioner’s officers, and we must assume that the information it contained was known to the petitioner at the time the original Form F was offered in evidence by the respondent at the former hearing, since a copy was later filed by the petitioner with the Circuit Court of Appeals. Respondent offered the original Form F as an admission by the petitioner against interest, and it may well be that respondent would have been entitled to offer the document for that purpose while at the same time objecting to the introduction by the petitioner of the revised Form F as a self-serving declaration. We need not decide that question here, it being sufficient to point out that the action of the respondent, in the circumstances complained of by the petitioner did not constitute fraud, either actual or constructive, nor the suppression of evidence. From a careful consideration of the record before us we are unable to find any substantial corroboration of petitioner’s allegations. Its contention on this point can not be sustained.

The per cwiam opinion of the Circuit Court, denying the petition for rehearing, used the following additional language:

Tlie original opinion of course must be considered as affecting tbe deficiency assessment for tbe year 1918 only and not in any way foreclosing submission to tbe Board of Tax Appeals of Revised Form F if and when that Board comes to consider assessments for subsequent years, as well as the other matters presented by the belated and unconsidered petition to rehear filed before tbe Board.

The petitioner urges most strongly that the quoted extract expresses the view of the Circuit Court that our former decision would not be conclusive on the same issue raised in subsequent proceedings, and that we are bound thereby. It is not clear to us that the court intended to pass upon the question of res judicata, since obviously that question was not then before the court. However, in any event the memorandum opinion of the court on the petition for rehearing was filed June 30, 1931, prior to the decision of the Supreme Court in Tait v. Western Maryland Ry. Co., supra, on May 29, 1933, and the latter decision, we think, is controlling here.

The conclusions reached above render it unnecessary for us to consider the second or alternative issue on the merits.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    Moody-Warren Commercial Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62495.
    Promulgated January 23, 1934.

      Thomas J. Warren, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner claims that its income in the taxable year should be reduced by an amount which it alleges represents a Joss sustained in its sheep-feeding operations. The loss claimed is the difference between the cost of feeder lambs purchased some months prior to December 31, 1929, plus feeding costs, and the alleged farm-price value of such lambs at that date. In support of its contention it relies on article 106 (2) (b) of Regulations 14 which, so far as material here, is as follows:

Because of the difficulty of ascertaining actual cost of live stock and other farm products, farmers who render their returns upon an inventory basis may at their option value their inventories for the current taxable year according to the “ farm-price method,” which provides for the valuation of inventories at market price less cost of marketing. If the use of the “farm-price method” of valuing inventories for any taxable year involves a change in method of valuing inventories from that employed in prior years, the opening inventory for the taxable year in which the change is made should be brought in at the same value as the closing inventory for the preceding taxable year. If such valuation of the opening inventory for the taxable year in which the change is made results in an abnormally large income for that year, there may be submitted with the 'return for such taxable year an adjustment statement for the preceding year based on the “ farm-price method ” of valuing inventories, upon the amount of which adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in effect for such preceding year. If an adjustment for the preceding year is not, in the opinion of the Commissioner, sufficient clearly to reflect income, adjustment sheets for prior years may be accepted or reguired.

The respondent has disallowed the deduction claimed on the authority of section 22 (c) of the Revenue Act of 1928, and in his notice of deficiency sets out his reasons therefor as follows:

(1) The attempt to compute an inventory at the end of the year 1929 does not conform as nearly as may be to the'best accounting practice in the trade or business and as clearly reflecting the income.
(2) Throughout Colorado, taxpayers, who are lamb feeders, reporting income on a calendar year basis, invariably defer expenses and report profits or losses at the time when the transaction is completed. Thus on lambs purchased in 1929, fed and sold in 1930, the income of 1930 contains the entire transaction. This custom has been that of your own company for a number of years without complaint or notice of a desire to change.
(3) No weight was taken of the lambs on December 31, 1929, and the Bureau considers the methods used by your company to approximate the value of the lambs at that date are purely estimates and can not be accepted as accurate. Feeder lambs are purchased and sold on basis of price per pound and the absence of an actual weight on December 31, 1929 precludes the taking of an accurate inventory at that time.
(4) The number of lambs which died before and after December 31, 1929 can not be determined which further tends to show that the inventory is not accurate.
(5) The method of arriving at market value December 31, 1929 is not in accordance with the farm price method as prescribed by articles 106 (2) (b) of Regulations 74.

The first four reasons stated by the respondent are fully sustained by the record. The method used by the petitioner in 1929 does not correctly reflect income for that year, since it involves the use of an estimate obtained by applying a formula to the weight of lambs purchased some three months before the end of the year. The inventory in question was not taken by count or weight and its result is no more than an approximation of the weight of the lambs on hand at December 31, 1929. On the other hand, the method of reporting results from lamb-feeding operations used by the petitioner in prior years and generally by all lamb feeders in Colorado, Wyoming, and New Mexico involves neither formulas nor estimates because the accumulated cost of the lambs is a fact of record in the books of the feeder and the amount realized is exactly known. Precise results are obtainable by the simple process of comparing accumulated costs with the known sales price and the difference is either gain or loss determined by a method in which error is avoidable and the determination of true income is certain and accurate. It was therefore wholly within the discretion of the Commissioner to reject the method of the petitioner and prescribe one that truly reflects income, as provided in section 41 of the Revenue Act of 1928.

Even if the petitioner is entitled to use the farm-price method of inventorying lambs on hand at December 31 of the taxable year, which for reasons to be discussed later is at the best extremely doubtful, it has not conformed with the express terms of article 106 (2) (b) of Regulations 74. Its action was a change in method from previous practices, and it has ignored the requirement that the opening inventory of the year in which such change is made must be brought in at the same value as the closing inventory of the preceding taxable year. In our opinion this alone is sufficient answer to the petitioner’s contention and completely supports the action of the respondent in disallowing the deduction here claimed.

The regulation under consideration was promulgated because of the difficulty of ascertaining the actual cost of livestock or other farm products in the hands of a farmer at the end of any taxable year. Farmers may, of course, purchase livestock and record the cost thereof, but in many instances all the animals on hand at the end of the year have been bred on the farm, fed with the products thereof, and the necessary work, unchargeable into a cost account, has been done by the farmer or his family without other labor expense. In such conditions the determination of actual cost is so much more than merely difficult that it is practically impossible, and so the farpa-price method of inventory valuation is authorized. There is no such situation here. The petitioner knows the exact cost of its lambs at December 31 and asks for the privilege of setting such cost against an estimated farm-price value for the purpose of determining a deductible loss resulting from a decline in market price. The farmer who uses the farm-price method does not offset the result obtained against cost because cost is ignored or is impossible of ascertainment. The farm-price value that he determines simply goes into his total inventory as an element in the computation of income at the end of the year.

The use of the farm-price method for valuing inventories is expressly restricted to farmers. In the circumstances herein it is not clear that the petitioner falls within that classification. It is a corporation engaged in the general mercantile business and certainly to the extent of its operations therein it is a merchant. Only a relatively small number of the lambs in question were fed on land owned by it and there is no evidence that any of the products of either of the small farms which it owned were used in its feeding operations. Such farms were operated by share-croppers and the nature of their products is left wholly to our imagination. The bullí of petitioner’s lambs were fed in rented yards located in or near Fort Collins and Cozad, Nebraska. In these circumstances it would appear that petitioner is not a grower of lambs, but a merchant or dealer in such animals.

The fact that the stock in trade of a dealer in animals is fed and may increase in value while- on feed is not proof that the dealer is a farmer. Thousands of dealers in poultry, sheep, and other meat animals buy their stock in trade and feed for awhile in coops or yards and then slaughter or sell on the markets, but such activities are far removed from tilling the soil, either in person or by proxy of renters or share-croppers. It may be conceded that to the extent of its operations of its two small farms by share-croppers, the petitioner is a farmer, but there is no evidence that connects its extremely limited farming interests with its very extensive operations as a dealer in lambs.

In his brief petitioner cites, discusses, and relies on our decisions in Pevely Dairy Co., 1 B.T.A. 385, and Elmer R. Wallingford, 4 B.T.A. 634. In our opinion neither is in point here. In each case the petitioner inventoried livestock on hand at the end of the taxable year by the usual method and the only controversy related to an adjustment of inventory to conform to decline in market price, and neither used nor sought to use the farm-price method. It is obvious, therefore, that those decisions have no bearing on the issue here.

In our opinion the petitioner has failed to show error in the determination of the Commissioner or to prove that its own procedure correctly determines income. The determination of the respondent is affirmed. Twin Ports Bridge Co., 27 B.T.A. 346.

Decision will he entered for the resfondent.

       SEC. 41. GENERAL RULE.
      The net income shall be computed upon the basis ot the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may he) in accordance with the method oí accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (For use of inventories, see section 22 (c).)


author: Teammell :

text:
    Alford J. Williams, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66915.
    Promulgated January 24, 1934.

      Kenneth N. Parkinson, Esq., for the petitioner.

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

Teammell :

This proceeding is for the redetermination of a deficiency in income tax in the amount of $9,175.55 for the calendar year 1929.

The questions involved are (1) whether an amount of $35,000 paid to the petitioner was a gift or was part of compensation due him for the sale of real estate, and (2) whether the petitioner is entitled to a deduction of $7,600 as expenses paid by him in promoting the sale.

The petitioner is an individual, residing in Garden City, Long Island, New York. During the years 1926 to 1929, inclusive, he was a lieutenant in the aviation branch of the Navy, being assigned to experimental flying, particularly racing, and being financed to a considerable extent by private capital. During 1929 and for some years prior thereto he was stationed in Washington, D.C. But during that period and particularly during 1928 he made numerous flights back and forth between Washington and New York City, principally to supervise and inspect the construction of a plane to be used for competition in the Schneider Cup races, and also to consult his backers.

The petitioner, in the course of his flights, became interested in the possibility of a location for landing or aviation fields within the New York area. There came to his attention a tract of land situated on Long Island, owned by the Lannin Eealty Corporation of Garden City, which tract later became known as Eoosevelt Field. Petitioner considered that this tract would be an excellent airport and believed that he could secure buyers therefor and developers thereof for such purpose. He received authorization from J. J. Lannin, the then president of the corporation, to negotiate for the sale of the property. No agreement was entered into or existed, however, between the corporation or its president and the petitioner, either as to the terms of sale or as to any specific amount of commission. However, petitioner was promised that he would be paid for negotiating the sale, Lannin, the then president of the corporation, stating that he would be amply compensated if he were successful. Lannin died in 1928. Following his death the stock of the corporation was owned in equal proportions by his widow, Hannah Lannin, his daughter, Dorothy Tunstall, and a son, Paul J. Lannin, the latter becoming president of the corporation and having control of its affairs, although he consulted the corporation attorney and also the general manager with respect to the corporation’s business affairs. Neither the attorney nor the general manager owned any stock in the corporation. Upon the authorization and assurance with respect to the compensation as above mentioned, the petitioner devoted considerable time and incurred expenses due to the promotion and sale. After the death of J. J. Lannin the petitioner received further assurances from Paul J. Lannin, his son and successor in office, the latter being a schoolmate and an intimate friend of the petitioner, that any arrangements that his father had made would be carried out. However, nothing was agreed in writing with respect thereto.

As a result of the petitioner’s efforts he succeeded in interesting prospective purchasers who finally negotiated the purchase of the property in 1929 at the price of $1,900,000. Petitioner was not advised of the completion of the sale, but, learning that the sale had been consummated, petitioner approached Paul J. Lannin, the then president of the corporation, with the object of securing from him a commission for the sale. He demanded $95,000. The usual commission was 5 percent on the sale of such properties. This was a custom recognized in that territory. Lannin told petitioner that his counsel did not recommend the payment of more than $55,000 and that he would not pay more. The petitioner considered this inadequate and unreasonable. He “ immediately rejected and decided that it was going to be a question of fight.” He also said that he would not stand for it. Finally, after talking for some time, Lannin gave petitioner a check on one bank for $55,000 and at the same time handed the petitioner another check for $35,000 on another bank, both being corporation checks. When the petitioner received his $55,000 check he signed a receipt in full for commissions due. The total amount of $90,000 was compensation for services in the sale of the property. The petitioner expended at least the sum of $3,000 in connection with the making of the sale, which amount should be deducted from the total amount of commissions received.

The question in this case is purely a question of fact. The testimony is somewhat conflicting. The petitioner testified that he received the $35,000 as a gift, while Lannin, the president of the company, who gave the petitioner the check, testified that it was not a gift but was drawn upon different banks for convenience and was all a part of a commission of $90,000 which they finally agreed was a reasonable amount. There is some conflict, however, even in Lannin’s testimony. He wrote an acknowledgment on the bottom of a letter which petitioner had prepared in which the petitioner recited the facts substantially as he testified to them at the hearing, to the effect that those facts were correct. His entire testimony, however, is to the contrary. We have to resolve all the conflicts in the testimony and give such weight to the testimony as we think it is entitled to, and from all the testimony in the record we are convinced that the whole $90,000 was commission paid to the petitioner for his services in negotiating the sale.

It would not seem reasonable to say that a person who is making a demand upon another for money could receive a portion of that money to satisfy his claim and then say that the balance of the amount was a gift, when he was claiming even more than the total amount as being actually due him for services. The petitioner claimed that the corporation owed him $95,000, and $90,000 was actually paid him. Lannin, the president of the corporation, testified that they finally agreed upon $90,000 as being the amount to be paid.

The other feature of the case with respect to the expenses incurred by the petitioner in completing the sale is not without difficulty. The petitioner kept no records of account and testified that he expended approximately $7,600. However, he was engaged in other work at the time and it is difficult to make an allocation or to determine what part of the money expended was really for personal living expenses, what part for business expenses and what part if any should ¡be allocated to the other venture. There is considerable indefiniteness also as to the actual amounts expended. From all the testimony, however, in this regard we have determined that $3,000 was expended in connection with negotiations for this sale.

Judgment will he entered under Bule 50.


author: Sea well :

text:
    Anna Vondermuhll, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43379, 45076.
    Promulgated January 24, 1934.

      Oliver O. Reynolds, Esq., and Robert B. Gumming, Esq., for the petitioner.

      Frank A. Sumne, Esq., for the respondent.
   OPINION.

Sea well :

These proceedings, consolidated for hearing, involve re-determination of deficiencies for the respective years 1924, 1925, and 1926 of $3,324.94, $2,868.48, and $4,389.73. Petitioner received certain income as a beneficiary of two trusts during the years 1924, 1925, and 1926, which the respondent determined to be taxable, but which the petitioner claims to be exempt from tax (under section 217, Revenue Act of 1924) on the ground that the income was interest on deposits with persons carrying on the banking business paid to her, a nonresident alien not engaged in business within the United States and not having an office or place of business therein. This is the sole issue involved in these proceedings, which were consolidated for hearing, and it is common to each of the years.

The correct answer to the issue depends on the interpretation and application of the statute mentioned. The pertinent parts of the statutes (section 217 (a) (1) (A), Revenue Acts of 1924 and 1926) are as follows:

In tbe case of a nonresident alien individual ⅜ ⅜ ⅜ the following items of gross income shall be treated as income from sources within the United States:
(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein. * ⅜ *

The petitioner, at all times herein material, was a citizen of Switzerland and a resident of the city of Basel in that country; she was not engaged in business within the United States and had no office or place of business therein. Her husband, who had been a member of the partnership of William Iselin &, Oo. of New York City, died in May 1920, leaving a large estate in this country, some of which was at the time deposited with that firm. Petitioner received about 60 percent of all of said property and about July 17, 1920, transferred it to her two sons, George A. Vondermuhll and Alfred E. Vondermuhll — a portion to eaoh. On that date George A. Vondermuhll made a conveyance to his brother and himself as trustees of the portion of the property transferred to him by his mother, which portion is described as follows:

(a) The sum of Three Hundred Nine Thousand Seven Hundred Twenty ana 51/100 Dollars ($309,720.51) on deposit with the firm of Wm. Iselin & Company of New York, in the name of Alfred Vondermuhll, which was the property of the Grantor’s father, Alfred Vondermuhll, until the time of his death and thereafter the property of said Anna Vondermuhll-Hoffman;
(b) The further sum of One Hundred Twenty-one Thousand Eight Hundred Sixty-two and 32/100 Dollars ($121,862.32) being a portion of the sum owed by the Grantor to his father, said Alfred Vondermuhll, during his life time, and after his death to his mother, said Anna Vondermuhll-Hoffman.

The conveyance recited that the property above described had been transferred to the grantor by his mother “ upon the condition and understanding that there shall be paid to said Anna Vondermuhll-Hoffman during her life the net income derived from said monies and that all of said monies be on deposit with said Wm. Iselin & Company of ISTew York at six per cent per annum interest, with power, however, to make changes in the investment of said monies.” It was recited further therein that the conveyance to the trustees was made in pursuance of said understanding. In the habendum clause of the conveyance it was contracted that the trustees (himself and his brother) were to hold and manage the monies and all proceeds and reinvestments thereof in trust during the life of Anna Vondermuhll and “ apply the net income thereof to her use during her life, and at her death to pay over the same to the Grantor, or if the Grantor be not then living, to such person or persons ” as the grantor by will should appoint, or, if there was no will, then to the persons entitled to the property under the laws of New York. The trustees were given power “ to allow the Trust Fund to be on deposit with Wm. Iselin & Co. at six per cent per annum interest or to invest the same from time to time, and as often as they see fit, resell and reinvest the proceeds either in securities * * * or in any stocks, bonds * * * or property ”; and the trustees were not to be held responsible for any depreciation in investments or errors of judgment, or for any cause except willful fraud. In case of a vacancy of a trustee, the survivor should appoint; or if a vacancy of both, then the persons presumptively entitled to the next eventual estate should appoint.

And on the same date, July 17, 1920, Alfred E. Vondermuhll made a conveyance to his brother and himself as trustees of the portion of the property transferred to him by his mother, which consisted of an itemized list of United States bonds, and domestic municipal and industrial bonds, and bonds of France, Cuba, Great Britain, and Sweden, all aggregating $527,000. The conveyance was in all material respects like that of George A. Vondermuhll mentioned above.

During the years 1924, 1925, and 1926 petitioner received from the trustees the following amounts paid to them by the parties indicated:

These receipts were not derived in any way from any of the foreign bonds included in the trust funds, but the whole thereof was derived by the trustees from the parties indicated as payments made by them as interest at 6 percent per annum on funds deposited by the trustees during the years indicated with the payors named.

No part of these receipts was included in the income tax returns of petitioner or of the trustees for the several years named, and the whole thereof is involved in these proceedings.

The trustees, George A. Vondermuhll and Alfred E. Vondermuhll, are citizens and residents of the United States, as are also the partners composing the firms of William Iselin & Co., A. Iselin & Co., and Arthur J. Rosenthal & Co.

The firm of William Iselin & Co., of which the husband of petitioner was a member prior to 1920, when he died, was during the years here involved composed of seven partners; its business was that of factors and comprised many activities, such as discounting sales of current obligation accounts and guaranteeing credits, receiving assignments of accounts and consignments of merchandise and making advances against these and other collaterals, carrying deposit accounts of manufacturers, merchants and others, upon which it paid interest at the rate of 6 percent per annum to the depositors and used the funds in financing its regular business; there were about 20 of such accounts, aggregating about $1,400,000, including that of the trustees. The firm was sometimes termed financial agents or textile bankers by merchants and manufacturers.

The firm of A. Iselin & Co. during the years involved was also a partnership engaged in various activities, including buying and selling stocks, bonds and securities for its own account and for the account of others, acting as members of a syndicate underwriting such securities, dealing in foreign exchange, acting as fiscal and transfer agents, custodian of securities, receiving money for transmission, issuing letters of credit, and receiving deposits, in some cases subject to check or draft or instructions from clients. The trustees deposited some of their funds •with this firm and received from it interest thereon at the prevailing rate, under contract, as shown above.

The firm of Arthur J. Rosenthal & Co. was also a partnership during the year 1926, and was known as investment bankers, and engaged in the brokerage business, buying and selling foreign exchange and securities on its own account and for others on commission, lending and borrowing money, receiving securities for safe-keeping and collecting and remitting, or crediting the income therefrom to clients; when income was credited, it was subject to draft. Deposits were attracted and received and used with the firm’s capital in its general business. Such deposits, some of which were received on time basis— 30 days to a year — were subject to draft. During the year the trustees had on deposit with the firm $200,000, and the firm paid to the trustees as interest thereon the sum of $10,143.33, which was remitted by the trustees to the petitioner as stated above.

The petitioner contends that the money paid to her was “ interest on deposits with persons carrying on the banking business paid ” to her “ a person not engaged in business within the United States and not having an office or place1 of business therein ” as provided in the exception (A) of section 217 (a) (1) of the Revenue Acts of 1924 and 1926, mentioned above. The respondent, on the other hand, contends that what was paid to petitioner was not “ interest ”, but income from a trust; that petitioner had no deposit, but if the deposits were hers they were not “ with persons carrying on the banking business,” and even if the persons were carrying on the banking business, they never “ paid ” the money to petitioner, but to certain trustees, and that petitioner’s situation is exactly as that described in I. T. 1405, where the ruling is contrary to her contention. To this petitioner replies that the trustees, under all the circumstances here, were her agents and constituted merely a “ conduit ” through which interest due her was paid by the bankers; that the payments were made by bankers, a bank being defined as a “ ⅝ * * firm, or company having a place of business where credits are opened by * ⅛ * deposit * * * subject * * * to check * * citing section 3407 of the Revised Statutes (Revision of 1878). Richmond v. Blake, 132 U.S. 592.

I. T. 1405, C.B. 1-2, p. 149, was made with reference to section 217 (a) of the Revenue Act of 1921, which is identical with the same section of the Revenue Acts of 1924 and 1926, and is to the effect that interest on deposits credited to the account of trustees and remitted by them to a'nonresident alien is not “interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein,” but “ the statute contemplates that the deposit shall be made by and the interest paid to the person ” who is an alien without business or office or place of business within the United States.

With reference to the contention of petitioner that the trustees were her agents and therefore deposits made by them were her deposits and payments made to them were payments to her, it is pointed out that under the trust instruments petitioner had no ownership of or control over the trust funds or how they should be invested and no control over the deposits, where or how they should be made, how long continued or how or by whom withdrawn; she had no power herself to draw on either the trust funds or income from them; she did not have any voice in filling a vacancy in the trusteeship, in case of a vacancy, and no power to remove or control a trustee in any manner. It is elemental that an agent is subject to the control of his principal. There does not appear to be any one of the requisites of agency present here. A trustee is not an agent. Taylor v. Davis, 110 U.S. 330.

Petitioner claims an exemption from the general provision of the taxing statute, and the burden, in a peculiar way, rests upon her to show that she comes within the exact provisions of the exception allowed. In Hubbard-Ragsdale Co. v. Dean, 15 Fed. (2d) 410, it is said :

⅜ ⅜ * ^ile plaintiff claims the benefit of an exception to the general method and extent of taxing corporations. The burden is upon the plaintiff to show that it clearly comes within the terms of such exception. “ In such cases, a reasonable doubt is fatal to the claim. Prima facie every presumption is against it. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.” West Wisconsin R.R. Co. v. Supervisors, 93 U.S. 595, 598.

See also Swann v. United States, 190 U.S. 143; Cornell v. Coyne, 192 U.S. 418.

Considerable doubt exists as to whether Congress intended by the words of the statute, persons carrying on the banking business,” to include persons, as disclosed by the evidence in this proceeding, in whose businesses some banking features are present as incidents thereof. It is suggested that the statute does not require in terms that such persons should be carrying on the banking business exclusively or even chiefly, or that they should be organized either as a state or a national bank. But we need not decide the point, for, if we hold that the language of the statute is sufficient to include as bankers those who paid interest to the trustees herein, nevertheless our answer to other questions involved, about which we entertain no such doubt, must exclude the petitioner from the benefits of the exception to the statute upon which she relies. For, under the language of the statute, we hold that she was not a depositor with persons carrying on the banking business; that what she received was not interest, but income from the trust; that it was not paid by the bankers, if they were such, to her; and that the trustees were not agents of petitioner in their conduct of the trust.

Reviewed by the Board.

Judgment will be entered for the respondent.